Authored by Tim Kosiek
Community banks throughout the U.S. used the strong economy and relatively stable interest rate environment to maintain steady operations throughout the third quarter of 2018. Baker Tilly’s banking industry key performance indicator (KPI) report reflected almost no change in comparison to the same benchmarks for the immediately preceding calendar quarter (e.g., earnings, credit quality and capital adequacy benchmarks all remained essentially the same). This consistency appears to reflect a notably more stable economic environment, disciplined management of credit pricing and quality, notwithstanding a continued highly-competitive environment, and the early stages of a move to higher interest rates.
If there is anything to take away from the relatively unchanged KPIs over the first nine months of 2018, it is that community bankers have diligently pursued the opportunities emerging from the strong economy. Loan growth, reflected in the comparison of the loan-to-deposits ratios at each of the quarter ends, has been somewhat subdued. Potential contributors to this observation were anticipation of increasing liquidity pressures arising from changes in interest rates, early stages of the potential for a downward credit cycle and the uncertainty of the outcome of the November mid-term elections. In combination, these factors kept many community bankers focused on internal matters such as compliance and technology considerations during the second and third quarters of 2018. In addition, many banking institutions continued to assess consolidation opportunities on both the buy and sell side. Until the recent series of market declines, bank equity currency remained quite strong, supporting a continued active consolidation of the industry, at price points that on average exceed 1.5 – 1.7 times book value.
As we head towards the end of quarter four, we expect more of the same consistency in the KPIs as we have seen throughout 2018. With the decisions stemming from the results of the mid-term elections remain uncertain, it does not appear there will be any significant shifts in either direction arising from changes in economic policy. However, the pace of deregulation may subside to some degree due to the change in leadership in the U.S. House of Representatives. If the equity markets rebound following the midterms and the pause by the Federal Reserve in their plan to increase interest rates on a managed pace, we may see a re-acceleration of the consolidation of community banks, especially those with assets of $500 million or lower. Other than an increased emphasis on securing and maintaining low cost deposits, we anticipate community banks to maintain a steady course for the remainder of 2018 and into early 2019.
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