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Central View: Opportunities Are Present among Uncertainty


Julie L. Stackhouse

I am often asked: “Is the banking crisis over? Has the performance of banks returned to ‘normal’?”

While we have seen great progress, the news is still mixed. Earnings for community banks have rebounded; however, pressure on net interest margins remains a concern. In recent years, many banks have benefited from a high volume of mortgage refinancing activity and the associated fee income, but that activity has now fallen off. Overall, community banks report weak loan demand and fierce competition for high-quality small business loans and commercial and industrial loans.

Many of the aforementioned challenges are a result of an extended low interest rate environment. But other factors, including regulatory changes, are also having an impact. Often cited are the new Ability-to-Repay (ATR) rule, the Qualified Mortgage (QM) rule and enhanced emphasis on consumer protection.

With respect to the ATR rule, community banks are uncertain how regulators will interpret ATR requirements. Often cited are borrowers with disrupted income streams or those who are unwilling to fully disclose income information. Likewise, banks are uncertain about whether to extend credit for mortgages that do not meet the QM rules. Community banks tell me that some non-QM mortgages will be made, but they will be exceptions and not the norm. It remains unclear what effect these decisions will have on mortgage credit availability. I believe we’ll need a few more quarters of data to really start assessing the impact of this rule.

Community banks also cite the Affordable Care Act as creating uncertainty for businesses. The delay in implementing the act’s mandates, while granting a temporary reprieve for many businesses, has also resulted in some confusion over the true impact of the act’s costs. Community banks are trying to understand the effect on small business balance sheets and, ultimately, the impact on demand for credit.

Community banks also express concern over escalating costs associated with consumer compliance expectations. Hiring even one additional staff member to address compliance laws and regulations can be significant for smaller community banks. Larger banks point to the opportunity costs of adding resources to address growing consumer compliance expectations.

This uncertainty, combined with the fact that more than 450 community banks are still on the Federal Deposit Insurance Corp.’s problem bank list, has some bankers expecting an uptick in merger and acquisition activity. Indeed, the data suggest that merger and acquisition activity is returning to precrisis levels. However, acquisition prices are much lower. It’s also important to note that the conveniences created by widening technology have, in some instances, diminished the value of traditional full-service brick-and-mortar branches. As customers embrace the conveniences of technology, the industry has evolved, resulting in some branch consolidation.

We clearly see challenges for community banks. Regardless, I remain optimistic. There is a role for well-managed banks in our communities. Those banks planning for the challenges will be best positioned to survive them.