ROBERT BALLETTO
‘Size does matter’

Grant Thornton, as part of an annual survey, recently asked top community bank executives from across the nation about strategies, technology, legislative issues and administrative functions that are being explored now and could possibly be a threat in the future. The survey results showed that the competitive nature of community banking has shifted dramatically over the past few years.

During Grant Thornton’s 10-year survey history, community banks frequently have listed credit unions and brokerage firms as their major source of competition. This year, 75 percent of community banks’ chief executive officers nationwide listed other community banks as their biggest source of competition.

Paul Pustorino, national managing partner for depository institutions at Grant Thornton’s Boston office, said community banks have a steep competitive market and need to step up their activity.

“In 1994, the community banks’ main source of competition was brokerage houses and credit unions, but over the years, and now because of the stock market [drop], brokerage firms have dropped out of sight and community banks view their primary competition as other community banks,” said Pustorino. “But competition is fierce … on a local and national level, community banks do not react quickly enough, although they have the right ideas. For example, banks looked at [debit] cards because it’s important to their business and they say they’ll offer them in three years … why wait? Banking has always been a conservative business, but in order to remain competitive, community banks may have to accelerate their thought processes.”

Pustorino said community banks are still the most valued and trusted financial partner for the public, but banks “need to react to that customer perception,” he said. “I think they really need to act quicker and understand the environment in which they are operating because [the environment] is moving quicker.”

‘The Biggest Threat’

The chief executive officers of some banks are already looking ahead and predicting their next business moves.

Robert Balletto, chief executive officer of Georgetown Savings Bank, said the future could bring more mergers and acquisitions.

“I concur with all of those who say mergers are creating an opportunity … it creates a growth opportunity,” said Balletto.

Balletto said his executive staff and board members are also taking a serious approach to other issues, including corporate governance and legislative initiatives such as the Sarbanes-Oxley and USA Patriot acts.

While Georgetown Savings is not a public company, Balletto said the idea of a corporate governance committee on the board is important and was implemented into the bank’s board earlier this year.

At the Bank of Canton, President and Chief Executive Officer James D. Egan said corporate governance initiatives have created a large amount of stress for smaller banks, but keeping in compliance will always be a top priority for banks.

“The smaller banks are going to have a difficult time [keeping up to date], but we’re doing OK. Obviously we will always need to have financial experts on the board,” said Egan. “There is so much new legislation … I can understand [the government’s] concept, but it’s a tremendous burden on us from the compliance and technical side.”

Pustorino said that according to the survey, all banks – especially banks in Massachusetts – are implementing stricter corporate governance initiatives, including more manpower and technology.

Pustorino said banks generally have a hard time finding good and qualified directors to serve on their boards, but banks in the Bay State are committed to finding honest and educated directors to head up the corporate governance committees.

“Boards are becoming more active because of corporate scandals and corporate governance issues. But in New England, bankers were far ahead of their peers in terms of providing education to employees and directors and updating directors and charters, so overall, in terms of corporate governance, Massachusetts banks are ahead of the curve,” said Pustorino.

Another section of the survey looked extensively at technology spending and enhancements, and 76 percent of community banks surveyed said updating and expanding technology to better track customer needs is an important function in bank growth.

Balletto said Georgetown Savings has taken a serious approach to technology advancements by implementing Internet banking and adding technology and marketing professionals to the bank’s staff to keep the institution “up and coming.”

But the biggest concern among community bank executives is the generation of enough revenue to keep the bank afloat through an unsteady economy.

“We are in the lowest interest-rate environment and we have done a tremendous amount of residential mortgage business, but our portfolio has gone down about 40 percent,” said Egan. “While commercial business continues to be strong and expand, [the bank’s] assets are in a higher risk category, but the interest-rate risk is being removed.”

While the market is still recovering and banks continue to search for additional revenue streams, Egan contends that Massachusetts is still the best place to do banking because of the environment, the professionals, the success rate and the amount of businesses that start in the state.

Grant Thornton’s survey found that retaining key employees is very important to future success, as is developing new sources of revenue, but Pustorino said banks should be more proactive in their business approaches if they want to compete in the marketplace.

Balletto said community banks need to start looking at alternative sources of income, including insurance and financial investments, in order to increase revenue and profitability for the bank. But he said the largest hurdle for community banks is the ability to compete in the current marketplace.

“The biggest threat comes from ourselves not being willing to compete aggressively,” he said. “Those who compete will be very successful. If [the bank] grows, we can give more back to the community. Size does matter, and if you’re not growing, you’re dying.”