January 25, 2023
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Community banks face regulatory, competitive pressures on overdraft policy

The regulatory and competitive pressures the largest banks faced last year regarding overdraft fees are starting to trickle down to the nation's smallest institutions.

It is unlikely that community banks will reduce or eliminate those fees to the same extent the financial industry saw at the nation's biggest banks in 2022, under pressure from both the Consumer Financial Protection Bureau and competitors, because community banks are more reliant on overdraft fees as a revenue source, analysts and attorneys told S&P Global Market Intelligence.

"In 2023 and beyond, you're going to see some migration of those changes from bigger banks to smaller banks," James Stevens, co-leader of the financial services industry group at Troutman Pepper, said in an interview. "Small banks have been looking at that and thinking about, 'What does that mean for us?'"

"What we've been hearing from smaller banks is that they're hearing the FDIC start to talk about overdraft," Chris Willis, a partner with Troutman Pepper who closely follows bank regulation issues, told S&P Global Market Intelligence.

The shift in attitude toward overdraft practices has put examiners "between a rock and a hard place," according to Jeff Naimon, a partner who works with banks and nonbanks at Buckley LLP.
"A lot of the long-time examiners are looking at long-time deposit practices of the banks they supervise and are surprised when all of a sudden, [the practices are] being questioned as potentially illegal," he said.

Community banks are also stuck between a rock and a hard place as they see the CFPB's efforts creating a national conversation on overdraft, which forces them to make difficult decisions in a competitive environment, according to Steven Simpson, a bank adviser at Cornerstone.

"It's a tough equation for banks. They really have to dance on that razor's edge," he said.

While the FDIC's focus may not be as sharp as the CFPB's crackdown on the larger banks, prudential regulators are starting to push their regulated banks "to go in that direction," Willis said.

Source: S&P Global Market Intelligence
Regulatory focus on unrealized losses makes liquidity planning key

Banks need to start preparing for stricter regulatory oversight of capital and liquidity, as agencies grow increasingly worried about unrealized losses in banks' securities portfolios.

In a rare move, regulators have begun publicly expressing concern about banks' underwater bond books and the potential that banks would have to sell securities and recognize what are currently unrealized losses. In interviews with S&P Global Market Intelligence, bank lawyers and advisers said the agencies are keeping a sharp eye on ratios such as tangible common equity and loans to deposits. Banks can prepare now for increased regulatory oversight and tougher exams by lining up other funding sources, preparing thorough liquidity plans and stress-testing those plans, the advisers said.

If regulators believe a bank may run into a liquidity crunch, they could limit dividend payments, the rate the bank can pay on deposits and the ability to access Federal Home Loan Bank borrowings, among other actions.

"The regulators have a valid concern, and they're out there expressing it," said Jeffrey Voss, founder and managing partner of Artisan Advisors, a consulting firm for community banks and credit unions. "They're giving fair warning to banks: 'Be prepared when we come in, we're going to be looking at this. And if you're not prepared, what we can do to you will actually just exacerbate the problem.'"
Source: S&P Global Market Intelligence
Bankers forecast credit deterioration, recession by summer

In late 2022, S&P Global Market Intelligence surveyed bank and credit union executives, and two-thirds of respondents expect the U.S. economy to be in recession within the next nine months. Of the 95 respondents that expect a downturn by roughly the end of summer 2023, 31 believe that the U.S. is already in recession. Only 11 respondents stated that they believed a recession would occur a year or more from the time of the survey.
 
In addition to expectations that the economy will slip into recession in the second half of 2023, if not sooner, respondents also expect credit losses to rise off historically low levels.

  • A majority of bankers surveyed expect a U.S. recession by the end of summer 2023.
  • The industry's net charge-off ratio is expected to increase, and over 30% of respondents expect lower credit quality this year for both consumer auto and commercial real estate loans.
  • The federal funds target range is expected to remain above current levels as inflation drops but remains high throughout 2023.
 ´╗┐Source: S&P Global Market Intelligence
Credit card late fees on chopping block

Credit card late fees could be slashed in half to as low as $15 as the Consumer Financial Protection Bureau is poised to release a proposal aiming to lower so-called "junk fees" soon, American Banker reported, citing analysts. Consumer advocates, meanwhile, want the CFPB to reduce late fees to as low as $9 or make them proportional to a cardholder's debt, the report said.
Source: American Banker
Credit unions more strategic seeking bank targets

Credit unions ended 2022 with a spurt of bank deal activity, and deal advisers expect the momentum to continue in 2023.

Lingering economic uncertainty and the impact of rising interest rates in 2022 muted banks' M&A interest, leading to a slowdown in deal activity. But credit unions are not feeling deterred by those same factors and should continue scooping up banks this year, deal advisers told S&P Global Market Intelligence.

As more of these deals come together, the interest among credit unions is growing, and they are getting more strategic by proactively engaging with advisers to identify potential targets and build relationships with those banks, said Greg Cunningham, senior vice president at Donnelly Penman & Partners.

"Historically speaking, oftentimes, some of the credit unions would just be more reactionary, let the deals come to them and hope they're included in a managed sale process," Cunningham said. "[Now] they're being a little bit more strategic in their proactive outreaches. They're trying to build from a relationship standpoint with targets that make the most sense to them and have that be a more meaningful piece of their strategic plan."

Credit unions announced 16 bank acquisitions in 2022, breaking the previous yearly record of 13 announcements in 2019, excluding terminations. However, these deals remain the minority of all U.S. bank M&A activity, with the 16 announcements representing just under 10% of the 168 total bank deals announced in 2022.

The activity broke other yearly records in 2022 as well, including the total assets of bank targets involved in credit union transactions, which was $5.70 billion across 16 targets, well above the previous record of $3.92 billion across 13 targets in 2019.

Further, the total average assets of the 16 bank targets in the 2022 announced sales to credit unions stood at $356.5 million, above the previous record-high of $349.6 million across the 10 targets in 2021.
Advisers expect the number of announcements in 2023 to be fairly in line with 2022.

"We still are seeing a lot of interest from credit unions in pursuing these transactions," Cunningham said in an interview. "As you've seen with the pace here recently, I don't think that the interest from their standpoint has deterred at all, but it remains steady."

Source: S&P Global Market Intelligence
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