Community bankers brace for rough year — and worse 2020

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Donald Hileman gets a gnawing sensation in his gut when he thinks about the next year.

Hileman, president and CEO of First Defiance Financial in Ohio, isn't alone, as more bankers become pessimistic about their institutions' growth prospects.

A recent survey conducted by Promontory Interfinancial Network found that nearly 40% of community bankers believe business conditions will worsen over the next 12 months. Less than a quarter of the 447 bankers surveyed in early January said they believed things would get better.

In a nutshell: Now is as good as it gets for many bankers.

Bankers who participated in the Promontory survey zeroed in on certain areas of concern.

Nearly 60% of respondents said the possibility of an economic slowdown ranked among their two biggest concerns. At the same time, most were confident that the United States would avoid a recession until 2020 at the earliest.

At the same time, 88% of bankers expect increased funding costs.

Bankers are more hopeful about lending, with about 40% expecting more demand.

Another survey, conducted by Dun & Bradstreet and Pepperdine’s Graziadio Business School, was less optimistic, finding that only a third of small and midsize businesses were in the market for financing in the first quarter. That was a decline from 43% a year earlier.

While Hileman said he couldn’t point to anything in particular that has him nervous, he says he believes things are slowing down a bit. The second quarter should be fine, but Hileman said he was less confident about the second half of this year.

Those concerns “give me a little pause that we’ll be able to drive the levels of growth that we’ve seen in the past,” he said.

Hileman agreed that deposit gathering will remain challenging for the next few quarters, adding that consumers have become more interested in interest-bearing products.

Other bankers have warned about the potential for credit cracks, particularly in areas such as commercial real estate. They argue that now is the time to tighten, rather than loosen, standards.

“This is a time when you see a lot of banks stretching, and we’re very careful not to stretch in this environment,” Russ Colombo, CEO of the Bank of Marin, said of technology-related CRE deals in the San Francisco area. “If you advance too much and the market falls, you’re going to have a problem on your hands.”

One area that has become less worrisome for bankers is fintech, according to the Promontory survey. Only 8% of respondents listed fintech as their biggest concern. In comparison, cybersecurity topped the list for 30% of bankers.

Bankers have become increasingly more comfortable with fintech as more partnerships have been formed between the groups. Technology has become a greater focus for banks intent on courting more millennial customers.

“We can’t just sit back and wait for [millennials] to come in our doors anymore,” Hileman said.

Mike Fleming, president and CEO of the $101 million-asset Litchfield National Bank in Illinois, said it’s not all gloom and doom. He said consumers still see the value of working with local banks.

“We make it our mission to do everything we can the help the community prosper, because we are all in this together,” he said.

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