Community bankers share thoughts on competition, customer loyalty, regulatory burden and more

Moderator: To what degree is gambling a factor for the local economy?

Larry Ness: I was on the gaming commission for several years in South Dakota. We have a large Indian population and they all have casinos. We also have video gaming in all our gas stations. I can tell you, one little gas station that we finance took in $70,000 on her five video poker machines. Thirty-five thousand dollars of that goes to the state, and she makes a 50 percent profit on the remainder, so she netted about $15,000 in one month on five machines. You don't have to pump too much gas if you are making $15,000 a month on video lottery. That isn't to say there aren't social consequences, because there are.

Brad Davis: Iowa got into gambling years ago. I can tell you, once you are in, you become dependent on that revenue. Iowa is in better shape than some other states in the Midwest but like it or not, we are in it. We're dependent on the revenue.

Kevin Olson: We have gaming 20 miles from us. The City of Joliet has two riverboats. It has helped the city revitalize. Before the boats, downtown was just a mess. Now it's vibrant with restaurants and entertainment. I think we've seen it provide goodpaying jobs for some of our clients. On the flip side of that, you do see some people who have problems with it. Unfortunately, as bankers we see that up close and personal. But all in all, I would have to say it's been positive for Joliet.

Moderator: What are some of the big issues you are dealing with?

Donna Petrocco: One of my challenges is keeping our market share. We've got a lot of big banks around - TCF, Washington Mutual. We're a mom and pop shop. The biggest challenge for us is being competitive with their rates. Bigger banks can offer higher rates on deposits, better rates on loans, and do a lot more advertising. We are the only Colorado-owned bank in our area but I don't know that it makes that big a difference any more. It used to be an advantage but in this day and age people go where they get the best rate.

Olson: I think name recognition can be an issue, especially in some of these changing areas. As people move out from Chicagoland, they are used to the names of the national or regional banks; they come out to see Grundy Bank and they've never heard of it. They say, 'What is it?' It takes a little bit of education for those folks to understand what a community bank is and perhaps the benefits we can offer. It can be a tough thing to sell over the airwaves or in a newspaper ad.

Dorothy Bridges: Our biggest issue is where are we going to get the talent? Our bank is located in an urban core, where we've got the big banks. It used to be that the big banks would feed us with lenders and credit analysts, but not so much any more. The market is so tight; it makes it very, very hard for us to compete. So even though we don't have multiple branches - we only have two - our efficiency ratio really gets hammered because of salaries. It is nothing to interview someone and have a commercial lending candidate expect a six figures salary.

Bill Dana: An issue we have is the size of our banks in relation to the number of people and the number of branches we have. We are based in Kansas City and we have eight branches. In the urban core, it is very difficult to grow deposits. We have to go to public funding or wholesale deposits. And we are not as fortunate or wealthy to have urban renewal; there are still a lot of pockets that are struggling. It is a lot tougher to get quality loans within our geographic area.

Moderator: How heavy is the regulatory burden?

Debra Lins: Our bank is 11 years old and I think we have five regs today that weren't there when we opened. That's huge.

Dana: We have a community that deals a lot in cash. So our issues are related to BSA and anti-money laundering and they are somewhat magnified. The most recent thing is money service businesses, that is, anyone who cashes checks - grocery stores, retail out-lets, liquor stores. People go in to cash their checks and that's how they do their banking. They don't go to a regular bank; they operate in cash. Those entities are our merchant customers and they end up having to comply with the Patriot Act. So if they don't have a policy in place, then we either have to choose not to do business with them or make them compliant to the regulations. So not only do you have the normal burden of BSA, you also have to expand that into all these other entities.

Ness: The regulatory environment is more serious now. The Comptroller says we are going to give you one lick of the lollipop on BSA; the second time, we are going to give you a C&D. And we have no choice. We have to give it to you. It is a serious, serious matter for banks our size with these types of regulations.

Bridges: We are very concerned about BSA. I have heard stories out in the field about banks our size. There are differences between the official pronouncements and the way the regs are being enforced during exams. It's sort of amazing to hear the regulators say they want us to continue serving these customers, the money service businesses. What choice do we have? Of course banks are going to take the course of least resistance and not get ourselves involved with that because it is so easy to trip up. The regulators are saying that is not what they want, but I say, well, you've got to change the reg; you've got to make it a little bit more flexible.

Dana: But the problem is they don't have the flexibility to change the regs, especially as far as BSA is concerned. We just had an examiner call us and ask us about a particular customer. The examiner ticks off about 10 customers, looking at currency transaction reports seeing if they need suspicious activity reports because of the high volume of cash transactions. So they are looking at us even though we are not involved in an examination. They are keeping track of our customers - potential terrorists, I guess you might say - because of the amount of cash transactions, and we've been serving these customers for 30 years.

Moderator: How about CRA? Is that on anyone's regulatory radar screen anymore?

Art Johnson: We just flipped to being required to meet the large bank standards, since our last CRA exam. We were fairly consistently receiving outstanding ratings as a small bank. We don't remotely expect, nor are we trying, to receive that kind of a rating under the large bank standard. The part that is particularly frustrating is the investment test. To find investment options that remotely have any sort of positive investment return, we have to go outside our community to make those investments. There are investment options in our community but they are owned by the large banks. It is particularly galling when the essence of our business is to serve our community and we've always done that, but in order to meet the standards of CRA, we have to send the money out of our community.

Ness: I'm in the same position with the large bank requirements. We've hooked up with Citibank in Sioux Falls and they are masters at finding these things. All we do is tag along on their coattails and put some money in there and get the credit. It's worked so far.

Davis: We've received "outstanding" ever since they started CRA. We had people who said you had to come up with the statistics that show you are serving the low and moderate income strata customers in your market, and being a rural area helps us.

Moderator: : Are customers loyal to your bank?

Davis: It is more difficult to have the same relationship with customers as we used to.

Ness: Loyalty is now an eighth of a point. It used to be a quarter, now it's down to an eighth.

Olson: Customers are more savvy, too. Whether it is from the Internet, or whether it is our commercial accounts being called on, customers are very much more aware of what their options are in the marketplace. I'd say that's true both for commercial and retail customers.

Bridges: It is an interesting fact that I have noticed that customers want us to be right outside of their door. We do a customer survey and score very, very high in every category but locations. They say we are not convenient. We can't compete with the banks that have numerous branches.

Moderator: What are you doing to retain and attract new customers?