Community bankers are facing difficult challenges but also have advantages over larger banks, an investor in financial institutions in 49 states said Thursday.
Joshua Siegel is founder and chief executive officer of privately held StoneCastle Partners LLC of New York, which has investments in more than 400 banks across the country.
StoneCastle Partners also has deposits in more than 1,600 banks in the country. The only state where StoneCastle has no investment is Alaska, Siegel said.
In Arkansas, StoneCastle is invested in Bank of the Ozarks in Little Rock and First Western Bank of Booneville, Siegel said.
StoneCastle has millions of dollars in deposits in about 45 other banks in the state, Siegel said. There are 109 Arkansas-based banks.
Among the challenges facing community banks -- generally those with less than $1 billion in assets and without a regional presence -- are problems with transition to the next generation of management, interest rate risks, heavy regulatory burdens, expenses and deployment of technology, said Siegel, who spoke at the 125th Arkansas Bankers Association convention held at the Little Rock Marriott.
From the 1970s through the 1990s, larger banks were at a significant advantage in technology because they were the only ones that could afford it, Siegel said.
"But small banks are no longer at a technological disadvantage," said Siegel, who added that StoneCastle had money to invest in any healthy bank at the meeting. "Right now, we're at a point in time where community banks can get very inexpensive technology. There is no longer any advantage for a larger bank in technology."
Another advantage for some small banks is they have huge market shares in the areas they serve, Siegel said.
The attraction to invest in solid smaller banks is the return that is normal for community banks, said Siegel, who is also chief executive of publicly traded StoneCastle Financial Corp. The average return on equity at community banks is about 8.5 percent to 9 percent, much better than most other investments and less risky, Siegel said.
"During the economic crisis, more than 75 percent of all community banks remained profitable," Siegel said. "And community banks, even though they represent only about 18 percent of the banking industry's assets, have 58 percent of the nation's small business loans. That's a massive disproportion."
Bankers are facing an economic environment in the country that they have not seen before, said Julie Stackhouse, senior vice president of the Federal Reserve Bank of St. Louis.
"We have had a long period of very low interest rates and an uncertainty goes with that," Stackhouse said. "But we've come through the recovery and it does look like conditions are improving."
The consolidation in banking will continue, Stackhouse said. "If for no other reason than that is the historical trend," she said.
Siegel said many small banks, such as those with only $100 million to $150 million in assets, will begin to merge with banks of similar size.
"They will be getting large enough to have efficiencies," Siegel said. "And they can remain local."
Business on 05/08/2015