NEW YORK, Nov. 5, 2012 /PRNewswire/ -- Community banking executives say new regulatory requirements are stifling growth, negatively impacting financial performance, and driving mergers and acquisitions (M&A) activity, according to a recent survey by KPMG LLP, the U.S. audit, tax, and advisory firm.   

In the 2012 KPMG Community Banking Outlook Survey, 47 percent of respondents identified regulatory and legislative pressures as the most significant barrier to growth over the next year, while 35 percent said regulatory compliance costs were having the greatest negative impact on financial performance.  Additionally, 27 percent said that bank management's top initiative in the next two years will be navigating significant changes in the regulatory environment.

"The new regulatory environment in which community banks now operate is a game changer because the cost of building the necessary compliance systems and processes is high," said John Depman, national leader of Regional and Community Banking for KPMG.  "As a result, many community banking executives are re-evaluating their business and operating models and growth strategies."

M&A, Wealth Management Keys to Growth
According to the KPMG survey, "regulatory changes" (38 percent) was selected as the most important driver impacting M&A.  Fifty-seven percent of the respondents said it was likely their bank would be involved in a merger or acquisition in the next two years as a buyer (42 percent) or seller (15 percent).  For banks with M&A as part of their growth strategy, 47 percent said they would target a bank with $500 million to $3 billion in assets, while 16 percent said a target bank would be in the $250 million to $500 million asset range and 9 percent said a target bank would have less than $250 million in assets.  Of the 74 percent of executives that indicated their community bank had a significant amount of cash on its balance sheet, 37 percent said they planned to deploy it by making an acquisition.

"The significant interest in acquisitions is not a surprise because it's one of the options community banks have to stay competitive and grow," said Depman.  "A successfully executed deal can provide access to new geographic markets, technology, and products and also generate scale to help absorb regulatory compliance costs."

Community bank executives identified asset and wealth management (40 percent), cross-selling services (30 percent), and business model restructuring (23 percent) as the areas they believe will be the biggest drivers of their bank's revenue growth in the next one to three years. 

Thirty-one percent of community banking leaders said the customer segment that presents the greatest growth opportunity for their bank was consumers -- ages 50 to 65 -- nearing retirement.

"With an aging population, community bank executives are bolstering their asset and wealth management capabilities as customers nearing retirement need these services," said Depman.  "These customers also are more likely to visit the branch and meet with a banker to discuss their portfolio management and investment options."

IT Investment a Focus, but Cyberattacks Not a Major Concern
Sixty percent of community banking executives said they would increase capital spending over the next year with information technology (50 percent), new products or services (34 percent), and acquisition of a business (23 percent) the top areas of investment.

Mobile banking and payments (26 percent) and cloud technology (23 percent) were identified as the most important IT-related projects for community banks in the next year. 

"Mobile banking is clearly a channel in which community banks are investing, as its utilization by consumers continues to become more mainstream," said Depman.  "Community banks also are examining cloud technology as a means to increase efficiency and reduce IT costs."

Fifty-one percent of community banking leaders said they were slightly concerned or not concerned at all that their bank may be vulnerable to a cyberattack, while 14 percent were extremely concerned and 33 percent were moderately concerned.

"Recent cyberattacks were highly publicized, but the majority of community banking executives report they are not overly concerned about this threat," said Depman.  "Banks of all sizes should ensure their security systems and various processes are regularly updated to guard against this threat, which presents significant financial and reputational risks."

Impact of New Capital Requirements
Capital and liquidity requirements from various regulatory initiatives such as the Dodd-Frank Act and Basel III (34 percent) were identified as the government regulation having the most impact on community banks.  Thirty-seven percent of respondents said their community bank would need to raise more capital to meet these requirements, while 34 percent said they would not and 29 percent said they had not completed the analysis yet.

"Many community banks have strong balance sheets and adequate capital, but many others will need to raise capital so those who are late to the game may find the cost of capital much higher," said Depman. 

Troubled Mortgages, Revenue, and Headcount
Thirty-seven percent of community banking executives said troubled residential and commercial mortgages are having the greatest negative impact on their bank's financial performance, according to the KPMG survey.  A year from now, 7 percent of respondents expect revenue to be significantly higher with the majority (54 percent) eyeing moderate revenue growth. 

According to the KPMG survey, community banks are anticipating some headcount gains in the year ahead, with 55 percent adding to their payrolls, 18 percent decreasing jobs, and 27 percent expecting no changes to their workforce.  

"Based on our interactions with clients, we're seeing community banks hiring more senior regulatory and compliance personnel as the time and expenditures dedicated to this area continue to escalate, while others are adding mortgage origination and wealth management talent to capitalize on growth opportunities they anticipate in these areas," said Depman.

The KPMG Community Banking Outlook Survey
The KPMG survey was conducted in September 2012 and reflects the responses of 105 senior executives in the community banking industry.  Based on asset size, 49 percent of respondents work for institutions with $1 billion to $5 billion in assets, 31 percent with $5 billion to $10 billion in assets, and 20 percent with $10 billion to $20 billion in assets.

About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative ("KPMG International").  KPMG International's member firms have 145,000 people, including more than 8,000 partners, in 152 countries. 

Contact: Ichiro Kawasaki
KPMG LLP
201-307-8640
ikawasaki@kpmg.com
Twitter: @ichiroakawasaki

SOURCE KPMG LLP