Editor’s note: This column ran in the Feb. 1 edition of The Pulse, a weekly BankBeat email sent to subscribers which also includes top stories from the previous week.
The 30th annual Acquire or Be Acquired conference attracted a strong crowd to the Phoenix area earlier this week to hear from M&A experts, talk technology, and network with colleagues from around the country. Some of the themes I picked up:
Only 98 deals were completed last year, and with the weak condition of the bond portfolio at so many community banks, a sizable portion of the would-be sellers will remain on the sidelines through 2024.
Funding costs are rising. As of December, 749 banks were offering one-year CDs with rates higher than 4 percent, noted Nathan Stovall of S&P Global Market Intelligence. However, community banks enjoy an advantage over larger banks on cost of funds, according to Curtis Carpenter of The Hovde Group. The average cost of funds at banks with fewer than $500 million in assets has increased 115 basis points since Q4-2021 to 1.44 percent today, whereas it is up 209 basis points at banks with more than $10 billion in assets to 2.21 percent today.
Banks are feeling the effects of tightening net interest margins. At the end of Q3, 230 banks had NIM lower than 2 percent. Carpenter noted that 59 percent of banks are experiencing contracting NIM, with 16 percent experiencing NIM contraction of greater than 20 basis points since Q4-2022.
Deposits held by commercial banks declined by $308 billion or 1.85 percent in 2023, but most of the funds lost were in smaller commercial banks. The 25 largest banks in the country saw a decline in deposits of $16 billion while all the rest saw a decline of $291 billion. (During the week following the failures of Silicon Valley Bank and Signature Bank, customers across the country pulled $184 billion out of the banking industry, while the largest banks saw their deposits increase by $120 billion.)
Regulators are growing jittery about commercial real estate concentrations in the loan portfolio. At the close of the third quarter, 550 banks had CRE in excess of 300 percent of capital, Stovall said. Referring to regulatory guidance, one speaker urged banks to be prepared to explain significant CRE concentrations, although another speaker said regulators will be more understanding as long as the bank’s liquidity position is strong.
Many presenters urged bankers to create a policy on digital strategy. Erica Crain of CLA said: “Figure out what it means to you, even if you have to bring in a third party to help you.” Other presenters talked about the ability of technology — much of it related to artificial intelligence — to help bankers deliver personal service more effectively. Jeffrey Kendall of Nymbus encouraged bankers to accelerate their business opportunities by using data better.
Bottom line: Investor interest in banking will reflect the industry’s subdued earnings outlook for 2024, although there is a lot of excitement about potential for better service delivery, greater efficiency and meaningful innovation made possible by a plethora of new technologies focused on making the most of consumer data.