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How Fed's extraordinary rebuke of Wells Fargo could benefit small banks

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How Fed's extraordinary rebuke of Wells Fargo could benefit small banks

In castigating Wells Fargo & Co. for "widespread consumer abuses" and penalizing it with an unprecedented order to halt its growth, the Federal Reserve opened the door even wider for community banks to poach talent and customers from the San Francisco-based megabank.

Small and mid-sized lenders told S&P Global Market Intelligence that they are assessing such opportunities, saying the Fed action is bound to distract Wells from serving certain customers and likely to further motivate proven bankers to seek new career opportunities.

These banks declined to be named because of competitive reasons. But Blair Hillyer, chairman and CEO of First National Bank of Dennison in Ohio, which does not compete with Wells, said it is a near certainty that many Wells rivals of all sizes are circling the embattled bank and looking to cherry-pick prized customers and staffers.

"I'm sure it's happening," Hillyer said. "The competition goes in and talks to key people, and tells them if they want a safe place, take a look at us. If it were me, I would do that. And it's a soft sell: The headlines in the press make your case for you."

Wells has since late 2016 toiled under the shadow of scandal. In September of that year, regulators fined Wells after discovering that the bank's retail staffers had opened millions of fraudulent accounts. The company limped through the final quarter of 2016 as a result. Both its net income and revenue in the period declined from a year earlier.

With additional problems since — such as erroneously charged auto and mortgage customers — Wells continued to struggle. Its 2017 revenue was flat from the previous year.

Some community banks already have capitalized on Wells' woes. At a conference last fall, for example, TriCo Bancshares President and CEO Richard Smith said his bank had recruited from Wells lenders who, in previous years, would not have left the banking giant for a much smaller competitor. With the newly hired lenders came many of their customers.

"We've had the good fortune of Wells Fargo's bad fortune," Smith said at the time.

Now, with the Feb. 2 consent order that forces Wells to limit its total assets to the level at which it finished 2017 — just under $2 trillion — bankers and analysts see an amplified opportunity for small lenders to gain market share at Wells' expense. That is because Wells now finds itself in an indefinite penalty box with regulators, as opposed to emerging this year from the worst of its troubles as investors and other stakeholders had hoped.

The Fed action requires Wells to prove to regulators that its risk management and governance issues are fully addressed. Conceivably, analysts said, the bank could demonstrate its turnaround in a matter of months and get the consent order lifted later this year. But several analysts said this week they expect the process to push into 2019 and perhaps late into the year. Vining Sparks analysts projected a time frame of 18 to 24 months.

While Wells can roll components such as trading assets off of its balance sheet to make room for core loan growth, as President and CEO Timothy Sloan envisions, some talented lenders are bound to be nervous about their own growth prospects while Wells is under the Fed order and while the bank's reputation remains under relentless pressure, analysts said. Wells customers, too, could prove more likely to listen to other banks' credit offers.

"I think they do have the ability to continue to grow their core businesses, but that does not mean its competitors are not going to be going to its bankers or customers and telling them that the Fed thinks [Wells] is in too much trouble and they should move," Scott Siefers, a Sandler O'Neill & Partners analyst, said in an interview.

Bryan McKeag, CFO of Dubuque, Iowa-based Heartland Financial USA Inc., which operates community banks across the Midwest and West, said that it may prove difficult to discern the precise impetus for Wells customers or lenders who jump ship because the bank's troubles have long been entrenched.

But, he added, "I do suspect in some markets this will become more of an issue now that there is this consent order."