By John Reichert and Melissa Lanska
Once again, 2023 showed the ability of community banks to adapt to unique circumstances and continue to serve a crucial role for their stakeholders. An unprecedented interest rate environment, a continuing onslaught of fraud and technology challenges, liquidity swings and an increasingly “cautious” regulatory environment were just a few of the issues facing bankers. Yet, most of the people we work with proved to be resilient and nimble and were able to position themselves relatively well heading into 2024. The following are just a few of the issues clients are facing in the year ahead.
1. Repricing & Credit Quality. Liabilities repriced at an historic pace in 2023. Many anticipate that assets will begin to catch up in 2024. While that should obviously help restore some of the lost net interest margin, the question remains whether there will be a noticeable spike in credit challenges as borrowers see payments adjust significantly. It may be a delicate period, but one we think most clients are monitoring closely and should be able to handle. While the Fed has projected several rate decreases, the effect may dampen some of the repricing, but should help recover some of the unrealized losses many people have in their portfolios.
2. Liquidity. The regulators are intensely focused on balance sheet liquidity. No secret here. We think most clients took steps in 2023 to begin addressing the issue and expect those efforts to continue throughout the year.
3. Fraud. This may be the single biggest issue the industry is facing. We used to get calls on account fraud, cyber breaches and similar instances once a month. By the end of 2023, we were getting multiple calls a week. Often, even if you have “best in class” defenses, products and procedures, these occurrences can be very costly. Insurance companies are often involved, business customers wrongly think the banks are liable, and disputes can drag out over large sums of money. The best thing banks can do now is focus on security, response plans, and customer awareness. Make sure you have the necessary tools and, more importantly, are getting customers to enroll and deploy them.
4. Capital. We have numerous clients engaged in efforts to raise capital. While it may not seem like the opportune time to raise capital, for many it has been years since they have offered the opportunity to invest to new shareholders. Doing so may well help provide cushion for any challenges and the wherewithal to seize opportunities that will surely arise in the months and years ahead.
5. Personnel. The “war for talent” continues. We are working with a number of bankers to provide creative long-term incentive structures, enhance or implement employment agreements, and wrestle with issues surrounding non-competes and non-solicits. Given the larger trends in the economy, we expect that this will continue to be a focus, especially as succession and retirements loom large.
6. M&A. For obvious reasons, M&A activity took a notable pause in 2023. However, that does not mean the underlying motivations for sellers have changed. If anything, they have become magnified. And it isn’t just bank-to-bank deals. There are a number of non-bank buyers and there are several people exploring business line acquisitions or divestitures (mortgage, insurance, wealth, etc.). The demand remains significant and growing and we expect to see activity pick up again in 2024 as people feel more comfortable that they have weathered the challenges of 2023.
7. Enforcement Orders. For the first time in more than a decade, we are seeing multiple banks enter into MOUs or Consent Orders with their regulators regarding liquidity, capital, and compliance matters. Unlike previous regulatory orders, so far at least, none have focused on credit quality. However, the trend is notable and we anticipate it to continue through the next exam cycle.
8. Competition. This is not a legal issue per se, but increasingly well-funded and less-regulated competitors are targeting specific business lines that were traditional services for banks, including such things as deposits, payments, and segmented loan offerings. Things such as “banking as a service” or BaaS are becoming prevalent. Increasingly, banks have to compete with credit unions, FinTech, private equity-backed entities, etc. We do not expect this to be disruptive immediately, but community banks must consider how they are going to respond to such challenges over the intermediate time horizon.
Where does this leave community banks going into 2024? For those with a thoughtful approach to your capital, shareholder base, balance sheet, talent, technology and product offerings, there will be significant opportunities to thrive in 2024 and beyond. However, as unpleasant as it may be, if you continue to focus on the blocking and tackling that worked in the past, we anticipate there will be numerous challenges on the horizon.
Reichert and Lanska co-chair Reinhart’s Financial Institutions Practice, Reinhart Boerner Van Deuren S.C., a WBA Bronze Associate Member.