Community banks are welcoming new technology with open arms - and an open checkbook.
Spending on information technology in community banks, defined as bank holding companies with less than $1 billion in assets, will total an estimated $1.25 billion in 1993, a 12% increase over 1992.
The information comes from the American Banker/Ernst & Young 1993 Community Banking Technology Survey, conducted by the Tower Group, a Dover, Mass.-based consulting firm.
While the $1.25 billion figure represents only a small fraction of the industry's overall annual technology expenditures of $15.3 billion, spending in community banks is growing at nearly twice the annual rate of the industry as a whole.
Likewise, the number of people employed in community bank technology functions is expected to grow from 10,200 this year to slightly more than 12,000 in 1996, an annual growth rate of 6%.
By contrast, employment in the technology sector for the entire industry is expected to grow only slightly in same period, after declining at the beginning of the decade.
The forces shaping the community banking environment - robust net interest margins coupled with increasing competition from regional banks and rising regulatory costs - are driving many smaller banks to beef up their spending on hardware, software, and personnel.
"A lot of institutions are bringing up systems that the larger banks have had in place for years," said Warren Heller, research director of Veribanc Inc., a bank rating firm based in Wakefield, Mass.
Community banks, added Mr. Heller, are playing catchup not only with their larger competitors, but with other small businesses as well.
The latest branch automation systems now found in many community banks resemble something "your local auto-parts store has probably had for 10 years," he added.
Still, Mr. Heller sees the upward trend as a positive sign. "Spending on technology is part of the cost of retooling. The implication is that the people that are buying are knowledgeable and making excellent purchasing decisions. That's what it's all about," he said.
Banks with less than $1 billion in assets are often perceived as less technologically sophisticated than their larger counterparts. But in many cases, community bankers are installing systems that match or even surpass those in place in larger institutions.
Applications based on image technology, which have been slow to catch on in larger banks, are at the top of the shopping list for many community banks.
Used in item processing, customer service, signature verification, and other applications, imaging systems are designed to improve the workflow and reduce the flow of paper through a bank's branch or back office.
But large banks have been slow in adopting image technology, believing that the cost of purchasing the systems and restructuring operations outweighs any possible benefits. Vendors also been slow in delivering the high-volume systems big banks require.
However, the equation changes with community banks. There, imaging systems can be driven by inexpensive personal computers, and can handle the volume of work easily.
According to the survey, 24% of community banks will be implementing image technology for checking statements by 1995. In such an application, a bank delivers laser-printed images of checks - rather than the checks themselves - with a customer's monthly statement.
An estimated 41% of the total will be using what is known as file folder imaging. (For more on imaging technology in community banks, see page 6A.)
The year's big push at Tanglewood Bank, a $175 million-asset institution in Houston, involves file folder imaging. In such an application, customer correspondence and other paperwork are digitized and stored electronically. Customer service reps and other bank employees then access the information from their computer screens, rather than wading through paper files.
"We hope to have most of the customer-related information stored on an optical imaging system by the end of the year," said Jerome Simon, executive vice president. According to Mr. Simon, that information includes signature cards, collateral files, and credit files. The bank also has a second optical storage system that archives management reports.
Users can access images either from desktop PCs or from PCs equipped with oversized monitors and placed strategically throughout the bank.
Mr. Simon said Tanglewood's data processing expenses would probably grow by more than 10% this year, as the bank implements the imaging applications and continues to upgrade its PC hardware.
The 54 PCs used by the bank's 56 employees are connected to both a local area network at each branch and a wide area network which ties the entire configuration together.
The PCs use a Microsoft Corp. Windows-based application for teller and branch functions. It accesses the imaging systems as well as Tanglewood's deposit and loan applications, which are run by the outsourcing firm Electronic Data Systems Corp.
Currently, though, most community bankers are looking at imaging for check processing. "We've been interested in the concept for some time, but it has not been affordable," said Tommy Looper, executive vice president and chief financial officer at Anchor Bank, a $220 million-asset institution in Myrtle Beach, S.C. "We were at the point where we were going to have to replace our current reader/sorter, and imaging is obviously the thing of the future."
Mr. Looper said the bank will spend approximately $400,000 this year to install a system to handle deposited checks, using equipment and software from NCR Corp. and Document Solutions Inc. The system will allow the bank to handle rapid deposit growth without adding additional staff and expense, he said.
"If we installed another [nonimage check processing] system, there would be no payback," Mr. Looper noted. "With the imaging system, there will be a payback within a five-year period." Anchor may install account-statement imaging capability at a later date.
Still, the expense of an imaging system - upwards of $200,000 for a check processing package, $50,000 for a file folder system - means that such projects typically supersede other development efforts within smaller banks.
Installing a statement imaging system "will probably be the biggest thing we do all year," said John Diedrich, an executive vice president at Glenview State Bank, a $495 million-asset institution in Glenview, Ill.
"Part of the reason for installing the system was payback, part of it the philosophy of our owners. Installing this type of technology helps us to keep pace with larger banks," said Mr. Diedrich.
Many banks, of course, are simply upgrading aging equipment. From its headquarters in Greenfield, a town of 20,000 in western Massachusetts, United Savings Bank competes with regional giants such as Fleet Financial Group, Shawmut National Corp., and BayBanks Inc., as well as local thrifts.
Nevertheless, the $216 million-asset bank's recent decision to upgrade its teller and platform equipment was based more on necessity than on competitive posturing. "The system we have in place goes back two or three generations. The printers, the most mechanical portion of the system, are being held together with Band-Aids," said James Neill, a senior vice president at United.
But the bank kept capital expenditures to a minimum for the past several years, Mr. Neill said, because it was increasing its loan-loss reserves.
With its earnings for the first six months of 1993 surpassing those for all of 1992, United's management decided there was no time like the present.
Mr. Neill said the bank signed a new contract in July to install equipment, at a cost of about $400,000. The system, based on Unisys Corp. personal computers and software from Information Technologies Inc. will guide employees through most transactions and facilitate the cross-selling of products.
In the future, Mr. Neill said, United will also be looking into upgrading or replacing its Unisys A1 mainframe and implementing image technology in its check processing area.
Although they may be somewhat insulated from changes in the technology marketplace, smaller banks using data processing service bureaus are by no means immune from pricing pressures. Rio Salado Bank, Tempe, Ariz., has grown to more than $100 million of assets since it opened more than 10 years ago. As it has grown, its data processing costs have skyrocketed.
According to David Fischer, Rio Salado's senior vice president of operations, the bank has grown at about a 30% annual rate over the past four years. But monthly data processing expenditures - tied to the bank's transaction level - have more than tripled, from approximately $8,000 a month in 1989 to $25,000.
As a result, Mr. Fisher said, Rio Salado is working with a consultant to evaluate other data processing alternatives, including in-house solutions.
"If we stay with a service bureau, we'd like to develop some sort of tiered pricing arrangement," said Mr. Fischer. "I know the service bureau has to make money, but not on each single transaction."
Rio Salado is also pursuing a number of strategies to stretch its limited resources. Mr. Fischer is trying to assemble Arizona's community banks into an ATM deposit network. A similar arrangement within the state was disbanded when the banks' ATM processor, Security Pacific Corp., was absorbed by BankAmerica Corp.
While technology expenditures within the community bank segment are climbing rapidly, Mr. Heller of Veribanc points out that community bankers are taking a no-nonsense approach to evaluating systems.
"You don't score kudos for automating. Automating your back office or redesigning your monthly statement doesn't attract customers," explained Mr. Heller. "In fact, it can have the opposite effect if there are snafus."
But with limited resources and looming competition, community bankers can ill afford to ignore the technology wave. As Mr. Looper of Anchor Bank explained, "We're using technology to survive."