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Strategizing for Success in Late 2024: A Follow-Up Guide for Community-Based Financial Institutions

Posted on October 1, 2024 Published by

As we move through the final stretch of 2024, community-based financial institutions face an environment characterized by higher interest rates, changing regulatory landscapes, and shifting economic realities. For these institutions, which often serve local communities, small businesses, and individuals, the ability to adapt to these challenges while maintaining personalized service and support is essential.

The start of the year brought a comprehensive checklist to help community financial institutions prepare for 2024. This follow-up blog revisits the strategies laid out in January and provides updated insights to guide your institution through the remainder of the year and into 2025.

Review the Credit Portfolio

In January, we emphasized the importance of thoroughly assessing the credit portfolio as a critical component of strategic planning. As 2024 has progressed, the economic environment has continued to shift, making ongoing portfolio review more important than ever for community-based institutions.

Refine Risk Profile Evaluations 

With interest rates remaining high throughout much of the year, borrowers—especially small businesses and lower-income individuals—are facing more difficulties meeting their financial obligations. This means it’s crucial to:

  • Update risk profiles: Community financial institutions should now revisit their risk assessments. Borrowers who were considered low risk at the beginning of 2024 may now present higher risks, especially those in sectors sensitive to economic fluctuations, such as hospitality and retail.
  • Deepen customer relationships: One of the unique advantages of community institutions is their close relationships with borrowers. Use these relationships to conduct more personalized risk assessments, considering not just numbers but also the specific challenges and opportunities your clients face.

Evaluate Loan Portfolio Concentration and Diversification 

Community financial institutions often serve niche markets, such as local agricultural businesses or small family-owned enterprises. This can lead to concentration risk if too much of the portfolio is exposed to one sector. Over the past year, it’s become clear that:

  • Diversification is essential: Reevaluate sectoral exposure and avoid over-concentration in vulnerable areas. Diversifying the loan portfolio by targeting sectors that have shown resilience, like healthcare or education, can mitigate potential losses.
  • Consider geographic diversification: If your institution serves several small communities, look at spreading lending across different geographic regions to reduce the impact of local economic downturns.

Stress Test for Resilience 

Stress testing is no longer just a precautionary measure—it’s a necessity for survival in a high-risk economic environment. With potential recessions and global uncertainties still looming, ensure that:

  • Stress tests are updated regularly: Use the latest economic data and stress test scenarios that reflect the realities of today, such as persistent inflation and the ongoing challenges in the real estate market.
  • Incorporate environmental risks: With the growing focus on climate change, some communities are facing increased risks from natural disasters. Consider including climate-related factors in your stress testing, especially if your institution lends to agriculture, real estate, or energy sectors.

Review and Update Policies and Procedures

Throughout 2024, regulatory scrutiny has intensified, particularly around areas such as fair lending practices, cybersecurity, and climate-related disclosures. For community-based institutions, staying compliant while managing limited resources is a delicate balancing act.

Ensure Compliance with Fair Lending and Anti-Discrimination Laws

One of the regulatory trends in 2024 has been a renewed focus on fair lending practices, ensuring that financial institutions serve diverse populations without bias. This has special relevance for community-based lenders, who are often in close proximity to underserved communities.

  • Review lending practices: Ensure that your institution’s lending decisions are free from bias and consider training staff on fair lending regulations. Regularly audit your loan approval processes to identify any unintentional discriminatory patterns.
  • Strengthen community outreach: Bolster your relationships with diverse communities by actively engaging with local businesses, offering financial literacy programs, and creating products designed to meet the needs of historically underserved populations.

Adapt Collateral Monitoring Procedures 

The real estate market has remained volatile throughout 2024, with property values fluctuating in different regions. For institutions that lend heavily on real estate, particularly those focused on local property markets, it’s essential to:

  • Reassess collateral valuations: Ensure that your collateral monitoring procedures reflect the current market value of properties. Overvaluing collateral can lead to larger losses if defaults increase.
  • Monitor changes in property markets: Stay up to date on local real estate trends, which may differ from national averages. Understanding your community’s market conditions can help you better manage risk and adjust lending practices accordingly.

Develop Your Team

A core part of the January strategy was focusing on talent development, and this remains just as important as we enter the final months of 2024. Community financial institutions, in particular, rely heavily on their employees’ local knowledge, relationships, and adaptability.

Upskill and Cross-Skill 

The evolving regulatory and technological landscape demands that your team is always up to speed with the latest trends.

  • Encourage ongoing education: Employees should be regularly trained on updates in regulations, new financial products, and risk management strategies. Invest in affordable online training programs, webinars, or in-house workshops.
  • Promote cross-department training: Small institutions benefit from having flexible employees who can handle multiple responsibilities. Cross-training staff in different functions, such as lending, compliance, and customer service, builds a more resilient workforce.

Foster Leadership Development 

To ensure long-term success, community financial institutions need strong leadership, particularly as the financial landscape becomes more challenging. Small banks and credit unions should:

  • Develop internal leadership programs: Encourage high-performing employees to take on leadership roles and mentor others. Leadership development programs can also help identify and prepare the next generation of leaders.
  • Promote diversity in leadership: A diverse leadership team will offer different perspectives and innovative solutions. Promote equity in advancement opportunities and ensure that leadership roles are accessible to all employees.

Plan Annual Reviews and Act on Findings

As we approach the end of 2024, annual reviews of your institution’s performance, loan portfolio, and risk management strategies are crucial for planning ahead. The insights gained from these reviews should guide your strategies for 2025.

Perform Strategic Loan Portfolio Reviews

At the start of the year, we encouraged you to develop a comprehensive annual review plan. Now is the time to take those reviews seriously and:

  • Analyze performance trends: Review how your portfolio has performed over the year, paying special attention to sectors that have underperformed or exceeded expectations. Adjust lending strategies for 2025 based on these insights.
  • Identify emerging risks: The end-of-year review should not only focus on past performance but also on potential future risks. Use the data from 2024 to anticipate challenges in 2025, such as further interest rate hikes or regulatory changes.

Implement Independent Loan Reviews 

Independent loan reviews are a critical part of maintaining an unbiased perspective on your portfolio’s health. Ensure that you:

  • Address previous findings: If previous independent reviews identified areas of concern, ensure that your institution has taken appropriate action. This might involve stricter underwriting standards or closer monitoring of high-risk borrowers.
  • Increase frequency if necessary: Given the volatile economic climate, consider increasing the frequency of independent loan reviews for higher-risk loans or portfolios. Doing so ensures that risks are identified and mitigated earlier.

Conclusion: Preparing for a Successful 2025

As 2024 draws to a close, community-based financial institutions must remain vigilant and adaptable. The strategies discussed in January are still relevant, but they must be fine-tuned to address the ongoing challenges of economic volatility, rising interest rates, and increased regulatory scrutiny. By continuing to focus on credit portfolio management, team development, and compliance, your institution will be well-positioned for success in 2025.

The strength of community financial institutions lies in their deep understanding of local needs, their ability to build lasting relationships, and their flexibility in responding to change. By maintaining these core values while adopting forward-looking strategies, community banks and credit unions can continue to thrive.

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“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors.”
— Bill Beardsley, President, Michigan Business Connection
“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors."
— Bill Beardsley, President, Michigan Business Connection