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Banks that want to expand via M&A will face a special challenge in 2014. The failed-bank market has quieted, but regulatory costs and other factors that are expected to drive open-bank M&A haven't coalesced quite yet, says bank M&A advisor Randy Dennis.
December 23 -
Esther George, president of the Kansas City Fed, highlighted the shortcomings of banking regulation, especially as applied to community banks, and said the "pendulum has swung too far" on consumer protection.
September 23 -
Camden Fine at the Independent Community Bankers of America believes entrepreneurial bankers will return to starting new banks in the latter half of this decade as the industry adjusts to the new business conditions and as consolidation creates voids.
September 5 -
Rebeca Romero Rainey, the CEO of Centinel Bank of Taos, will use part of her speech at a Federal Reserve conference on small banks this week to discuss the need for regulatory relief and her belief that community bankers have a duty to persevere under difficult circumstances.
September 22
ST. LOUIS Economic and regulatory forces have put a large percentage of community banks in a holding pattern, according to a new survey.
Smaller institutions are still trying to adapt to the slowly recovering economy, new government rules and other business challenges, according to the survey issued Wednesday by the Federal Reserve Board and the Conference of State Bank Supervisors.
As a result, a large number of banks have no plans to add new products in coming years. The risks of expanding technology products often overshadow the need to do so in their eyes. And while more banks are mulling mergers, the industry has yet to see a meaningful increase in activity.
Banks gave no clear indication when the limbo period will end.
A panel of bankers and other industry experts at the Fed's community banking conference in St. Louis tackled these issues on Wednesday, along with ways that bankers and regulators can help smaller institutions.
"There are a lot of people who are still trying to figure this out and where things are headed," Lamont Black, a finance professor at DePaul University and the panel's moderator, said during a discussion on regulation.
Very few banks just 6% of the survey's 1,008 respondents are exiting businesses as a result of new regulation, the study found. But 40% said they had no plans to roll out new products or services in the next three years. (The survey largely focused on banks with less than $10 billion in assets, with most having $100 million to $1 billion in assets.)
The study also found that two-thirds of respondents had no plans to make non-qualified mortgages, or would only do so under special circumstances.
"Low- and moderate-income customers are negatively impacted," said Timothy Zimmerman, president and chief executive of Standard Bank, Monroeville, Pa., who also chairs the Consumer Financial Protection Bureau's community bank advisory council. "They aren't bad borrowers but now they probably can't get credit."
Technology also remains daunting for smaller institutions, with inherent risks such as compliance, due diligence and the potential of cyberattacks outweighing market demands for products such as mobile banking and remote deposit capture.
"All technology carries an additional compliance risk," Hank Seale, a technology consultant based in Austin, Texas. "So we're looking for tech products that offer the lowest compliance risk."
Panelists also weighed in on consolidation trends and the dearth of new bank charters. A day earlier, a research team from the Fed issued a report that found that economic factors, including low interest rates, have a tremendous role in
"I would never do a second [de novo], not in this environment," said Trey Maust, co-president and chief executive of Lewis & Clark Bank in Oregon City. "There needs to be a reasonable economic return 12% to 15% internal rate of return to justify the effort."
The regulatory process, largely downplayed in the Fed research, also provides a disincentive to form a new bank, Maust said, adding that a five- to seven-year period of heavy scrutiny for startups is too much. "You are in a very tight bandwidth of operating parameters that are almost like having a consent order," he said.
The study also looked at bankers'
The overall results seemed to indicate that bankers are taking a step back to assess the environment, Julie Stackhouse, head of supervision at the Federal Reserve Bank of St. Louis, said in an interview. "This is a year with a lot of change for banks," she said, expressing hope that next year's survey will give bankers and regulators a better understanding of the industry's trajectory.
The panel also looked at ways to break the malaise, with Black asking the audience to weigh in.
There was a call for greater dialogue between bankers and regulators, with the potential of forming a task force to examine key issues. Todd Vermilyea, senior associate director in the Fed's division of banking supervision and regulation, said during the gathering that bankers could expect the central bank to "be a willing partner with engagement."
David Cotney, the banking commissioner in Massachusetts, suggested that more state regulators could made adjustments to their supervisory processes. There was a view from others that the idea of granting examiners more discretion,
"The dialogue has changed a little bit," Stackhouse said, with more attention placed on flexibility and judgment.
"We know that, with flexibility, there are potential differences in how things are done, but maybe that's OK," Stackhouse said. "The question is where do you start? I don't think you can just go out and tell examiners to be more flexible. I think that's in front of us."
One of the more innovative ideas came from Joshua Siegel, chief executive of StoneCastle Partners, which invests heavily in community banks.
"Why not administer a test to borrowers after letting them read [loan] documents?" Siegel suggested. "The government gives people a driving test before letting them drive. Why not give them a mortgage test to qualify for a mortgage and take the burden off the banks?"
Still, the overall assessment was that more relief is needed.
"I think the future of community banking is bright," Zimmerman said. "We just have to take some of the restrictions off, but the business model certainly makes sense today."
