Community banks on the whole emerged from the first quarter profitable and well capitalized. Loan losses were rare, and executives' collective outlook on credit quality is bullish.
To be sure, deposit levels fell after the failures of Silicon Valley and Signature banks. Funding costs jumped, and net interest margins were squeezed. But most community lenders said deposit balances recovered, and they remain stable. In the first week of May, deposits at all but the 25 largest U.S. banks rose 0.4% from a week earlier, according to the most recent Federal Reserve data.
Bears mauled small lenders' stocks anyway. The S&P U.S. SmallCap Bank Index is down more than 30% since the start of March. The Dow Jones Industrial Average, in contrast, is up nearly 2% in the same span.
What gives?
Shares of small banks "are clearly oversold," Claude Hanley, a partner at Capital Performance Group, said in an interview. "But it's complicated."
These collapses galvanized short sellers as well as pessimistic investors, who are focusing intently on threats to all banks' financial health — potential deposit flight or credit weakening if a recession hits.
The Fed has hiked interest rates 10 times over the past year to combat inflation, which hit a 40-year high in 2022 and remains more than double the central bank's 2% target. Historically, the combination of rapidly rising rates and lingering high costs has
Community banks are particularly active commercial real estate lenders, a segment vulnerable to diminished demand for office space if remote work remains commonplace in the post-pandemic era.
But, as Hanley noted, small banks tend to lend more in suburban and rural areas, as opposed to the downtowns of major markets — the areas hardest hit by work-from-home trends.
That fact helps explain why community lenders' credit losses are virtually nonexistent, analysts at Piper Sandler said. At the Gulf South Bank Conference last week, bankers were cautious about forecasting loan growth this year but were otherwise optimistic, according to analysts. They reported deposit stabilization and confidence in their ability to protect net interest margins — the spread between the interest they earn on loans and what they pay for deposits.
"While recent market turmoil may lead outsiders to believe banks are on the brink, the reality for the banks we saw is that deposits have stabilized, spreads are holding and credit conditions remain pristine," the Piper Sandler analysts said in a report. "Funding obviously remains a valid concern, but not a single bank noted abnormal deposit outflows tied to a loss of confidence. Most cited stable deposit balances" during the current quarter.
Bankers made the same case during interviews this month.
"There's definitely a rebound coming," said Larry Mazza, CEO of the $3.6 billion-asset MVB Financial in Fairmont, West Virginia. "The issue is timing, of course, but bank stocks will be back."
MVB cited "
MVB's shares are down about 30% since the beginning of March, meaning its offer for Integrated — initially worth $98 million — had declined in value by roughly half. MVB says it didn't like deploying stock when its buying power was so depressed.
"The economics just didn't work at this point," Mazza said. But he did not rule out revisiting the deal down the road, and he said long-term investors are beginning to refocus on community banks' enduring strengths. MVB, for example, has a steady deposit base, robust capital levels and strong credit quality — and Mazza says those metrics could be maintained even in a recession.
"The fear is waning," Mazza said. "I think we mostly had a social media-driven panic that fueled short selling, but I think that's slowing. It's going to be a bumpy ride in the near term, but I think there's a helluva lot of value in bank stocks."
Christopher Maher, chairman and CEO of
"There is a little more pessimism today than is warranted," Maher said.
Loan growth is likely to ease this year and deposit costs are bound to remain elevated amid increased competition, he said, but the bank's foundation is sturdy. The community banking sector overall can claim the same, he argued.
"So I'm hopeful we can bring this unfortunate chapter to a conclusion and we can all move forward and focus on the reality that we have a strong banking system," Maher said.
