We also review what bankers told us about their environment, competition, and future challenges. The representative bank in the District is family owned and locally controlled. The economic and competitive environment that District banks face depends, in part, on growth prospects and diversification opportunities of the bank's communities. The most intense loan and deposits competitors are other community banks. Problems that most challenge survey respondents involve basic aspects of successfully managing a bank: funding, income sources, and meeting competition. Despite identifying many problems, all but a few bankers expect their banks will remain in business and succeed.

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Management and Staffing Challenges
By Forest Myers

Community banks are known for their personal service and strong customer relationships. They are an important source of working capital for small businesses and act as engines of economic growth for their communities. If they are to continue in these roles, community banks must be able to attract strong, competent management and dedicated, capable staff. However, our examiners have noted a general aging of senior management at many of the banks they visit. In addition, they have noted instances of understaffing at smaller banks. With this anecdotal information, we asked Tenth District bankers if they will be able to meet their management and staff needs and what personnel challenges they see ahead over the next five years, 2001 to 2005.

Looking forward, a significant majority of District community banks believe they can attract and retain the directors, officers, and staff they will need. In those instances where bankers saw problems ahead, invariably it was factors beyond the bank’s control—lack of qualified individuals, poor community prospects, or tight labor markets—that were seen as stumbling blocks rather than banks’ inherent inability to pay a competitive wage. Thus, it is the demographics of the marketplace rather than the competition of the marketplace that weighs more heavily on the future of those that see problems in getting directors, officers, and staff for their banks.

On a more specific matter, management succession may become an increasingly important issue for many banks as time passes. Many executives at survey banks plan to retire, and a good number (as many as 30 percent of chief executive officers) will reach age 65 during the next five years. However, only about 30 percent of survey banks had written succession plans. Even taking into account family ownership and possible succession arrangements within families, nearly 40 percent of survey banks were left without some form of management succession plan in place, leaving them exposed to a potential leadership shortfall at a time when officer turnover may increase. If survey results typify those for banks more generally, succession is an important evolving issue that deserves attention by bank management and bank supervisors before future turnover, expected or unexpected, occurs.

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Performance and Operation of Commercial Bank Web Sites
By Richard J. Sullivan

This article reviews banker experience with Internet banking based on responses to the 2001 Survey of Commercial Banks in the Tenth Federal Reserve District. The performance of bank Web sites (measured by customer enrollment, usage rate, fee revenues, and generation of new customers) has been modest but is similar to experience of most U.S. banks. Developing policies, working with vendors, regulatory requirements, security, and marketing and promotion head the list of activities that challenge banks when installing and operating Web sites. Long-term strategic factors, such as remaining competitive, retaining customers, and updating technology motivate banks to establish Web sites. Banks with Web sites have less immediate concern with reducing costs and adding revenue. In sharp contrast, high cost and lack of customer demand are most important for banks that have decided not to install a Web site. Despite their skepticism, most banks without a Web site plan to install one within the next few years. The concluding section discusses implications of these findings for bankers, bank supervisors, and policy makers.

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The Decline in Core Deposits: What Can Banks Do?
By James Harvey and Kenneth Spong

In recent years, growth in traditional deposit funding sources has failed to match the growth in assets at many banks. These funding shortfalls are raising a number of important concerns, including whether community banks will have to curtail lending to small businesses, farmers, and other local customers. This article takes a look at bank funding trends and their implications for community banks. The article also examines possible explanations for the trends, such as strong loan demand, shifts in household financial portfolios, new competition, comparative returns on other financial instruments, and changing demographics in community banking markets. The final section of the article then explores the options and strategies community banks can use to address their funding challenges.

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Financial Modernization: A New World or Status Quo?
By Joe Van Walleghem

The passage of the Gramm-Leach-Bliley Act (GLB) in 1999 was a milestone in financial services regulation. GLB repealed restrictions dating back to the Depression against the commingling of securities, insurance and other financial service activities within a banking organization. While still a relatively recent event, observers ponder the early, practical impact of this legislation on the scope of activities conducted by Tenth District organizations. Our banker survey provides some revealing results on the extent of early adoption and the views of Tenth District bankers as to the perceived benefits derived from GLB and how they see these changes affecting their world. In brief, the Tenth District mirrors the nation in the somewhat modest changes to banking activities and strategic plans in this initial phase.

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