There is no shortage of challenges for banks.
Regulatory burdens persist, competition is heating up and interest rates, while rising, remain near historical lows.
At a recent conference hosted by the University of Mississippi’s School of Business, panelists discussed several issues and opportunities for community banks, ranging from capital and consolidation to branches and technology.
During the event, American Banker discussed these topics with a number of attendees, including Paul Murphy, CEO of Cadence Bancorp. in Houston; Curtis Gentry, president of First National Bank of Eastern Arkansas; Frank Sibley, president and CEO of Citizens Bank & Trust in Marks, Miss.; and Greg Taylor, president of Merchants and Farmers Bank in Holly Springs, Miss.
Following is an edited transcript of those talks:
What’s your view on the future of community banking?
Gentry: It is a relationship business, and you have to keep that at the top, but we have to keep up with technology. As a community bank, we’ve been in business since 1886 so we’ve seen the ebbs and flows, the good times and bad times. We’re coming from a rural area, but we had the opportunity to migrate into the Memphis metropolitan area, so we’re more focused now on technology. We’ve realized that, going forward, we need to embrace it. Sometimes it is a hurdle to get your board to go along with expenses and the modifications that need to be made. But I think it is very important and the way of the future.
In our area, internet/mobile banking has been the most prominent change. We can reach out from one of our branches to almost an entire county of people in a rural area. Doing transactions online has been very helpful to our clientele.
Murphy: Deposit and asset betas are going to move up a little bit faster so that is a solid foundation.
Kelly King at BB&T recently suggested that there should be fewer banks? What are your thoughts on the number of banks and M&A?
Murphy: The industrial logic of merging banks makes a lot of sense because of the expense saves, the technology and the regulatory burden. Spreading those over a bigger base creates value for shareholders and it improves the control environment. It just makes for a healthier organization.
Having said that, there are number of smaller banks with outstanding management teams and business plans that will continue to thrive as they find niches where they are able to be very competitive. The entrepreneurial spirit will always keep a number of banks successfully thriving. Regulatory burden does make it a lot harder.
We’re active and interested in finding good banks to partner with. We went public in April for two reasons. One is to have a currency. We’ll be thoughtful and selective. It is difficult to say whether we’ll do something in the next year or the next five years. It depends on our counterparts and when they’re ready. Just because we went public doesn’t mean that XYZ bank becomes actionable. And there will always be competition [for deals]. We’ll be disciplined.
Taylor: We will see consolidation. How much more I don’t really know. There’s not as much talk among banks with $250 million in assets or less [now] as there was in the prior five years.
Sibley: We have been approached three times in the last three years [about selling]. We have analyzed it and decided that we want to stay independent. We’re not interested in acquiring. We are interested in merging in an environment where [our management survives]. If the culture doesn’t fit, there’s no need to play the game. We’re heavily loaned up so we’d be looking for somebody with good core deposits.
What’s your view on competition? Branching?
Gentry: Our main competition in the rural areas of Arkansas and Mississippi has not been other banks. It has been the Farm Credit system and shadow banks. Payday lenders are the ones we have issues with because they’re hitting our retail customers. I think bankers as a whole could do a better job working together to overcome hurdles we’ve got with credit unions and Farm Credit and not worrying about each other. We have a very good relationship with other banks in our area due to loans participations. That helps us compete against the big banks.
Murphy: It seems to get more and more competitive every year. Maybe M&A will be an offset, with fewer banks. On the fintech side, I don’t know if that is a competitive threat or an opportunity for us. Maybe the early adapters are showing off technologies that could become part of our arsenal. We don’t have to develop it ourselves. We run over 300 applications a day right now. If someone generates a new one, there’s no reason why we couldn’t incorporate it into our model.
The reality that branches are important to clients has not changed. You see them getting smaller and less labor intensive with more generalists and fewer specialists.
Taylor: In our market, we have three community owned banks. You don’t see that much today at all. We don’t see that changing in the next five years. It could be after that. In our market, it is really competitive among all of us, but we also work together on some deals, too.
Sibley: We have two to three independent Mississippi banks in our market. We do have some competitive issues from regionals. There are 15 banks here. We work off of relationships. Our clients know us and they can call us because they know we can give them an answer. We have been successful in beating banks in that area. I don’t know how much longer that will be an advantage.
It has been nearly a year since the presidential election with few, if any, cases of regulatory relief. Are you still optimistic? What regulations do you want changed?
Gentry: The most important thing for us has been the issues with mortgage lending. In our area we can take the paperwork for a $5 million commercial loan and a $2 million ag loan and stack them up against a $20,000 home mortgage and the [mortgage] will have more paper than the other two combined. Something is wrong there.
Washington has failed to, in my opinion, protect the intended class of people. If we have a little lady with shaky credit who needs a $20,000 home improvement loan for air conditioning or a new roof … we can’t help her under the current regs even if she has been a long-time customer. We don’t like that because we’re her to serve our local communities. And we don’t need the [Consumer Financial Protection Bureau] telling us how to do it.
We are having to do a lot of work for the federal government collecting all this data. Coming from a smaller community bank, we’re taking people out of production and putting them into compliance. You can’t afford to do that.
Murphy: The Treasury has come up with roughly 200 initiatives [to improve regulation for banks], of which roughly two-thirds do not require legislative action. I am optimistic that they will go through them in an orderly fashion and do a lot of work that can make a difference. And the tone has changed. I am less optimistic with the Senate being able to make real material changes. It is disappointing that they’re in gridlock. But if they get a little momentum with taxes, there will be some things that are not controversial if we get a bill.
Taylor: I just got back from Washington. I don’t see legislative [action]. I see action from the people who will be appointed [to regulatory posts]. Capital is the biggest issue. Still a lot of the burdens will stay in place even if we get relief. Take the forms and platforms in place for real estate lending. We’re unlikely to change that even if they relieve us of having to do it.
Sibley: The HMDA [Home Mortgage Disclosure Act] and real estate lending rules are really burdensome on smaller banks because we don’t have the staff or the training to stay up to date. That’s a big issue for a bank of our size. The proposed rule for small-business data collection will be a nightmare. We just started reviewing that, and it will take away our competitive advantage of giving you a quicker answer. It is going to slow our process down, which will give larger banks an advantage.