Things Are (Mostly) Looking Up

Thinking positively. The tide of optimism has definitely turned since the first quarter of this year. In our recent survey of bank executives, 45% say they believe the U.S. economy will improve within the next six months. This demonstrates a sizeable increase from the 24% who were similarly optimistic in our first quarter 2010 survey. While the bulk of respondents are still in the camp that believe the economy will likely remain the same over the near term, (44%), we noted a drop by nearly half among those who believe that harder times are still ahead (11%, compared to 20% six months earlier).

Moreover, among those who were asked how well their local economies are faring, a similar strain of optimism is found. Thirty-five percent (compared to 22% in the first quarter) believe their local economy is poised to improve, and only 9% (compared to 18%) believe things will get worse within the next six months.

How do you assess the U.S. economy’s health in the next six months?

Improve 45%

Remain the same 44%

Worsen 11%

How do you believe your local economy will behave in the next six months?

Remain the same 56%

Improve 35%

Worsen 9%

Staffing concerns. One-quarter of bank executives expect the number of people they employ at the bank to increase in the next six months. However, 16% anticipate a decline in the number of bank employees, with slightly higher numbers in the Midwest and western regions. The Northeast, by contrast, reported the highest percentage of those who expected to ramp up numbers of employees in the next six months (33%).

Expectations for numbers of bank employees

Stay the same 59%

Increase 25%

Decrease 16%

Regulatory burden remains. Among the concerns that bank executives have over the next 12 months, regulatory concerns overwhelmingly stand out above the rest. Fully 87% of bank executives ranked regulatory burden as a major concern over the next 12 months-nearly 30 points higher than the next, most-pressing concern: exposure to commercial real estate losses (58% ranked it as a major concern.) In third place, but much lower than either of the first two, was a concern over retaining quality talent (37% ranked as a major concern.)

What is your biggest concern?

Burden of pending regulatory reform on your bank 87%

Exposure to commercial real estate losses 58%

Retention of quality talent 37%

Exposure to commercial loan losses 36%

Increased regulatory scrutiny on compensation 35%

Exposure to residential real estate losses 28%

Exposure to consumer loan losses 11%

More CRE woes ahead. The largest percentage of bank executives surveyed (35%) believe the shoe will drop on commercial real estate values sometime within the next 12 months, but that opinion is far from unanimous. Another quarter of the surveyed group (25%) believe commercial real estate values already have bottomed out; and another 24% believe it will happen in the next six months. Not surprisingly, perspectives on this question have a lot to do with one’s region. Forty-two percent of the central region think their values have already bottomed out, compared to only 10% of bankers in the southern region and 18% of those in the western region who think so.

When will we see the bottom with regard to commercial real estate values?

Already hit bottom 25%

Within three months 5%

Within six months 24%

Within 12 months 35%

More than 12 months 11%

Capital raising? Not so much. With the regulatory scrutiny placed on capital standards in the wake of the financial crisis, we asked bank executives to tell us their anticipated plans with regard to capital raises in the next 12 months. Less than a quarter of the total surveyed (22%) say it is very likely they’ll go to the market to raise capital, but a higher percentage of those from the still-troubled Southeast (37%) say they’ll do so. The majority (67%) say such action is not likely in the next 12 months. Finally, a small group (11%) said they had already successfully undergone a capital raise.

Will your bank go to market to raise capital in the next 12 months?

Not likely 67%

Very likely 22%

We’ve already done so 11%

Growth: It’s back to basics. Overwhelmingly, most (87%) bank executives say they plan to grow their institutions the old-fashioned way: through organic loan origination, a strategy that was more popular than any other option by nearly threefold. Placing second but much farther down in popularity was increasing mobile banking earnings (37%), and third was opening new branches (33%). Thirty percent of bank executives expect to grow through the use of participations. Finally, M&A, heretofore a stalwart among bank growth options, appeared much further down on the list: 24% of bankers said they’d consider

non-FDIC-assisted transactions to aid growth and 23% said they would look to FDIC-assisted transactions to do so.

How does your bank plan to grow?

Organic loan origination 87%

Increase mobile banking 37%

New branch openings 33%

Participations 30%

Non-FDIC-assisted deals 24%

FDIC-assisted deals 23%

Adding ATMs 22%

Loan pool purchase 10%