Sometime in the next five years the $1.2 billion-asset Bank of Granite Corp. in Granite Falls, N.C., intends to expand into neighboring markets by buying another bank, says R. Scott Anderson, its chief executive officer.
Stephen P. Wilson, the chairman and CEO of LCNB Corp. in Lebanon, Ohio, says his $600 million-asset company is likely to buy more than one bank within five years.
And they have plenty of company.
More than one-third of community bankers nationwide plan to be buyers by 2012, according to a survey done last fall by ABA Banking Journal that got 656 banker responses. It was released Tuesday in Orlando at the American Bankers Association's National Conference for Community Bankers.
"There are a lot of smaller banks that will have a very difficult time surviving, if for no other reason because of the incredible regulatory burden," said Mr. Wilson, whose company closed a $9.7 million deal for the $50 million-asset Sycamore National Bank in December. "We feel we've positioned ourselves to be an option for those banks."
Buyers far outnumber sellers, the survey found, however. Fewer than one in 10 community bankers said they expect their company to be acquired within the next five years.
This statistic stood out for Steve Cocheo, the executive editor of ABA Banking Journal, which has done the survey of community bankers each fall for the past 12 years.
"I've been hearing many bankers in recent years talk about the difficulty of continuing to try to operate," not only because of skyrocketing compliance costs but also because of the expense of keeping up with the latest technology, Mr. Cocheo said. "What surprised me was that only 7.3% are currently in a mode where they expect to be acquired."
Mr. Anderson said Bank of Granite bought First Commerce Bank in Charlotte about five years ago and "that's worked out great."
As it looks to move into contiguous markets with high growth potential, Granite would like to buy again, he said. But finding a seller for the right price is a challenge.
Mr. Cocheo said he believes that outsourcing might be helping banks forestall the need to sell.
The survey said that more than one-third of community banks have begun outsourcing functions that had traditionally been performed by staff. Of these banks, almost 70% said they had initiated, or increased the level of, outsourcing within the past two years.
The top reasons bankers gave for outsourcing were to cut costs and to obtain expertise without adding to the staff; 60% cited each of these motivations. (They could choose more than one.)
Internal audit was the function that most of these banks — 52.7% — chose to outsource, followed by loan review, 48.8%; compliance audit, 46.3%; item processing, 44.8%; servicing of automated teller machines, 28.4%; and information technology management, 24.9%.
Banks with more than $1 billion of assets were more likely to outsource than smaller ones. Nearly half said they already outsource some functions.
Babette E. Heimbuch, the chairwoman and CEO of FirstFed Financial Corp. in Santa Monica, Calif., said her $7 billion-asset company does its own loan servicing because it is unwilling to give up control of such an important function. But she said it saves money by outsourcing automated teller machine servicing, item processing, and some information technology functions. "As systems get more complicated, you tend to outsource it and not build your own," she said. "It's more cost-effective."
Outsourcing is likely to become more prevalent soon. Of those that do not already use the strategy, one in four are considering it.
The survey also found that banks continue to adopt remote deposit capture rapidly. About 16% offered it a year ago, but now 37.5% do. Another 25% plan to add it this year, and 3% next year.
Of those offering remote deposit capture, 32.3% said they did so because it is an essential survival strategy, 27% like to be technology leaders, and 14.8% because competitors had it. Only 9.5% said customers asked for it; 6.3% viewed it as a way to cut processing costs; and 9.5% cited other reasons.
Those with remote deposit capture generally seem happy with the results. About 71% said it has helped retain business customers, and 59% said it has helped attract new customers. But 54.2% said the service is not profitable on a stand-alone basis.
Among the survey's other findings:
- Other community banks continue to be the toughest competition for both deposits and loans, according to 54% of the bankers surveyed. This is virtually unchanged from the year before. About 32% said larger banks are the leading deposit competition; 11.5%, credit unions; 1.4%, Internet banks; and 1.6%, other types of rivals. For loans, 40.3% cited larger banks as the toughest competition; all of the other options were under 5%.
- Technology spending is rising at most banks. About 58% said they expect to spend more on technology this year than last. However, more are cutting back on their technology budgets than in the previous year. Almost 12% said they expect to spend less for technology in 2008 than they did in 2007, compared with 6.3% who said technology spending in 2007 was higher than in 2006.
- Business lending positions were cited the most difficult ones to fill, with 93.4% of bankers saying it is hard or very hard to find qualified candidates in their markets. Information technology officers came in a close second, at 92.9%, followed by compliance officers, 92.1%; trust officers, 90.9%; business development managers, 90.7%; and chief financial officers, 90.7%. Topping the list last year was chief risk officer, a new category at the time, but this year the position tumbled to seventh place, with 89.7% of the respondents saying that it was hard or very hard to find a qualified one in their market.
