Optimism & challenges for community banks in 2013

With the recent election and New Year’s Day behind us, there are several things to watch for in the community banking industry in 2013.

The Minnesota election aligned both chambers of the legislature, the Governor’s office and Attorney General’s office with the Democratic-Farmer-Labor Party.  That result could mean some interesting and challenging times lie ahead for Minnesota’s community banks when it comes to State banking laws.  The last time the Democrats controlled the legislature, Tim Pawlenty was Governor and his veto power stopped a number of bills that were very troubling for community banks in the state.

Some of those past bills could make a return appearance and they could be much more likely to pass in the current political environment.  One very troubling piece of legislation that could likely reappear is a mandatory mediation bill.  This bill passed out of both the House and Senate but was vetoed by Governor Pawlenty three years ago.  The bill would require community banks and other lenders to engage a mediator appointed by Attorney General Lori Swanson prior to commencing any foreclosure process.  Minnesota has one of the lengthiest foreclosure processes in the country, with the average foreclosure taking about 14 months to complete.  This bill sparked fierce opposition from community bankers when it was proposed previously.  The bill troubles community banks in particular because they are common sense, relationship-driven lenders.  By this I mean that community banks work very hard to avoid foreclosure and by the time they initiate foreclosure, most often months or years have passed where the community banker has tried to work with the borrower; foreclosure is a last resort.  Proponents of the bill point to the success of farmer/lender mediation efforts.  Community bankers note that some major differences exist, namely the difference between farmers’ multiple revenue sources and several types of collateral compared with W-2 wages and a single asset with homeowners.  Community bankers who have testified on this issue have noted a consequence in the banking industry could be much less credit available for real estate mortgages, or mediation requests filed on day one of delinquency, removing the friendlier option of the banker attempting to work with the borrower.

On the national front, the recent election yielded the status quo: gridlock.  The most recent landmark financial regulation, the Wall Street Reform and Consumer Protection Act, otherwise known as “Dodd Frank,” has suffered from many missed deadlines. (Please note the name of the bill; it was not aimed at Main Street.)  There is a lot of chatter about reforming Dodd Frank, but it appears that by nearly all accounts the bill is here to stay.  Community bankers will be watching as the rules are written, studies are conducted and new regulations are enacted.   They will work hard to prevent harm to their relationship model of community banking.

Currently, the national Consumer Financial Protection Bureau is authoring and reviewing regulations related to consumer compliance.  Community banks under $10 billion in assets are exempt from direct supervision of the CFPB. However, the laws they write will be used by other federal regulators as they supervise banks.  Credit unions do not have to comply with consumer compliance laws.

The health of Minnesota’s community banks is improving, and that trend should continue through 2013.  The number of banks that make up the “watch” list for the Minnesota Department of Commerce is smaller, and there is a trend that shows banks moving from the worst categories to something reflecting better heath.

Expect to see increasing merger and acquisition activity in 2013 and beyond.  With the continued artificial, low-rate environment expected to continue into 2015 through the economic policy set by the Federal Open Market Committee, the pressure on margins and earnings for community banks will be crushing.  Coupled with increasing regulatory burden, many community bank owners are signaling they have had enough.  As the overall health of the banking industry improves, sale prices are improving as well, making the market attractive to sellers for the first time in several years. 

So what does it all mean?  2013 will be a challenging year from an economic standpoint, but with the overall health of banks continuing to improve there is plenty to be optimistic about in 2013.  As the merger and acquisition trend continues to accelerate, banks will generally be somewhat larger than today.  Community banks are still very flush with liquidity and are ready to lend, so small businesses and consumers alike should visit their local community banker to discuss financing options.

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