Looking back, looking ahead

Whew! Year-end is nearly here. What a big year it has been for both our firm and the industry.  This is a good opportunity to look at what’s about to become last year, and look ahead to 2016.

Looking back

A few highlights as I think back over the year:

1. Interest rates finally went up.

As I have told virtually any audience, board, and inquirer for the last several years, “interest rates are going up.” I have finally been proven correct.

Of course, they did not have anywhere to go but up.

It has always just been a question of timing. For most of us in the industry, the incremental increase recently provided by the Fed is a non-event. If the incremental increases continue, however, then most community banks will likely make more money since the asset side of their balance sheet will reprice faster than the liability side.

In any event, looking back, the much-anticipated interest rate increase finally showed up with little fanfare.

2. We continue to be in a period of significant consolidation.

I do not view consolidation as “bad” for the industry as a whole, but when you have consolidation of 250 banks or so a year combined with a total, as a practical matter, absence of de novos, then the number of institutions providing community banking services is reducing fairly rapidly.

Of course, this is of obvious concern to state and national trade associations that serve community banks. But it should be more of a concern to all of us who promote and foster the benefits of independent community banks in our communities.

I am one of the few “pundits” who believes there will be a period of de novo banks after the current period of consolidation. Hopefully, the regulators will grow more reasonable—one can hope—and the capital requirements will be something that is feasible in some of these smaller communities.

Historically, when there has been a period of consolidation, a vacuum has been created and new banks fill that vacuum. I am still optimistic that will occur post-recession as well. We will just have to wait and see. [Read Jeff’s recent blog on de novos, “Will there ever be new banks again?”

3. Capital allocation. This year was the first full year of completely post-recession operation for most banks. Because of that, virtually every community bank is in the process of looking at how best to allocate its capital to enhance value for its shareholders. Part of this focus is driving mergers and acquisitions, and a lot of it is driving the unsolicited offers or approaches we are seeing. (If you are going to allocate your capital, one should do it toward one’s best option first.)

This allocation of capital will either be the way to improve return on equity for the shareholders or to provide a return of equity to the shareholders through increased dividends, increased stock redemptions, and the like.

Thankfully, community banks are back to looking at opportunities, not just dealing with problems.

4. Regulatory issues have certainly not abated. It has remained clear through 2015 that compliance is here to stay. It seems that among the federal bank regulators and the Consumer Financial Protection Bureau, each is trying to figure out who “is the toughest sheriff in town.” It consistently appears that they are trying to outdo each other, particularly with respect to unfair and deceptive practices cases.

Even safety and soundness, which has been deemphasized for the last couple of years as the industry has returned to health, is now being re-emphasized. The Comptroller of the Currency, for example, is beating the drum about conditions he sees that are similar to the 2006-2007 time period as it relates to underwriting and concentrations in commercial real estate.

I hope the community banks are smarter than the Comptroller thinks they are. Only time will tell.

5. The regulatory burden is as heavy as ever. I was just discussing the regulators, but this rates further comment.

I have been in this business nearly 40 years. For 40 years, I have heard community bankers and others complain about the regulatory burden. We are still rightfully complaining about it.

But let’s consider this: The burden has never put any of us out of business. And it will not in the future. It is just something we have to deal with going forward.

Am I in favor of some of bifurcated regulations that are tougher for the bigger banks and less tough for the smaller banks?  Of course!  I think there are a lot of reasonable issues being floated around out there, including alternatives for the CECL loan loss reserve proposal, that make some sense.

This burden does not, will not, change by itself, however. As community bankers, we must be involved in the efforts to make sure the regulators understand that community banks are different than the large regionals and too-big-to-fail banks.

6. Competition for talent. One thing that I noticed heavily as I worked with community banks across the nation in 2015 was the intense competition for talent.

Generally when I think about intense competition for talent, it is typically in the loan area. Who would not want a lender to bring over a $40 million loan portfolio when he or she joined your bank? 

However, I have also seen competition for talent in other ways. The need for talent in technology and operational areas of the bank has increased dramatically, as has the need for compliance talent in all areas, not simply credit.

Community banks in rural areas suffer the most. It is difficult for them to attract talent into their rural area. Once they do attract talent, it is difficult for them to keep the really good ones who either do not have a career path in the rural community bank or do not want to raise their families in the rural area.

Competition for talent was tough in 2015 and is not likely to get any easier in 2016.

Looking ahead

In light of these reflections, the following are some quick predictions for 2016:

1. Interest rates will continue to rise (again).

2. Competition for talent will continue.

3. The regulators will be regulators.

4. Capital will be all important, particularly the allocation of that capital to enhance shareholder value.

5. Consolidation will continue. (I think the window we are in will stay open at least through 2016).

6. De novo banks will increase.

7. Technology security will continue to be a focal point.

8. The payment system will continue to evolve.

I wish all the community bankers across the nation a Happy and Prosperous 2016!