The year ahead could initially be another sluggish one for organic growth, but there are some hints that lending and revenue opportunities may pick up later in the year.
“If the cost of short-term funding drops, I think you’ll see a stronger appetite for growth,” says Julieann Thurlow, CEO of $880 million Reading Cooperative Bank in Reading, Massachusetts. “But you also need borrowers that are actually willing to pay 8% and 9%. A lot of deals that actually looked strong when interest rates were at 5% and 6% don’t look as strong at 8% or 9%.”
Executives and board members responding to Bank Director’s 2024 Bank M&A Survey reported economic uncertainty (56%), competition from other financial institutions offering better rates (55%) and limited loan demand (34%) as the top obstacles to achieving organic growth. Survey respondents largely represented community banks.
Some banks have used this slow period to better position themselves to capitalize on growth opportunities when they present themselves. Survey participants reported adding staff in revenue generating areas of the bank (57%) and adding new products within existing business areas (42%), among other initiatives.
At the same time, however, investment in digital initiatives to grow loans slumped to 22% from 41% a year earlier, respondents reported. But that may say less about the state of technology investment and more about the loan growth environment when bank executives and directors took the survey in September 2023.
Jordan Sternlieb, a senior partner in the financial services practice at the consulting firm West Monroe, reports that some of the banks he works with have chosen to optimize their lending process in one way or another. That might mean digitizing certain aspects of the process or differentiating how they approach different sized business clients.
“We’re seeing a lot more automation, especially at the lower end of the credit world: automated decisioning, faster decisioning, that sort of thing,” he says.
The Cooperative Bank of Cape Cod in Hyannis, Massachusetts, has upgraded its digital account opening processes, for example, says CEO and Chair Lisa Oliver. The $1.5 billion bank partnered with a fintech firm to add more consumer lending products, rather than adding more staff. It’s also looking to expand its commercial lending beyond Cape Cod, to add some geographic diversity to its lending portfolio.
“I do think it’s a very good time to look at what offerings that we do have and figure out how to fill in some of those gaps, while ensuring we’re making meaningful contributions to our market,” Oliver says.
Reading Cooperative Bank has focused on automation within its lending process and improving its deposit onboarding process. Additionally, the bank is investigating its options for a data lake, or a system that pools all of a bank’s customer data together into one source. That kind of investment would give Reading Cooperative’s bankers a more unified picture of each customer and help them target those customers more accurately with products and services, Thurlow says.
Oliver and Thurlow both cited housing construction, including affordable housing, as a potential growth area later this year, but that depends as much on municipalities allowing for more construction as it does on interest rates.
Joel Pruis, a senior director with Cornerstone Advisors, expects demand for commercial and industrial lending to rebound around the fourth quarter, as borrower sentiment could lag a little behind moves in the federal funds rate. He reports that some banking clients are investing in treasury management and payments capabilities to round out relationships with C&I clients and earn additional fee income while loan demand is down.
“We’re telling our clients, ‘You’ve got to prepare now to take advantage of that growth in the future,’” he says.
Sternlieb believes that small business borrowing demand is poised for a comeback, too. “For the banks that figure out small business, I think there’s still a real opportunity there to make money in that space,” he says.
Bankers are still waiting for funding costs to come down and are still dealing with liquidity challenges. Looming over all of that is the question of whether 2024 will bring about a recession or the Fed will achieve its hoped-for soft landing.
“The reality is it’s going to be a little bit of a tough year, but a building year,” Oliver says. “If we come through this year and we enter 2025 in a much more stable place, I think that will be great for everybody.”