Community Banking in the 21st Century

Transcription

1 Community Banking in the 21st Century Findings from the 2013 Federal Reserve / CSBS Survey of Community Bankers Jim Fuchs Assistant Vice President Federal Reserve Bank of St. Louis Charles Vice Commissioner Kentucky Department of Financial Institutions

2 Purpose of the Survey Understand the challenges and opportunities facing community banks in the post Dodd-Frank environment Hear directly from community bankers from across the U.S. Provide a foundation for more robust discussions during the 2013 town hall meetings with community banks 52 meetings in 28 states with more than 1,700 community bankers Create a record of the survey results that can be used by policy makers 2

3 Today s Community Banking Environment 3

4 While the overall percentage of community banks has not changed 4

5 their share of assets and deposits has 5

6 Percentage of Deposits in Community Bank Branches (June 30, 1994) 6

7 Percentage of Deposits in Community Bank Branches (June 30, 2003) 7

8 Percentage of Deposits in Community Bank Branches (June 30, 2012) 8

9 The number of community banks has also changed over the past 20 years Community Banks in 1994 ($10 billion or less in total assets) Community Banks in 2007 ($10 billion or less in total assets) Community Banks in 2013 ($10 billion or less in total assets) 10,286 7,136 5,722 *Since 2007, the overall number of community bank charters has declined by nearly 20 percent ** At the end of 2013, community banks represented 98.4% of commercial bank charters and 16.4% of assets 9

10 The financial crisis also had an impact on the number of community banks: more than 500 failed 10

11 44 states have experienced at least one failure since

12 There is still a large number of problem banks today 12

13 Challenges could lead to additional mergers. 120,000 U.S. Banks and Thrifts 12, ,000 10,000 80,000 8,000 60,000 6,000 40,000 4,000 20,000 2, Branches (Left Axis) Total (Left Axis) Headquarters (Right Axis) Source: National Information Center (NIC) 13

14 The Midwest looks particularly intriguing for merger activity Source: National Information Center (NIC) 14

15 Outmigration was high in these areas pre-crisis Source: Wall Street Journal, Smallville, USA, Fades Further, March 27,

16 And remains high today Source: Wall Street Journal, Smallville, USA, Fades Further, March 27,

17 Aggregate Total Assets ($000) Merger and acquisition deals since 2002 $1,400,000, $1,200,000, $1,000,000,000 $800,000,000 $600,000,000 $400,000,000 $200,000, Average, Medians and Counts $ YTD Aggregate Total Assets ($000) Average Deal Value / Tangible Common Equity (%) Median Deal Value / Tangible Common Equity (%) Number of Completed and Pending Deals 0 Source: SNL M&A Statistics as of 2/26/

18 Percentage (%) Beyond banking, housing issues remain in some parts of the country. U.S. Percentage of Seriously Delinquent Loans as of December 31, % January 2007-December 2013 Source: CoreLogic 4.99% 18

19 Home prices are recovering. But have not recovered. Geographic Area Market Peak Market Trough Peak to Current Percent Decline Boston November 2005 April Chicago March 2007 March Denver January 2014 September 2011 (2.7) Las Vegas April 2006 January Los Angeles April 2006 May Miami May 2006 November New York City May 2006 March San Diego March 2006 May San Francisco March 2006 May Washington, D.C. March 2006 April Source: Case-Shiller, through January 2014 release *percentage above previous peak 19

20 Community Bank performance has also improved ROA Nonperforming Loans + OREO/ Total Loans + OREO Loan Loss Reserves/ Nonperforming Loans Tier 1 Leverage Ratio

21 What we did in 2013 Partnership between the state banking regulatory agencies through the Conference of State Bank Supervisors (CSBS) and the Federal Reserve (through the Federal Reserve Bank of St. Louis) 21

22 What we should take-away The challenges facing community banks are real and will likely lead to significant changes in how these institutions operate 22

23 What we should take-away This industry has changed and survived through multiple transitions and need to leverage their strengths today Community banks have a key advantage social capital. They are an integral part of their communities. Community banks have intense knowledge of the local market and flatter organizational structures; they are willing to tailor products to local needs (if the cost is not too high). Community banks play a critical role in small business, farm, and residential lending. This lending is critical to community building and stabilization. 23

24 What we should take-away We re in another period of transition but it s still early and the outcome is highly uncertain 24

25 What we should take-away There are scores of bankers who are thinking and planning for the future. They see opportunities. They know what they do is important. 25

26 Survey Questions Challenges Opportunities Importance of Size and Scale Characteristics of Management and Directors Financial services in declining areas Areas of Future Research 26

27 Challenges One size fits all approach to regulation, removes one of the strongest advantages of community banks: tailoring products to fit specific customer/community needs Competitors too big to fail banks Farm Credit Banks Credit Unions Nonbank providers of payment services 27

28 And more challenges Rapidly changing technology and related consumer demand Access to capital Attracting and retaining qualified employees 28

29 Opportunities Do Abound, However Differentiating from larger banks Customer service Customization Fees Lending opportunities Improving economy Serving void left by mortgage companies SBA loans Wealth management Return to a normal banking market 29

30 Size and Scope? Must be bigger unless it is better to be smaller Compliance cost is more challenging for smaller banks Compliance cost and burden increases with size Smaller banks can be profitable The size must be related to the community the bank serves and give it the capacity to serve that community. 30

31 It is always about Management Community bankers are successful when they have strong ties to the community Bankers from larger banks are good candidates as community banks offer a better environment for innovation and autonomy Changing attitudes about careers make it more difficult to retain and development people 31

32 Changing Role of the Directors Independent and willing to challenge management Resist temptation to micromanage the day-to-day operations of the bank While business development is important, there has been a shift to directors who understand finance and corporate governance Best directors are those that take time to understand banking 32

33 The Partnership of Management and Directors Entrepreneurial spirit Disciplined, adhering to practices through economic cycle Sound business acumen Diverse backgrounds Deep understanding of markets served Nimbleness and teamwork 33

34 Serving Areas in Decline Larger banks are not interested in these areas It takes a connection and interest in these areas to want to serve them Community banks need to collaborate to serve these areas Need better cooperation, less competition, from state agencies designed to promote economic development Regulation must allow tailoring of products and services to serve these areas (QM concerns) 34

35 Understanding the Industry through Research Researchers and policymakers need to understand how community banks actually operate Identify products eliminated because of regulation Explore the relationship between regulation and the number of people un-banked Local economic impact of community banks Opportunities created by a shared services model 35

36 Other Opportunities for Researchers Do portfolio mortgages perform well even if they do not meet the Qualified Mortgage definition? What is the impact of risk retention policies on community banks? Could tax credits or incentives for investments in communities make a meaningful difference? What is the impact of nonbank competition on community banks (mobile wallets, nonbank providers)? 36

37 Opportunities for Researchers What regulations create the most compliance costs for community banks? Are there effective ways to align regulation and risk as a means of right sizing compliance costs? What is the relationship between consumer complaints and consumer protection? Are complaints a proxy for effectiveness? When do big shifts in banking strategy lead to success and why? 37

38 Competition is everywhere and continues to grow Farm Credit System Credit Unions Non-bank payment services (and math-based currencies) Larger banks Banks without a branch network 38

39 Where do we head from here? State banking regulatory agencies will be conducting another nationwide survey in 2014 Focus Areas: Impact of the QM rule, compliance costs, technology expenditures Survey results will be published in September 2014 Survey is designed to gather statistically valid data that can be used by researchers (and summary results shared with policymakers) 2 nd Annual Community Banking in the 21 st Century Conference scheduled for Sept