-
One-fourth of bankers surveyed by KPMG expect to become sellers in 2014 as challenges and regulatory scrutiny rise.
November 21 -
Douglas Manditch, chairman and chief executive at Empire National Bank, believes community banks are being squeezed by "overzealous" regulation and are feeling pressure to sell.
September 3
There is a glimmer of hope that 2014 year will be a better year for community banks.
Any improvement will only be slight and reserved for banks that have positioned themselves to take advantage of recovering economy and more consolidation. Much like 2013, small banks will likely face tepid loan demand, more regulatory scrutiny and net interest margin pressure.
Bankers should consider new products or markets to improve bottom lines. Geography will greatly influence returns, with Texas and the mid-Atlantic providing the most opportunity. At the same time, some small banks likely will exit the mortgage business as new regulation, such as the qualified mortgage rule, goes into effect.
(For full Countdown 2014 coverage,
American Banker asked five banking experts Jack Thompson, head of financial institutions investments at Gapstow Capital Partners; Lee Burrows, CEO of Banks Street Partners; Jim Adkins, managing member at Artisan Advisors; Patrick Mitchell, managing director at Protiviti; and Dory Wiley, president and CEO of Commerce Street Holdings for 2014 predictions for community banks.
The following is an edited excerpt.
How do community banks grow in the next 12-18 months?
JACK THOMPSON: Not all community banks will necessarily grow in the next 12 to 18 months. Those that have focused on generating temporary earnings, such as building their securities portfolios, may not be in a position to experience loan growth like banks that have spent the last few years building the customer relationships that will allow them to generate high-quality assets as overall economic conditions improve.
PATRICK MITCHELL: New products and expansion into new markets should be the key drivers of community bank growth. Loan demand is expected to increase as the economy continues to improve, but the pace could be tempered a bit by a likely increase in interest rates as the Fed cuts back on its quantitative easing program.
Community banks will need to focus on underserved markets to fuel loan growth. As banks look to
DORY WILEY: The recovery is sporadic and varies from locale to locale throughout the county. Texas banks will be able to grow with their local economy much easier than the Chicago or Midwestern banks while they are more dependent are stealing market share.
What are the biggest threats and opportunities for community banks in 2014?
LEE BURROWS: Margin compression seems to be the biggest threat, but this is followed closely be
JIM ADKINS: For many community bankers, asset quality will continue to be a major roadblock. New nonbank competitors continue to chip away at traditional bank products through technology. Credit unions
Asset and
What will be the strongest areas for loan demand? What will be the weakest areas?
BURROWS: This is a bit of a trick question in that the demand could be highest in loan products that banks may be steering away from such as [land acquisition, development and construction] lending. There's plenty of demand, but banks have necessarily scaled back this type of lending due to regulatory pressures.
Another area that could be big is SBA lending, though it is becoming an increasingly crowded field for lenders.
ADKINS: Consumer lending will be the strongest lending sector. However, this strength will be concentrated at the larger community and regional banks because many smaller banks do not have significant consumer loan operations. Construction lending will continue to be weak as this sector still is recovering from recession-related asset quality issues.
WILEY: The strongest areas will be in
What will mortgage banking look like a year from now?
MITCHELL: With declining unemployment and interest rates remaining low, demand for residential loans should continue. As the year progresses, interest rates will likely increase and demand will gradually taper off.
The cumulative effect of massive and concurrent regulatory changes impacting mortgage lending is likely to be that many smaller lenders will exit that market, or at least the riskier segments. Other lenders may look to white label relationships or other solutions that allow them to offer products to their customers without having to build the necessary infrastructure, systems and processes internally.
THOMPSON: Mortgage lending has become a relatively unattractive method for asset generation for community banks. It is an increasingly commoditized product that is facing enhanced regulatory oversight and unclear regulatory capital treatment. Therefore, we believe many community banks will continue to reduce their exposure in this area.
What should we expect in terms of M&A?
BURROWS: Brisk! We believe it will be
Now that so many of the acquiring banks' currencies have recovered, acquirers are out hunting for smaller banking partners. The activity will be particularly swift among banks that have no listing for their stock and, therefore, may have limited means to obtain liquidity.
MITCHELL: We should see continued M&A among community banks as they look to expand into new markets, manage regulatory changes and spread costs over a larger asset and revenue base. The magic number to remain competitive appears to be assets of at least $1 billion, although one could argue that the number is slightly higher. Most of the banks we work with are actively looking for acquisition targets.
WILEY: M&A will continue to increase, with Texas leading the way followed by the mid-Atlantic, Northwest and California, with the Midwest and Southeast slowly catching on. Pricing multiples will follow in the same fashion with clean strong banks at 2-2.5 times book value in Texas moving down to 1.25-1.5 times book value [in other markets].
THOMPSON: M&A should increase as banks seek to achieve operating scale and become less concerned about credit portfolio uncertainty. However, sellers without a valuable operating franchise may be disappointed by the prices they are offered.