There's a lot of wisdom in the community bank sector. Most of it comes from culture and tradition, as opposed to the curricula of the highest-ranking MBA schools. Having worked for 321 community banks in the past 35 years, I offer the following list of reasons why community banks are healthy, even amid the horrific banking crunch.
- Family-Owned Influence. Forget Wall Street, stockholders, regulators, market share, assets, the competition and PR. Community banks are driven by their founders' legacies.
- Personal Attention. Every bank claims it, but if you don't get a whiff of the banker's breath, it's not a community bank.
- Traditional Banking. Ask community bankers to explain derivatives and they'll talk about the safety of a 12-month CD at a guaranteed rate. The formula for traditional earnings doesn't create heroes, but it assures long-term stability -- keep cost of funds low, lend at market rates, slash operating costs.
- Collateral. Borrow money from a community bank and be prepared to give up your firstborn. Securities and real estate won't do much good as collateral in this economy.
- IT Investments. CRM didn't make it among community banks. Community bankers invest in technology much like they invest in securities: "Show me the dividends, the appreciation and the safety."
2009 IT Spending to Increase 7% or More
Given the economy, one might expect IT spending cuts at all financial institutions. But there are some practical realities tied to any IT environment that require support in the form of spending. To look at the issue objectively, I imagined myself as the CIO of a typical community bank. Examining a typical community bank budget spreadsheet (100 line items for any bank IT cost center), I tried to freeze every line item with only one thought in mind: Can we still operate without increasing the expense?
But some pieces of the IT beast have to be fed, no matter what. Status quo just means no new purchases. However, existing resources will cost more in subsequent years just to keep them running. The net result of this hypothetical exercise is that my "typical bank" would spend 6.9 percent more in 2009 than in 2008. Causes for the increase include occupancy costs, vendor maintenance charges (hardware, software, support, special services), mandated regulatory compliance, ad hoc audits that were mandated by the IT Oversight Committee, contractual commitments that are coming due in 2009, salary increases of bank personnel who are labeled as IT staff, arbitrary network price increases that were imposed by carriers based on an approved rate increase, insurance and property tax increases approved by regulatory agencies, and increased processing volumes that propel the bank into the next tier of charges.
My typical bank didn't make an acquisition, it didn't enjoy a surge in market share, it didn't significantly grow its transaction volumes, it didn't open branches and it didn't enjoy a windfall. So, based on my calculations, in 2009 every community bank will spend 7 percent more on IT just to stay alive. And some banks will spend an additional 5 percent or so to enjoy the benefits of good business decisions even during a period of unprecedented economic woes.q
Art Gillis is a regular contributor to the BS&T blog, which can be viewed at www.banktech.com/blog.