FRIDAY THE 13TH IN BANKING

Stories abound, but superstition has held (reportedly since ancient times) that Friday the 13th is a day of bad luck. There are three such occurrences this year, today, April (ok, that one makes sense given you have to pay taxes) and July. Before you shrug this off as jovial fantasy, consider that medical professionals say as many as 8% of Americans worry about the day and take precautions to protect themselves. The number 13 in fact, is deeply embedded into our history as a bad thing, so people worry about it. Consider for instance that there are 13 witches in a coven; many cities do not have a 13th Street or Avenue; many buildings don't have a 13th floor on the elevator bank; and legend has it that if 13 people sit down to dinner together, one will die within the year (rumor has it that one could refers to the Last Super, where 13 were present). That is all pretty creepy stuff and if you are in the 8% that worries about such things, we say we hope you enjoy reading this on Monday the 16th and that you had a great weekend hunkered down in your underground shelter. Now that our superstitious discussion is out of the way, we can get down to the business of banking. As you head into a long weekend, we give you some things to think about, as you continue to refine strategy this year and execute on your plan. At a high level, credit trends are improving. While quality is still strained, the trend is definitely our friend, as steady improvement can be seen. In fact, the latest Federal Reserve analysis from the Beige Book (a beige-colored book that reviews conditions in each of the 12 Fed Districts) indicates economic activity expanded at a modest to moderate pace, suggesting ongoing improvement in economic conditions in recent months. That is cautiously better news, so things are looking up some in economic terms at least. Loan growth remains difficult, but some opportunity is surfacing. Overall, GDP is expected to be 1% to 2% this year, so that means banks can expect loan origination to be roughly that percentage. Since community bank loan growth is low, paying off higher cost liabilities and better managing that side of the equation becomes a key ongoing strategy. Given how spread dependent community banks are and against this backdrop of weak loan demand, margin compression is expected to continue for some time. That points to a tough operating environment that will require banks to maintain a laser focus on exploring ways to improve profitability. Given the difficulty the industry has already been through and against rough operating conditions, some banks will seek M&A as a way to either boost performance or just cash out. Capital levels are high, so opportunity is there, but some will wait for profits to rebound before making any moves. Given the costs to meet regulatory requirements, it makes sense that banks will seek out partners to reach enough scale to absorb costs. Accounting issues and uncertainty sill make M&A difficult, but look for an increase nonetheless in coming quarters. Further, expect banks to do stock buybacks, pay periodic dividends and shrink the balance sheet in order to boost equity value and maintain flexibility. No matter your superstitious tendencies or beliefs, it could be a few years yet for a decent economy to provide support to the banking industry, so in the meantime, bankers will spend that time refining the business model.