While many businesses, homebuyers and individuals have benefited from the Federal Reserve's continuing effort to keep interest rates low, that same economic policy -- along with heightened pressure from regulators and tepid demand for new loans -- has added up to a time of historic challenge for community lenders in the North Bay and beyond.
Executives at North Bay financial institutions said they saw no clear end for the current conditions, citing the Fed's pledge to keep rates low until U.S. unemployment drops below 6.5 percent and the rapid issuance of new regulatory guidelines by the new Consumer Financial Protection Bureau. While the regional economy has steadily improved, an enduring sense of uncertainty has tempered new requests to finance business expansion and other activity, they said.
Apart from an upward bump following a federal economic stimulus package in 2009 and 2010, the average net interest margin for North Bay banks has marched downward over the past 10 years, according to filings with regulators . (Net interest margin generally is the difference between what institutions must pay on deposits and what it can charge for loans.) Some of the largest declines in margins were in the strained economic environment of the early 2000s, as well as in the period surrounding the 2008 financial crisis. In total, the eight North Bay banks under $3 billion in assets as of last year saw an average margin of 4.26 -- a decline of nearly 20 percent from a margin of 5.29 percent for those banks operating in 2002.
With increased loan volume being among the current ways that lenders can move the needle for themselves and their shareholders, this environment has created intense competition for new business between financial institutions in the North Bay. Many lenders have already pushed their rates as low as possible, further compressing margins while trying to satisfy a consumer that has grown accustomed to borrowing money on the cheap.
Yet in a market where those lenders compete directly with the even lower rates often available from national banks, North Bay-based institutions are currently finding a competitive edge by retrenching in the traditional niche of community banking. Many consumers, executives say, respond to the prospect of a banking relationship that goes beyond interest rates, drawn to institutions that offer specialized expertise and service along with technology that is increasingly on par with the leading national banks.
Still, more than half of the country's lenders backed by the Federal Deposit Insurance Corp. either sold or were closed by regulators between 1990 and the end of 2012. Remaining lenders across the size spectrum face a markedly different landscape than in years past.
“It’s a very different business environment for small banks,” said Nancy Sheppard, president and CEO of the community bank trade group, the Western Independent Bankers. Amid the emerging economic stability, Ms. Sheppard said that surviving lenders are on stronger footing.
“Banks are recovering. We’re not seeing the failed institutions, or the risk of that,” she said.Compliance burden increases
While lenders have long been among the most regulated industries in the United States, many executives noted that the rapid issuance of new rules from the Consumer Financial Protection Bureau and demands like the Bank Secrecy Act have significantly increased the workload of compliance personnel. Hires in those departments often command six-figure compensation, adding expense at a time when many are closely watching their margins, said Russell Colombo, president and chief executive at Novato’s $1.4 billion Bank of Marin.
"That can hit pretty hard for smaller banks, and there's great demand for these people," he said.
As chair of the group organizing the Western Independent Bankers’ annual executive conference this month, Mr. Colombo echoed a widespread sentiment that smaller lenders face a disproportionate burden when faced with the industry-wide blanket of new regulations. For the third year in a row, concerns about regulation remained the top concern for community banks in the trade group's annual survey
While Bank of Marin posted strong profits in 2012, Mr. Colombo acknowledged the challenging environment.
"You've got these increasing costs on the regulatory side and decreasing margins. That's not a good formula," he said.
Born from 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau and its guidelines affect a broad set of business activities for lenders and are designed to prevent the risky practices that many argue were at the root of the recent financial crisis. The rules are generally considered to target the nation's largest banks, but are required for lenders of all types and sizes.
