If you thought 2012 was a roller coaster ride for community banks, brace yourselves for next year.
American Banker recently reached out to three banking experts, Jeff Adams at Monroe Securities, Richard Lashley at PL Capital and Joshua Siegel at StoneCastle Partners, to get their views of community banking in the year ahead. The following is an excerpt of their responses.
How would you assess the environment for community banks over the next 12-18 months?
JEFF ADAMS: Community banks continue to recover on the asset quality front, but it remains a slow recovery. As the challenges with problem loans recede, community banks will look for solid loan growth opportunities, but find demand still tepid. Over the past few years, we've seen more evidence of the regionals emphasizing lending to smaller business clients on much better terms than community banks, providing an additional headwind for community banks looking to go on the offensive.
Margin pressure will continue to weigh on the industry, squeezing spread income. Unlike the larger banks, community banks have little fee income to offset the loss of spread revenue, which will result in a more pronounced impact on earnings.
RICHARD LASHLEY: For most banks, credit issues have been dealt with or will be manageable without requiring capital raises or destroying profitability. The biggest challenge is mitigating net interest margin compression without taking on excessive interest rate risk.
There is also the related issue of growing loans and revenue while dealing with a near-recessionary economy and the most oppressive regulatory and political environment in 25 years. The industry as a whole is earning about two-thirds of the [return on equity] they earned pre-crisis. Profitability will grind higher, slowly, over time, but not get back to pre-crisis levels due to higher capital levels in the denominator. About 90% of the industry is profitable, which is almost back to normal.
JOSH SIEGEL: Banks will face a dichotomy of performance metrics. On one hand, over 6,200 banks are profitable, well capitalized and earning an average 9.9% [return on equity] and have been underwriting near-pristine credit quality for at least three years, which foretells of low nonperforming assets and chargeoffs over the next four to five years .