Grant Thornton's 12th annual survey of community bank executives found that newer regulations are causing these bankers to shift priorities and reconsider ownership structures.
"Banks are getting more criticism from regulators in exams and are having to shore up systems to deal with the USA Patriot Act and Bank Secrecy Act," said Todd Sprang, a financial institutions industry practice partner in Chicago with Grant Thornton.
The survey, which is to be released Monday, says banks see protecting customer privacy, assuring quality financial reporting, and controlling technology risks as their keys for continued success.
Privacy protection was also a big issue in the 2003 survey; the others topping the list in 2003 were controlling credit risk and managing interest rate risk.
For the 2004 poll the firm interviewed 439 executives at banks ranging from less than $100 million of assets to $5 billion, along with three at banks with assets over $5 billion. Among the regulations on bankers' minds are those implementing the Sarbanes-Oxley, USA Patriot, and Bank Secrecy acts.
Compliance is affecting the bottom line, too - 93% of public banks and 79% of privately owned ones told Grant Thornton that their costs for general audit fees rose in 2004. Costs for documentation of internal controls jumped at 83% of public banks surveyed and 60% of private banks.
Beyond money, complying with regulations distracts banks from their core business, Mr. Sprang said. This is particularly true of Sarbanes-Oxley's section 404, which requires that banks evaluate every part of their operations, document all their controls, and make sure they are effective.
"The time and resources that it takes for department heads throughout the organization to participate in the process, as well as the executive management team, may well have taken away from their ability to execute on strategic plans," Mr. Sprang said.
For example, in Grant Thornton's 2002 survey more than half the banks said they planned to start measuring customer profitability in the next three years, and 42% said they planned to start using customer relationship management software. In the 2004 survey only about a third of the banks said they had actually done so.
"We don't know why, but one guess is the regulatory burden is preventing them from implementing CRM software," Mr. Sprang said.
That burden is also causing some banks to consider going private. Fifteen percent of the banks said they are likely to take their banks private in the next three years, against 8% last year. Of those thinking about going private, 90% said the hassles of compliance are among the reasons, and 90% cited compliance costs.
Mathew Schriner, a managing director in risk management for Alex Sheshunoff Management Services LP in Austin, said no letup is in sight. Banks will face more regulatory pressures this fall when new Home Mortgage Disclosure Act data are released.
"It will awaken the fair-lending beast. Fair lending will again be a top-priority issue," Mr. Schriner said.
The survey also found that 53% of the banks polled say the United States is overbanked, yet 49% said they plan to expand geographically.
