Grant Thornton’s 11th annual survey of community bank executives shows an industry with a positive outlook for 2004.

Some 76 percent are optimistic about business for community banking. Sixty percen feel the same regarding 2004’s general economic outlook.

Bankers are also responding to the needs of their Internet-savvy customers. Eight in 10 consider offering online banking services as important for future success, and 86 percent currently have at least an informational website. The number of banks offering online transactions stands at 64 percent, expected to rise to 76 percent by 2005.

Accounting, tax and business advisory firm Grant Thornton presented the results of its most recent national community banking survey at this week’s N.C. Bankers Association meeting.

John Ziegelbauer, partner-in-charge of Grant Thornton’s financial institutions practice and co-author of the study, provided an overview of the survey findings to the organization on March 29. Other speakers at the event included U.S. Sen. Elizabeth Dole (R-NC) and Robert Johnson, the CEO of Black Entertainment Television and owner of Charlotte’s new NBA franchise.

The survey also shows community bankers looking towards internal over external growth for the short term. Thirty-eight percent of banks plan to improve existing services and/or offer new lines of business, while only 8 percent anticipate acquiring another banking institution in 2004. In three years, however, the picture changes with 30 percent anticipating acquisition of another bank.

“Community banks may have expansion opportunities as a result of the announced mega-bank mergers,” says Ziegelbauer. “Branches will soon be available in markets where the consolidated banks overlapped, affording financial institutions with the perfect opportunity to geographically expand into new markets.”

Retaining employees a must

Retaining employees is a top priority for almost all community bankers, and 84 percent consider developing new sources of revenue to be important. Regarding their confidence in these areas, 70 percent say they do a good job retaining key employees, while only 33 percent say they are confident in their ability to develop new sources of revenue.

Customer service is also integral to a bank’s continued success. Customer-related issues that bankers rate important include updating/expanding services for business customers (74 percent) and expanding traditional banking services (53 percent).

Bankers cite controlling credit risks managing interest rate risks and protecting customers’ privacy as the top three operational issues important for success. Three-fourths of bankers are also confident about their performance in each of these areas.

Threats and competition

While the survey showed other community banks and credit unions have been the top two competitive threats for community banks for the past three years, brokerage firms continue on their downward trend. Only 34 percent of community banks now consider brokerage firms as a source of competition … down from 66 percent in 2001.

However, non-financial companies that provide services traditionally considered to be “banking” (payment cards, funds transfer, money orders and ATMs) increasingly pose a competitive threat. The number of community bankers that see these entities as a source of competition has tripled from 10 percent in 2001 to more than 30 percent today.

The cost of compliance with corporate governance regulation, including Sarbanes-Oxley, has increased costs for community banks in general. The impact is more significant, however, among publicly held and FDIC banks.

“As members of one of the most highly regulated industries, most community banks instituted good corporate governance and financial reporting policies well before the passage of Sarbanes-Oxley,” says Ziegelbauer. “Bankers must not lose focus, however. With uncertainty regarding how regulators will interpret the application of corporate governance policies, all financial institutions must continue to apply strict governance standards.”

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