According to most reports, the threat of a double-dip recession is fading and there are signs that the economy is moving from a slow to a moderate rate of growth. Recovery, however, is coming slowly to community banks. They are being squeezed. Low demand for loans translates into less revenue while increased compliance costs mean higher expenses.
In a recent Plante Moran survey, 48 percent of financial institutions anticipated their regulatory compliance costs would increase 25 to 50 percent this year added to a 25 to 50 percent increase over the past several years.
Bankers are faced with many challenges going into 2013. They must successfully deal with constantly changing margins, manage risk, and balance the appeal of online services with information security concerns. Like all businesses, they also have to develop a comprehensive response to the healthcare reform play-or-pay mandate that goes into effect Jan. 1, 2014.
The debate among many is whether to drop or keep offering benefits. McKinsey and Company researchers, however, insist there are other options and indicate that after employers better understand the economic and social incentives embedded in the law they may dramatically restructure their benefits.
It is a complex question and you need to take a comprehensive approach.
The Sweetest Spot is Close to Home
This year just like in years past community banks need to operate in their sweet spot. They can compete most successfully in their local markets where their service and knowledge give them an edge. Bankers should be ready to help the business leaders in their communities build on their optimism.
Data collected by the National Center for the Middle Market (NCMM) in mid-December 2012 and comments from business leaders who reviewed the findings before they were printed in mid-January were moderately optimistic about 2013. “It appears we are slowly recovering from the Great Recession,” a distributor, with 40 employees and $10 million in annual sales, described.
Responses regarding investment decisions, which often indicate how companies feel about the future, show that 41 percent of executives continue to keep their money in cash or securities rather than use it for growth, expansion, or acquisitions. However some are spending. “We’re trying to invest in advanced equipment to increase our capacity and reduce our manual workforce to help offset the increasing costs of healthcare and pensions,” explained a $100 million manufacturer with 625 employees.
Number One Challenge: Healthcare Costs
In every industry, the cost of healthcare is the top challenge. More than 90 percent of the respondents to the NCMM fourth quarter survey found healthcare costs to be somewhat or highly challenging. That has remained unchanged through most of the year and is a constant across size and industry.
As employers begin planning for the play-or-pay mandates that will go into effect in 2014, 47 percent will be reconsidering staffing. Thirty percent said they would freeze hiring and 17 percent said they would be laying off workers.
Growth Profit Pressures Continue
Besides healthcare costs, executives in the NCMM report are concerned about their ability to continue revenue growth and indicate that margins are under pressure moving into 2013. Commodity prices rose significantly last year, and they might impact the cost of doing business and the ability of middle-market companies to maintain margins. Unlike large firms, middle market firms don’t have the leverage to control price swings. One way to grow revenues is to go abroad, but middle-market companies view this as risky.
In 2012, middle-market companies posted average gross revenue growth of 7 percent and predict a 5.2 percent increase in 2013. According to NCMM Academic Director Anil Makhija middle-market business leaders are often cautious in their forecasts.
The middle market added 1.17 million jobs in 2012 for a 2.7 percent gain, compared to a 2.1 percent gain for large U.S. firms. Small businesses were at the low end of the scale with only
1.2 percent job growth according to ADP data. The middle market anticipates a slight drop in job creation, down from 2.7 percent in 2012 to 2.3 percent in 2013.
Looking more closely at job creation last year, the service industry topped the list with 5.5 percent growth in jobs according to fourth quarter figures. Health care was second with 3.4 percent growth, retail was third with 2.8 percent. The wholesale industry was at the bottom with only 0.7 percent growth, followed by manufacturing with 1.7 percent.
Looking ahead in 2013, the service industry will continue to outpace the other industries, but anticipates job growth will decline 1.5 percent to 4 percent. Construction jobs will grow from 1.9 percent in 2012 to 3.5 percent this year, and the wholesale industry anticipates doubling its job growth over last year, up from 0.7 percent to 1.2 percent.
Confidence is Low, but Improving
According to NCMM polling, confidence among middle-market leaders remains depressed, but they are slowly becoming more optimistic. Of the firms surveyed roughly half are at least somewhat confident in the U.S. economy with the largest companies showing the biggest increase.
The economists at the NCMM say the fourth quarter results suggest “a notable change in trends that point to increasing expansion in the broader economy after a year of mostly tepid GDP growth.” And they conclude: “Talk and fears of a double dip recession are quietly receding.”
We thank the National Center for the Middle Market (NCMM) at The Ohio State University for sharing its data with us. The NCMM surveys 1,000 c-suite executives of middle-market companies in a range of industries each quarter. The middle market is defined as companies with annual revenue between $10 million and $1 billion.