Your friendly, neighborhood community bank may not stay that way much longer, given reduced loan margins and investment income and heightened regulatory costs. The KPMG LLP 2012 Community Banking Outlook Survey, which includes input from more than 100 top execs within the community banking industry, found that more than half – 57 percent – expect their organizations to be involved in a merger or acquisition (M&A) transaction within the next two years.
Several forces are driving M&A within the sector. The most frequently cited was regulatory change; 38 percent of respondents said this was prompting them to consider joining with another institution. As the survey noted, an acquisition can “generate sufficient scale to absorb regulatory compliance costs and meet regulatory capital requirements.”
In fact, 27 percent of respondents said that navigating regulatory changes, such as Dodd-Frank and Basel III, was the top concern of management. Last month, the Independent Community Bankers of America (ICBA) testified before Congress, telling a House Financial Services subcommittee why the proposed Basel III regulatory capital requirements shouldn’t apply to U.S. banks with assets of $50 billion or less.
Access to new geographic markets is another M&A driver; 27 percent mentioned this. One-fourth of respondents indicated that debt was prompting them to consider M&A, while one in five mentioned the lack of organic growth opportunities, access to new technology, and access to new resources.
Of the respondents planning to engage in M&A, 47 percent plan to target banks with asset levels of between $500 million to $3 billion.
Despite the challenging business environment, more than half (51 percent) of respondents reported an increase in revenue over the year, while nearly three-quarters indicated that their banks have significant cash on their balance sheets.
When it comes to deploying their cash, acquisitions were the most popular strategy; 37 percent said this was a planned use. Paying off debt came in second, at 27 percent.
Technology investments also should rise in the coming year, as 60 percent of respondents indicated that their capital spending will increase. Fully half of respondents plan to spend more on IT resources, while about one-third will focus on new products or services. Within IT, the most popular areas of investment are mobile banking, mentioned by 26 percent of bankers, along with cloud technology, which was mentioned by 23 percent. Another recent survey, this one by the ICBA, found that 37 percent of community banks currently offer mobile banking, while 44 percent plan to offer it within the next two years.
Just under one-third (31 percent) of respondents to the KPMG report expect their institutions to moderately increase commercial lending.
When it comes to their own growth opportunities, community banks are counting on consumer markets – both individuals nearing retirement, as well as young professionals – rather than their commercial product lines, to move them forward. Only 11 percent named commercial customers as their greatest growth opportunity.
Despite the challenges facing the industry, most community bankers have a positive outlook on the economy; 54 percent of the bankers surveyed expect it to either moderately or significantly improve over the coming year.