WASHINGTON — Many community bankers remain apprehensive about the year ahead.
Leaders of smaller institutions continue to fret over low interest rates and hypercompetition. Some are paying closer attention to regulatory caps on commercial real estate lending, along with other compliance matters. Others are concerned that gradual increases in interest rates, which the Federal Reserve is expected to begin Wednesday, could actually lead to more margin compression.
Such trepidation was on display at a community banker roundtable Dec. 9 hosted by the American Bankers Association.
Attendees included Micah Bartlett, chief executive of Town and Country Financial in Springfield, Ill.; Norman Beatty, chairman and CEO of First Hope Bank in Hope, N.J.; Luanne Cundiff, president of First State Bank of St. Charles in Missouri; Gilda Nogueira, CEO of East Cambridge Savings Bank in Massachusetts; Charles Umberger, CEO of Old Town Bank in Waynesville, N.C.; and Gary Yager, CEO of VisionBank in Topeka, Kan.
In a wide-ranging discussion, the executives also indicated where they are seeing the most loan demand and fee-producing businesses that are helping to support the bottom line. Here is an edited transcript of the discussion.
What businesses are driving revenue?
NORMAN BEATTY: In northern New Jersey, we've seen growth in the last 10 months in commercial lending, mainly commercial real estate. There had been a dearth of that in the previous two or three years. We also do a substantial amount of business with doctors and, believe it or not, veterinarians who are consolidating or bringing their practices together.
LUANNE CUNDIFF: We're heavy into residential real estate. Six years ago we acquired a mortgage operation from a failing bank and brought over about 18 employees. We'll originate about $900 million [in mortgages] by the end of the year.
Manufacturing is also coming back in our area. It is doing better in our market compared to past years.
MICAH BARTLETT: Commercial banking probably drives the most business and profit for us, but our mortgage subsidiary has become a fairly relevant piece of our business. About half of the subsidiary's operations involve mortgage lending within markets where we have a retail presence, but we also have a program where we're the back office for other banks. We have a handful of clients where they have the sales folks but we handle all the products, compliance and technology. That is a growing business for us.
What is competition like? How is it influencing loan pricing?
GARY YAGER: It is a very, very competitive market. There aren't a lot of banks in Topeka that are making [spreads of] more than 80 basis points.
GILDA NOGUEIRA: The Boston area is a great market with a lot of demand — it is a hotbed for commercial real estate — but it is extremely competitive. Gary, you just said 80 basis points and I smiled because getting 50 basis points would be good for us. Our margins are extremely thin, and a lot of that has to do with pricing pressure. There are so many players going after the same loans that you have to question those who end up with the loan. Some banks are making 10-year loans in the 3[%]s, which is a bit scary.
BARTLETT: In addition to bigger banks and outside institutions, there are eight community banks headquartered in Springfield, and they're roughly the same size. We're largely a white-collar market, which means mostly commercial real estate and price-based competition. It is crazy competitive.
One of our strategies is diversification. We're implementing initiatives to diversify our revenue sources. I mentioned the mortgage business, but we also have a 401(k) platform that we offer to clients as well as other banks. That's going fairly nicely.
Our view is that beating up on each other over loans is just not a good sustainable business model. We're positioning ourselves to find other things on the periphery while still taking care of our customers and the community.
What other impediments exist for increasing revenue?
YAGER: We bumped up on the limit on commercial real estate non-owner-occupied properties [where such loans are expected to stay below 300% of total capital]. I don't know how we'll grow if we can't get beyond that 300% mark. It is a huge challenge for us, since commercial real estate really dominates our market, though we just started a loan-production office in Kansas City.
NOGUEIRA: As a mutual, we have no real way to raise capital other than through earnings. We're also running up against the 300% cap, so we're always managing our growth so we'll have the capacity to lend for commercial real estate.
Our [borrower] turnover rate is very, very high, so we're like hamsters on a wheel. We can originate $100 million in loans and retain only $20 million. People always thought that a consumer wouldn't refinance with low interest rates, but that's not the case across the entire balance sheet. There are so many people looking to upgrade [their homes] so there's a lot of movement, and a lot of portfolios are not lasting seven years.
What are your thoughts about the Fed gradually raising rates?
CHARLES UMBERGER: The challenge I see with the Fed's moves is that they are going to do enough to further compress the margin yet not enough to materially move our asset yields. It is going to make our margins worse than they are right now. It is going to hit smaller community banks because we're totally spread dependent.
It will not be a healthy yield environment for the next 18 months. Most people put floors in their loans, and it will take about 150 basis points to be able to hit some of those floors.
NOGUEIRA: We always debate the fact that shocking the balance sheet is crazy because that's not how rates move, so we don't want it shocked when the regulators want it shocked. The good news is that, with a gradual increase, we're not going to see liability costs spike. But it is going to have no effect on the long end [of the yield curve].
CUNDIFF: The other thing we have to consider is the depositors' perspective. It has been so long since there has been a movement in rates. Once word of one hits the paper, they are absolutely going to expect a rate increase. … If that's the case, and the liability side of the balance sheet starts to move up, we're going to see margin compression.
Outside of regulatory worries, what else keeps you up at night?
NOGUEIRA: We're also concerned about asset bubbles. Is there another one looming?
BEATTY: The [Office of the Comptroller of the Currency]views the upcoming tsunami as credit, whether it is concentrations, the competition to underwrite, a lack of covenants or the race to the bottom in rates. They're using the phrase credit as their bugaboo.
I'm more concerned about the cybertechnology area and how I can protect the bank from cyberattacks. In our home office we still have the 1936 barricade on display consisting of steel, navy gunmetal and electric wires — they're not electrified anymore — and a pistol behind the counter for the teller and a gas mask to put on. Yet today the entire bank could be gone with just a flick of a button. And it could happen through simple carelessness on the computer.
That is significant. It is a continuum in how we adjust in our sophistication, and we're going to be having this discussion again five years from now.