Community banks are the backbone of local economies, providing essential financial services to individuals, families, and small businesses. However, their pivotal role comes with unique challenges, including increasing regulatory scrutiny, evolving compliance requirements, and heightened risks in areas like cybersecurity and vendor management. As we move into 2025, the need for proactive audit planning has never been greater.
Audits are an opportunity for community banks to strengthen their operations, mitigate risks, and build trust with stakeholders. By prioritizing key audit areas, banks can navigate the complexities of the regulatory landscape while maintaining their commitment to serving their communities.
This blog outlines the top audit priorities for community banks in 2025, covering critical areas like BSA/AML compliance, cybersecurity, and fair lending practices. With the right focus, community banks can position themselves for success in the year ahead, ensuring both regulatory readiness and operational excellence. Let’s explore where to focus your efforts to stay ahead in 2025.
Strengthening BSA/AML Compliance
Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance remain top priorities for community banks in 2025 as regulators continue to heighten their focus on preventing financial crimes. For community banks, ensuring a robust BSA/AML program is not only essential for meeting regulatory expectations but also critical to maintaining trust and operational integrity.
I. The Importance of BSA/AML Compliance
Community banks often operate in markets where they are perceived as having weaker controls compared to larger institutions, making them potential targets for money laundering and other financial crimes. Regulators, including FinCEN and federal banking agencies, are particularly vigilant about ensuring that smaller institutions implement effective controls to detect and prevent illicit activities. A failure to meet these expectations can result in penalties, reputational damage, and increased regulatory scrutiny.
II. Comprehensive BSA/AML and OFAC Risk Assessments
Strengthening BSA/AML compliance in 2025 requires community banks to focus on several key areas. Comprehensive risk assessments are the foundation of an effective program. Banks must review customer risk profiles, transaction patterns, and geographic exposure to identify vulnerabilities. Updates to risk assessments should reflect changes in products, services, or operational environments introduced during the year. Advanced risk-scoring models can further help banks identify and prioritize high-risk customers and activities.
III. Transaction Monitoring and Suspicious Activity Reporting (SARs)
Effective transaction monitoring and timely SAR filings are equally vital. Banks need to ensure their monitoring systems can detect unusual patterns or anomalies that could signal financial crimes. Audits should include a review of SAR filing processes to verify accuracy, timeliness, and adherence to regulatory requirements. Additionally, testing system thresholds and parameters ensure that monitoring remains relevant and effective as risks evolve.
IV. Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)
CDD and EDD are integral to identifying and managing risks associated with high-risk customers. CDD procedures should align with current regulatory standards, including the identification of ultimate beneficial owners (UBOs). For high-risk customers, such as politically exposed persons (PEPs), enhanced due diligence measures must be in place to mitigate risks. Ongoing reviews of customer information ensure risk profiles remain up-to-date and accurate.
V. Training and Awareness
Training and awareness programs play a pivotal role in building a culture of compliance within community banks. Regular training sessions help staff understand their roles in maintaining BSA/AML compliance and ensure they are equipped to identify and address red flags. Incorporating case studies and real-life scenarios into training can make it more impactful and relevant. Continuous updates to training programs ensure they reflect the latest regulatory changes and emerging risks.
VI. Audits and Compliance Reviews
Proactive measures such as independent audits and internal compliance reviews can further strengthen a bank’s BSA/AML program. These exercises help identify and address gaps before they are flagged by regulators. Regular updates to policies, procedures, and internal controls ensure the program remains aligned with evolving regulatory expectations.
Managing Cybersecurity Risks
Cybersecurity risks have become one of the most significant threats to community banks, as cybercriminals increasingly target smaller institutions that may lack the robust defenses of larger organizations. In 2025, managing these risks is more critical than ever, as regulators heighten their scrutiny of IT security measures and demand greater accountability for safeguarding sensitive financial data. For community banks, strengthening cybersecurity through comprehensive audits is not just about compliance—it’s about protecting customer trust and ensuring operational resilience.
I. The Importance of Cybersecurity Controls
The growing complexity of cyber threats has made cybersecurity a top priority for regulators. Ransomware attacks, phishing schemes, and insider threats have increased in sophistication, while the expanded use of cloud-based systems, digital banking platforms, and remote work environments has created additional vulnerabilities. Regulators such as the Federal Financial Institutions Examination Council (FFIEC) and other global bodies have introduced stricter cybersecurity requirements, making it essential for community banks to align their practices with these evolving standards.
II. Internal Audits, Vulnerability Scans, and Penetration Testing
To manage cybersecurity risks effectively, community banks must first evaluate their IT risk management frameworks. Audits should focus on assessing the bank’s cybersecurity policies, procedures, and controls, ensuring they are both comprehensive and up-to-date. This includes reviewing access controls, data encryption protocols, and network security measures. Special attention should be given to identifying potential vulnerabilities, such as outdated software or inadequate monitoring of critical systems.
III. Incident Response and Business Continuity Plans
Banks must demonstrate their ability to detect, respond to, and recover from cyber incidents swiftly and effectively. Audits should evaluate the adequacy of incident response protocols, testing whether they are well-documented, regularly updated, and rehearsed through simulations or tabletop exercises. Additionally, business continuity plans should account for various cybersecurity scenarios, ensuring that the bank can maintain critical operations even in the face of a major disruption.
IV. Vendor Management
Third-party risk management is also a critical component of cybersecurity. Many community banks rely on vendors for essential services, such as IT infrastructure, cloud storage, or digital banking platforms. These partnerships can introduce additional cybersecurity risks, particularly if vendors fail to maintain adequate security standards. Audits should include a review of the bank’s vendor management program, assessing due diligence processes, contractual agreements, and ongoing monitoring to ensure that third-party vendors comply with cybersecurity expectations.
V. Training and Awareness
Training and awareness are vital for minimizing human-related cybersecurity risks. Employees are often the first line of defense against cyber threats, and inadequate training can leave the bank vulnerable to phishing attacks or social engineering schemes. Audits should review the scope and frequency of employee training programs, ensuring that they cover topics such as recognizing phishing attempts, maintaining secure passwords, and adhering to data protection protocols.
Enhancing Fair Lending Practices
As regulatory expectations evolve, fair lending compliance is set to remain a top priority for community banks in 2025. Regulators are intensifying their focus on preventing discriminatory practices, ensuring financial inclusion, and promoting equitable access to credit. For community banks, enhancing fair lending practices through comprehensive audits is crucial—not just to avoid fines and penalties but to build trust with customers and align with regulatory and community expectations.
I. Loan Applications and Underwriting Practices
Community banks must ensure that credit decisions are based solely on objective criteria, such as creditworthiness, and are free from bias or discrimination. Audits should analyze loan approval and denial patterns across various demographic groups to identify potential disparities. If disparities are detected, banks must investigate whether they stem from unintentional biases in policies, procedures, or employee practices and take corrective action where necessary.
II. Marketing Practices
Regulators increasingly scrutinize how financial products are marketed to ensure they are accessible to all segments of a community. Banks should review their advertising campaigns, promotional materials, and outreach strategies to confirm they do not exclude or disproportionately target specific demographics. For instance, digital marketing strategies should be assessed to ensure online advertisements are not inadvertently steering products away from certain populations due to algorithmic biases.
III. Community Reinvestment Act (CRA)
As CRA regulations continue to evolve, community banks must ensure their lending, investment, and service activities align with the credit needs of the communities they serve, particularly low – and moderate-income (LMI) areas. Fair lending audits should include an assessment of CRA performance, focusing on whether the bank is meeting its obligations and effectively documenting its efforts.
IV. Effective Training
Training employees on fair lending laws and compliance requirements is essential for maintaining a culture of fairness and accountability. Regular training sessions should equip staff with the knowledge needed to identify and avoid discriminatory practices. Audits should evaluate the frequency and content of training programs, ensuring they are updated to reflect new regulatory requirements and tailored to the bank’s specific operations.
V. Leveraging Technology
Advanced analytics can help banks identify lending patterns and trends that may indicate potential risks. Automated tools can also streamline compliance efforts by monitoring credit decisions, marketing campaigns, and loan servicing for signs of bias. Fair lending audits should assess whether these technologies are effectively integrated into the bank’s compliance framework and whether the data being analyzed is accurate and comprehensive.
Strengthening Vendor and Third-Party Risk Management
As community banks increasingly rely on third-party vendors to provide critical services, vendor and third-party risk management is set to remain a top audit priority. Regulators continue to scrutinize these relationships, emphasizing the need for robust oversight to ensure that vendors meet regulatory standards and do not expose institutions to undue risks. For community banks, strengthening vendor management practices through comprehensive audits is essential to maintaining operational integrity, compliance, and trust.
The complexity of vendor ecosystems presents significant challenges for community banks. From cloud service providers to fintech partnerships, third-party vendors are often deeply integrated into a bank’s operations. However, these relationships can introduce risks such as data breaches, operational failures, and non-compliance with regulatory requirements. Regulators, including the OCC and the CFPB, have set clear expectations for how institutions should evaluate, monitor, and manage their vendor relationships.
I. Vendor Selection and Onboarding
Community banks should begin by auditing their vendor selection and onboarding processes. Audits should assess whether the bank’s due diligence efforts are thorough and aligned with regulatory requirements. This includes evaluating vendors’ financial stability, compliance history, cybersecurity measures, and data protection protocols. Additionally, banks must ensure that vendor contracts include clear expectations for compliance, performance, and reporting, as well as provisions for audits and termination rights in the event of non-compliance.
II. Ongoing Monitoring
Ongoing vendor monitoring is equally important. Regular performance reviews should evaluate whether vendors are meeting their contractual obligations and maintaining compliance with regulatory standards. Audits should include an assessment of the bank’s processes for tracking vendor performance, such as periodic reviews, service-level agreement (SLA) monitoring, and incident reporting. For critical vendors, community banks should ensure they have comprehensive contingency plans in place to mitigate the impact of potential disruptions.
III. Cybersecurity
Cybersecurity risks associated with third-party vendors require special attention. With vendors often having access to sensitive customer data and critical systems, any vulnerabilities in their security measures can expose the bank to breaches or compliance violations. Audits should examine how the bank ensures that vendors maintain robust cybersecurity practices, including encryption, access controls, and incident response protocols. Vendor risk management audits should also evaluate how the bank monitors compliance with frameworks such as the FFIEC Cybersecurity Assessment Tool.
IV. Vendor Management Tools
In 2025, technology will continue to play a pivotal role in managing vendor risks. Vendor management platforms and automated tools can streamline processes such as due diligence, risk assessments, and performance tracking. Audits should evaluate whether the bank is effectively leveraging these tools to enhance its vendor management program. Additionally, the accuracy and completeness of data used in vendor risk assessments should be reviewed to ensure reliable decision-making.
V. Training
Training employees on vendor risk management is another critical area for audits. Staff involved in vendor relationships should be equipped with the knowledge and tools needed to evaluate and monitor third-party risks effectively. Audits should assess the scope and frequency of training programs, ensuring they address emerging risks and regulatory expectations.
Preparing for Regulatory Changes
The regulatory landscape is constantly evolving, and 2025 promises to bring significant updates that community banks must be prepared to navigate. From changes to existing laws to the introduction of new requirements, regulators are increasingly focused on ensuring financial institutions adapt to emerging risks and challenges. Proactively preparing for these changes through robust audits and updated compliance frameworks is critical for community banks to remain compliant and operationally efficient.
I. Updating Policies and Procedures
Audits should begin with a comprehensive review of the bank’s policies and procedures to ensure alignment with updated regulatory expectations. This includes assessing whether current compliance frameworks account for emerging risks such as fintech partnerships, data privacy, and climate-related disclosures. Regular mock audits or gap analyses can help identify areas where policies fall short of new requirements, allowing banks to address vulnerabilities before regulatory examinations occur.
II. Regulatory Change Monitoring
Community banks should designate a compliance officer or team responsible for monitoring new regulations and assessing their potential impact on operations. Participation in industry groups, webinars, and regulatory briefings can provide valuable insights into upcoming changes. Audits should evaluate how effectively the bank’s compliance team tracks and integrates these updates into its practices.
III. Updating Training
Training is an essential component of preparation for regulatory changes. Employees across all levels of the bank must understand how new regulations affect their roles and responsibilities. Audits should assess the quality and frequency of training programs, ensuring they are tailored to address specific regulatory updates and provide actionable guidance.
Conclusion: Top Audit Priorities for Community Banks
As community banks prepare for 2025, focusing on key audit priorities is essential to navigating a dynamic regulatory environment and addressing emerging risks. Strengthening BSA/AML compliance, managing cybersecurity threats, enhancing fair lending practices, monitoring third-party risks, and staying ahead of regulatory changes are not just about meeting compliance requirements—they are about building trust, ensuring operational resilience, and positioning your institution for long-term success.
Proactive audit planning and thorough execution will not only help community banks avoid penalties but also uncover opportunities to improve efficiency and deliver better services to their customers. By addressing these priorities now, community banks can confidently face the challenges of 2025 and beyond.
Ready to ensure your bank is audit-ready for 2025? RADD LLC specializes in providing tailored audit solutions that help community banks strengthen compliance, mitigate risks, and stay ahead of evolving regulatory expectations. Contact us today to schedule a consultation and discover how we can support your institution’s success. Let’s work together to make 2025 your bank’s strongest year yet!