NEW YORK -- Wen officers of community banks are asked to give their strategies for dealing with the deregulated 1980s, it is often noted that in terms of return on average assets, small banks outperform large banks.
So why do community banks need strategic planning?
"You make money by design, not by happenstance, in today's deregulated environment," says Kendon T. Birchard, senior vice president of the $167 million-asset National Security Bank of Chicago.
Mr. birchard, whose bank has implemented a strategic plan, adds that a formal, written strategic plan is necessary to maintain or enhance what a bank has achieved.
Tom Mularz, who coordinates strategic planning programs for the Bank Administration Institute (BAI), notes that banks as a rule have done very little strategic planning and community banks have done none. In the past, there was little reason to do so.
The cost of funds was fixed by regulation as was the marketplace and the type of products offered.
Now, the rates banks pay for deposits are deregulated, and geographic and products limitations are disappearing.
These trends affect all banks, but community banks have fewer ways to cope.
The smallest banks, which have natural niches that are unlikely to attract competitors, can be run on an ad-hoc basis. But the largest banks have the financial and managerial resources to develop a strategic plan.
Banking industry observers believe the mid-size banks -- lacking size, capital and management depth -- will have the biggest problems competing in the 1980s.
"Community banks have -- through automated teller machine and correspondent networks -- the same complexities in products and markets as the larger banks but less internal management to cope," says Roger W. Smith, a bank consultant. Mr. Smith works out of the Portland, Ore., office of Arthur Andersen & Co. He recently coauthored a book, "Strategic Planning for Banks," with Richard Sapp, professor of finance at Portland State University.
Mergers and acquisitions play a larger role in today's banking market than they did in the past, and a bank must decide whether it will be a buyer or seller. Without a strategic plan with regard to mergers, the bank can fall prey to an unwanted suitor or be caught unperpared for either a good deal for its stockholders or an opportunity to enter a new market by acquiring another bank.
Mr. Smith notes that with all of the talk about mergers and acquisitions, a number of community bankers thought they could sit back and wait for the big money-center banks to ride into their towns, buy their banks, and leave a trail of cash behind them.
"The fact is that community banks have not proven to be attractive merger targets for large banks," says Mr. Smith, "and community bankers have come to the realization that there is no market for their stock and that they will have to learn to deal with the new environment." Regulators Want Formal Business Plans
In some cases, regulators require community banks to develop formal business plans for either improving the capital position or improving the performance of the loan portfolio.
Strategic plans also can help small banks take a longer-term view of their marketplaces, avoid making unilateral decisions, and reduce subjective decision-making.
Once a community bank decides to establish a formal strategic plan, the procedures are the same as for large banks.
"The first step is to determine where a bank is, whether it has a strategic plan, whether it has a process for developing one," he says.
In its strategic planning programs, Bank Administration Institute (BAI) looks at four main areas of a bank, Mr. Mularz says: Marketing, human resources, operations, and accounting and finance.
An important element in the process is what BAI calls its "Marketscan" and Arthur Andersen calls environmental scanning -- basically tools for analyzing a bank's marketplace. …