December 2015 January 2016

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/ Seven Questions /

NEEDED: REVENUE DIVERSITY

With meaningfully higher rates way out in the future, local banks must try other tools By Steve Cocheo, executive editor view,” says Patterson. “But in the regulatory environment and interest-rate environment that we are in, community banks are clearly challenged.” New capital and liquidity requirements are among the headwinds they face. Not leaving money on the table, trimming expenses, and exploring new ways to make money are must-do’s, according to Patterson. Community banks, generally speaking, lack a diversity of revenue sources. “They do a few things really well, and they largely depend on interest income. Fee income hasn’t been a sweet spot for community banks,” says Patterson. “But you can’t be a one-trick pony anymore. You’ve got to be able to thrive in all kinds of interest rate environments.”

W

hen you last flew, you most likely paid for your baggage—both ways, a nd maybe even an extra fee for curbside check-in. You may have paid more for extra legroom, and you may have plunked down ten bucks more for the privilege of boarding early so you had a shot at fitting your rollaboard overhead. Then, once aboard, you probably paid for Wi-Fi to keep in touch with the office, and something from the snack cart. It’s a safe bet that most community bankers would never treat their own community bank customers that way. But is there a middle ground between “nickel and diming” people and free? “Community banks give away way too much,” says Peyton Patterson. “Everything is free. And it doesn’t have to be. If customers get the things they are looking for, within reason they are willing to pay for that. But generally, community banks have been afraid to charge fees, and even if they do, they will often waive them.” Pat t er son, he a d of New C a na a n, Conn.-based Peyton R. Patterson Consulting, is no theorist. She has been in banking for over three decades, most recently at the top of two community banks—Bankwell Financial Group and 14

BANKING EXCHANGE

To thrive in all rate environments, make fee income a “sweet spot,” says consultant Peyton Patterson. NewAlliance Bancshares, both of Connecticut—as well as much larger banks. She says community banks need to seek ways to bolster revenue, cut costs, and improve efficiency, because the pace of interest rate increases will likely be too slow to produce the buoying effect that many smaller banks are hoping for. Patterson believes community banks’ greatest strength remains high-quality customer service. Larger institutions have grown better, here and there, at this, but “if I had to put larger banks and community banks on a scorecard, community banks would still far exceed the big ones,” says Patterson. “They know their customers, and people still gravitate towards them because they fulfill a vital role in their community.” To stay in the game, she says, community banks must begin pulling every lever that will help their performance. Charging appropriate fees is one lever. “ The community banks that stood their ground and survived the f inancial crisis play an important role in their communities, from a lending point of

December 2015/January 2016

Q1. Community banks traditionally employed officers who did multiple tasks. And yet increasingly, individual bankers must deeply understand key specialties. But the need to contain costs is stronger than ever. How can management make this all work? Prompted by regulatory requirements, community banks have to invest in subject matter exper tise regarding risk management, controls, credit quality, and more. And, aside from offering the benefits of working in a smaller environment, that means attracting that talent financially. It’s the only enabler you have, but you can’t just keep spending more money on investing in people without cutting somewhere else—not unless you can find new revenues to offset the expenses. There a re ma ny oppor t unities in smaller banks to automate procedures and controls, and to squeeze out inefficiencies. You trade that off for good people in the front line and the back office, and the result is a more viable, growth-oriented company. Q2. Where should bankers be looking for greater efficiency? Account opening is one of the most inefficient processes in small community banks. Underwriting of loans, especially