How North Bay community banks adapt to shifting business environment

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Community banks, unlike their bigger counterparts, have to stay on their proverbial toes in a business climate filled with change and uncertainty. How can these banks manage challenges, the regulatory environment, new tax cuts and constant technological advancements?

The Business Journal went directly to the source to find out. The following Q&A includes comments from three presidents and CEOs who run smaller banks in the North Bay: Jim Brush of Summit State Bank, Khalid Acheckzai of Poppy Bank, and Russell A. Colombo of Bank of Marin. Some comments have been edited.

What is your bank’s No. 1 challenge?

JIM BRUSH: Balancing needs. We are growing quickly, which takes extra effort from our exceptional staff, finding time to meet all of our customer needs, funding our local growth with local deposits, and maintaining a solid community bank profile. We are committed to our employees, community, and shareholders to provide exceptional experiences.

KHALID ACHECKZAI: It would be difficult to pick one. Cybersecurity is a big risk that most businesses, especially financial institutions, are faced with. Also the regulatory environment. The instability in the interest-rate environment and the recent inverted yield curve are also challenging for the banking industry.

RUSSELL COLOMBO: There really is just one principal challenge we continually face: attracting and retaining talented people. In our 29-year history, we have built a high-caliber team of talented, committed, experienced bankers. As we grow, we constantly strive to hire candidates that are a complement to that team. Finding people who are a fit, not only professionally but as part of the Bank of Marin culture of legendary service and community commitment, is our greatest challenge — and one of our biggest accomplishments.

Are there services your bank can provide better than big banks? If so, what are they, and why can a bank of your size excel in that area?

BRUSH: Yes, in just about every area except technology and consumer lending. Technology for smaller-sized banks is expensive and, often, purchased through a third-party, whereas larger banks have bigger budgets and often in-house staff to create proprietary software, giving them greater flexibility. We are focused on serving the business community and prefer to not compete for consumer loans as there are many local consumer-lending institutions that do it well.

We are a relationship bank, focused on knowing our customers, calling them by name and helping them with the services they need. We consider their overall relationship, and our services are generally better and less expensive than a big bank (that) tends to be focused on how much they can make from each account. We provide lending solutions tailored to individual needs, not out of a box, and decisions are made locally by experienced lenders.

ACHECKZAI: I would say we can provide most services better than big banks — that is both on the lending and deposit sides. A bank (of) our size can excel in these areas, as we don’t have the number of layers that the big banks do, and (we) are closer to our clients and their financial needs. We can listen to them and make decisions quicker to meet their expectations and timelines.

COLOMBO: The foundation of our strategy is consistent credit and expense management, adherence to our relationship-banking model and commitment to the communities that we serve. These disciplined fundamentals lead to quality organic loan and deposit growth, strong credit performance, and steadily increasing market share.

We thrive in serving clients at a local level, providing the in-person attention and deep understanding of our markets’ unique business dynamics and economic drivers that other lenders are not as well-equipped to consistently deliver.

How has the regulatory environment for banks like yours changed in the last few years? Has there been a positive, negative or mixed effect on how you do business? Why?

BRUSH: In the last few years, the onerous regulatory burden on community banks is growing in both volume and complexity. Regardless of whether the regulation applies to a particular bank or not, the bank still has to evaluate its potential impact on the organization. This often includes software updates, risk assessments, testing, procedural review, training, audit and board approval and oversight. The biggest impact is on staffing.

Every bank, including relatively small community banks such as Summit State Bank, have become impacted by the multiple code sections that govern mortgage lending and servicing, which contributed to our decision to stop consumer lending entirely. Fintech companies have also been added to the mix and compete online without offering service. In the long run, consumers are left with less personalized service and more self-service options.

ACHECKZAI: While there continues to be regulatory challenges in the industry, there have been some positive changes recently. Exam cycles have been extended for some banks, call-report requirements have been changed, and classification of reciprocal deposits have also been changed.

COLOMBO: The regulatory environment for banks intensified substantially after 2008, adding meaningful new cost pressures for all banks. However, in the past couple of years, I have been encouraged by the shift in regulators’ attitudes toward community banks. While we have not seen a major rollback in regulations, we are seeing a recognition of the important role community banks play in giving back to the communities they serve.

Bank of Marin’s approach to regulatory compliance has always focused on ongoing and substantive communication with our regulators. We strive to fully understand their expectations and to keep them appropriately informed about our compliance efforts to avoid surprises and ensure approvals.

How do the Trump tax cuts affect the bank? If it resulted in additional income or a reduction in costs, did you increase a dividend or take some other action?

BRUSH: Generally speaking, the tax cut came and went by being absorbed into so many aspects of our business. I believe competition has helped allocate the tax reduction into higher employee wages, reduced yields charged to businesses on loans, and in other ways. We did not increase dividends and do not anticipate higher return on equity in the future as a result of the tax cut.

ACHECKZAI: Being an S-Corp, the Trump tax cuts did not directly affect the bank’s income. The income that passes through to our shareholders may be taxed at a lower tax rate given the shareholder’s personal tax situation.

COLOMBO: Beginning in January 2018, the top federal statutory income-tax rate declined to 21 percent from 35 percent. This did lower our company’s tax expenses and notably benefit our earnings per share. Our effective tax rate for the first nine months of 2018 was 24.5 percent, down from 33.4 percent over the same period in 2017. The reduced rate positively impacted our diluted EPS by $0.38.

Is your bank’s size inhibited from being able to fully embrace technology, such as mobile banking? In what ways? On the flip side, in what ways is your bank’s size an asset in dealing with the changes technology brings?

BRUSH: Our size does inhibit us from hiring a large technology staff and so our solutions are typically outsourced, which can be more expensive. We do have a very good understanding of our customer needs and try to compete and meet them. In the end, it is not cutting-edge technology that most customers want, it is good service tailored to their needs.

ACHECKZAI: Not at all. As a $2 billion bank, we fully embrace technology to give our clients the most up-to-date services available in the industry. Mobile banking and services such as remote deposit capture for our commercial clients are two examples of the basic technology-based services we provide. In fact, our size is an asset, as it allows us to be more proactive and adjust quickly to technological changes.

COLOMBO: We are not inhibited by our size; we regularly offer enhanced state-of-the-art products and digital offerings to our customers. Our core processing, including digital offerings, is outsourced to third-party providers. We also procure the best software available from leading providers; therefore, we are not burdened with the cost of developing the services ourselves. This model helps us embrace leading-edge technology while managing expenses.

While megabanks have dedicated development teams that are dependent on internal priorities and willingness to spend, our model is very different. As a community bank, we are in regular contact with our clients, gathering their feedback and assessing their changing needs. This gives us an advantage as we make decisions about investing in new technology, products and services for our customers.

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