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Meeting the Challenges: Investments, fintechs and regulations

By Bill Poquette, Editor-in-Chief

Three big challenges facing community bankers were addressed at the opening session of the recent Missouri Independent Bankers Association convention: investment strategies for a flattening yield curve, the competitive threat of global fintech giants, and regulatory pressures.


Jim Reeber, president and CEO of ICBA Securities, led off by listing the implications of a flattening yield curve: less benefit to extending asset maturities/durations; less benefit to mismatching assets/labilities; longer-durated assets can hold their value compared to shorter ones; net interest margins initially rise, then revert to mean. There is less penalty to shorten assets, and less penalty to lengthen deposits, he advised.

Overall, in Reber’s view, banks are positioned well for rising rates. The primary exposure, he explained, is to declining rate scenarios from both an earnings and economic value standpoint. Banks have reduced their exposure to asset sensitivity in recent years but have reduced asset sensitivity over the last year.

There are still plenty of reasons for banks to invest in municipal bonds, although demand hasn’t changed much as a result of tax reform and banks have plenty of income they can shield from taxes. Data show individuals are the largest buyers of munis, according to Reber. The market has not expanded and with limited supply, retail demand should keep a floor under prices, in his view.

The effect on interest rates of the Federal Reserve’s winding down of its balance sheet and the ballooning national debt are concerns of Reber’s. The central bank is selling off securities slowly and not reinvesting what is maturing. It will pay down $420 billion in 2018 and will be down to $3 trillion by April 2020.

The nation’s interest expense is “fixin’ to blow,” in his view, because lost tax revenue is not building bridges and creating jobs. “Politicians have significant incentive to keep interest rates anchored now more than ever,” he said. “Using modest projections, annual interest expense is expected to rise $580 billion by 2028.”

Reber concluded his presentation with these points:

  • Two more rate tightenings could occur this year; five by the end of 2019.
  • The big wildcard is inflation.
  • There should be support for municipal prices from several fronts.
  • Banks are poised to do well in 2018.

The Missouri bankers got an urgent call for action from John Waupsh, chief innovation officer for Kasasa and author of Bankruption: How Community Banking Can Survive Fintechs. “Twelve thousand global fintech companies are all dedicated to driving a wedge between you and your customers,” he began, before displaying a chart listing banking services offered in the planning stages by some of the biggest fintechs.

PayPal, for example, offers checking, savings, personal/auto loans, business loans and p2p payments. American Express does the same. Ally offers all of those except business loans but does offer mortgages. SoFi is not just refinancing student loans, it is advertising no-fee personal loans up to $100,000 on TV. Amazon, Waupsh pointed out, tops the list of apps consumers say they can’t live without. “And they offer 17 different banking products and services in the United States and 30 internationally,” he said.

But it isn’t just these U.S.-based fintech giants community bankers should worry about, he warned. “Amazon is dwarfed by Ant Financial Services, the Amazon of China and an affiliate of the Alibaba Group with 25 different fintech companies under its wing,” he said. “They are very interested in the U.S. market.”

Waupsh emphasized that these fintechs don’t compete on rate. “Their rates are higher than yours. They compete on experience.”

U.S. banks generally are five years behind these fintechs, in his view, and he suggested a three-pronged strategy to catch up: target the audience you want to serve, focus on their needs, study your data and know it and use it.

A mixed message from Washington, D.C., was delivered by Rep. Blaine Luetkemeyer, R-Mo., whose family owns and operates Bank of St. Elizabeth in central Missouri.

“I think you’ll see a new approach with different regulators,” he said. “There is a culture in some of these agencies that needs to be rooted out,” he added, citing as an example examiners’ interpretation of “guidance” as law. Guidance doesn’t have to be enforced, he noted. “You can push back; it is not like a rule or a law.”

As a member of the Financial Services Committee and chairman of the Financial Services and Consumer Credit Subcommittee, Luetkemeyer is focused on several issues of critical importance to community bankers.

Among these, he hopes for relief on Bank Secrecy Act/anti-money laundering enforcement. “Banks in the southern tier of states along the U.S. border have to fill out thousands of suspicious activity reports,” he said. Another of his pet peeves is the beneficial ownership rule: “Regulators want to deputize you to enforce it. If you don’t, you are penalized.”

Regarding CECL, Luetkemeyer blamed it on accountants. “They have no idea how this works in the real world,” he said. The Financial Accounting Standards Board rule is supposed to benefit investors, he pointed out, and most community banks are not publicly owned. Part of the problem is FASB is not a government entity, so an effort is being made to get banking trade groups to present something to the board that would exempt non-public companies.

The MIBA convention, held Sept. 10-12 at the Lodge of Four Seasons in Lake Ozark, drew more than 350 bankers, vendors, speakers and guests, along with nearly 70 booths in the exhibit hall.

Wyatt Jenkins, Brian Mall and Brandy Buckler (l to r) of BKD present Wright City-based FMB Bank’s Kristin Beckmeyer with the BKD award for Excellence & Innovation. The annual award recognizes high-performing MIBA member banks that use innovative ideas to demonstrate commitment to their employees, customers, shareholders and community.

 

During the convention, Jeff Williams, Security Bank of the Ozarks, Eminence, was elected MIBA president, succeeding David Alderton Jr., Peoples Bank of Wyaconda, Kahoka. Also elected were chairman, Stephen Kroenke, Farmers Bank of Lincoln; president-elect, Matthew Laumann, Farmers & Merchants Bank of St. Clair; vice president, Jack Hopkins, Community Bank of Raymore; and secretary-treasurer, Matt Sinnett, Midwest Independent Bank, Jefferson City.

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