American Bankers Association: Community banks brace for rate increases, expand income sources

Community bank CEOs are facing today's management challenges head-on by preparing for the inevitable upswing in interest rates, expanding sources of non-interest income, investing more technology dollars in Internet banking and offering free checking accounts to grow their business.

These are the broad-brush findings of a new survey of community bank CEOs conducted jointly by the American Bankers Association's Community Bankers Council and the ABA Banking Journal. The survey, which CEOs helped to design, covered topics of special interest to community bank managers, including trends in non-interest income, changes in checking account features, asset-liability management strategies and technology spending priorities. Findings were released Feb. 12.

Products, income

Community banks have steadily expanded their menu of products that yield non-interest income; so much so that 74 percent reported their non-interest income rose in 2003. This was especially true for consumer banks with more than $200 million in assets.

While the bulk of non-interest revenues 44 percent came from deposit-account related service charges, this number was down significantly from last year and 2002, when such charges accounted for 56 percent of the non-interest income pie. The second largest source of non-interest income was banks' mortgage operations, which accounted for 21 percent of revenues (up from 18 percent in 2003).

Other components of banks' non-interest revenue: 6 percent from ATM/debit card fees; 5 percent from sales of securities, annuities and insurance; and 4 percent from trust fees.

The most common income-producing product was debit cards, offered by 73 percent of survey respondents, followed by credit life (59 percent), phone banking (55 percent) and online banking (53 percent).

Checking accounts

The survey finds trends in community banks' checking accounts that favor consumers. Specifically:

A majority 69 percent of community banks now offer free checking accounts, and they have became the norm in 21 percent of community bankers' markets. Community bankers attribute this trend to the desire to gain more customers and to generate more product revenue.

Most community banks (84 percent) still cash "on us" and government checks for non-customers. A bank's market type seems to influence this; 92 percent of rural banks offer this service, while 65 percent of urban banks do.

Consumers have a significant amount of choice in overdraft protection services at community banks. Sixty-three percent of banks offer overdraft lines of credit, 53 percent offer automatic overdraft transfers from other accounts, and 40 percent say they offer fee-based overdraft protection.

Community bankers in the survey charged the same amount (the average fee was $20.20) to cover an overdraft as they would to handle a bounced check, adding a valuable service covering a customer's overdraft for no additional charge.

Rate increases

A majority of community banks roughly 65 percent are preparing for the inevitable upswing in interest rates by extending cheaper long-term deposits, promoting adjustable-rate loans and shortening their securities portfolio. Other asset-liability management (ALM) strategies bankers are employing include match-funding larger loans as much as possible with wholesale funds (35 percent said this), extending low-rate federal fund borrowings as far as possible (21 percent) and selling off some low-rate bonds (18 percent). The survey also reveals steps bankers have taken to beef up ALM processes and which indexes are used for pricing business loans.

Tech spending

Technology spending was higher in 2003 for most (61 percent) community banks, and 49 percent predict their tech budgets will increase further in 2004. Spending priorities have shifted a bit, reflecting a renewed focus on branch banking which 63 percent of bankers say is their lead consumer banking channel by volume (up from 53 percent in 2003's survey). Fifty-two percent expect branches to remain their leading channel in 2007 up from 40 percent in 2003.

Core systems remain the most common spending priority, cited by 27 percent of banks, while Internet banking continues to be a priority investment for 18 percent of banks, especially urban community and business banks. Branch banking's continued popularity may explain why a slightly smaller percentage of bankers 17 percent expect Internet banking to be their lead consumer channel in 2007, down from 23 percent in 2003.

"This year's survey results point up the most important tool the successful community banker possesses adaptability," said Steve Cocheo, author of the survey and executive editor of ABA Banking Journal, in a news release. "Nearly every section demonstrates that community bankers realize they are in a fluid business, subject to ebbs and flows in customer preferences and desires. They must not only meet but also anticipate these changes in order to serve their customers effectively. This is no small feat, and it's testimony to why community banking is no game for the squeamish."

Other portions of the survey offer a detailed profile of the typical community bank CEO and their perspectives on hiring and compensating employees. The complete survey report, which includes more than 60 tables, charts and graphs that illustrate the responses of 575 community bank CEOs, was published in the February edition of ABA Banking Journal.