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MBA Convention Report: Inflation or Not, to Merge or Not

By: Bill Poquette

Differing views about the threat of inflation were presented to members of the Missouri Bankers Association at their annual convention in Branson last month. Economist Elliot F. Eisenberg, president of Graphs and Laughs, argued there is currently no inflation and no expectation of inflation. On the other hand, Esther George, president and CEO of the Federal Reserve Bank of Kansas City, believes pressure is mounting with food prices up sharply, rent and housing costs rising, and tuition bills climbing.

Eisenberg ticked off several areas where he sees no threat of inflation: import prices for all commodities; producer prices; the consumer price index; core personal consumption expenditures index; and total compensation. What worries people, in Eisenberg’s view, is the Federal Reserve’s balance sheet has grown but not the money supply. Monetary velocity has dropped like a rock, he noted; money isn’t being loaned out so there is no fear of inflation.

Nevertheless, he sees signs of improvement in the economy. The labor market is improving, albeit slowly, he pointed out. Container traffic has recovered, light vehicle sales are booming, non-residential and commercial real estate are recovering, mall vacancy rates are declining – slowly, as are office vacancy rates, consumer and business confidence are up, housing is improving. “Best of all,” he said, “no recession is in the cards.”

Esther George was in agreement that the economy is improving. It is in its fourth year of expansion, she noted, although progress is slower and more protracted than following previous recessions. “But we experienced a major shock,” she said. The present pace of 2 – 2 1/2 percent growth will continue this year – with consumers supplying the primary stimulus. “They are two-thirds of the economy,” she pointed out.

But employment, while growing, is still lower than desired, housing is not yet up to normal levels and capital spending by business is especially slow. “Businessmen tell me they are holding back because of the uncertainty of regulation and health care issues,” she said.

And inflationary pressures are rising, in her view. In a “fair amount of time” it should reach the 2 percent goal of the Federal Open Market Committee, she said.

Commenting on monetary policy, George said the committee is easing less but still easing, and it projects low interest rates until full employment is reached. But that may be too long, in her view. “Cutting rates is easy,” she said, “but history tells me raising rates is far more difficult. The tendency has been to wait too long.”

With mergers and acquisitions on many bankers’ minds, a timely breakout session for the MBA members about the current environment was led by Joseph Porter Jr. and Paul Cambridge, attorneys with the Polsinelli PC law firm.

While there are currently some 6,700 bank charters, the number is heading toward 5,000, in Porter’s view. Activity is not as heavy in the Midwest as on the coasts, he added. “But I don’t believe you have to grow this way to survive,” he suggested. “As reflected in a recent Federal Reserve study, small banks are doing well.”

M&A discussions are increasing but deal flow has yet to reach pre-recession levels, according to Porter. Seller asset quality continues to improve and valuations continue to improve, but buyers are being conservative, he noted. “There is a lot of talking going on,” he said, “but there is a disconnect between buyers and seller on price.”

Among reasons to consider selling cited by Porter were anticipating low levels of growth and profitability for the foreseeable future; increased regulation and uncertainty; compliance and technology costs; fatigue of directors and owners; lack of succession planning; difficulties raising capital; TARP and SBLF interest rate increases scheduled to kick in in 2016; trust deferrals ending; and too much holding company debt.

Reasons to sell, according to Porter, include smaller banks hoping to become larger; gaining market share in current markets; entering or expanding presence in new, complimentary markets; building loan and deposit bases and retaining key loan officers of the seller.  In addition, troubled banks have worked through their issues, strong banks have capital to spare to fund the purchase price and pricing is reasonable.

Bill Poquette is editor-in-chief of BankNews magazine.

Copyright (c) July 2014. BankNews Media.