As bankers look ahead to 2016 within their industry, they’re faced with adapting to the tastes of today’s tech-savvy customers, not to mention dealing with costly federal regulatory burdens enacted in the wake of the recent economic crisis.
That’s on top of navigating the limited available growth opportunities and operating in an economy that has improved, but still leaves much to be desired.
MiBiz convened a group of veteran West Michigan bankers to talk about what they see ahead for next year. Participating in the roundtable conversation were:
- John Irwin, West Michigan president for Huntington Bank
- Phil Koning, president and CEO of Hudsonville-based West Michigan Community Bank
- Jeff Kuras, an attorney in the financial institutions group and a partner at Honigman Miller Schwartz and Cohn LLP, the law firm that sponsored the roundtable
- David Ramaker, chairman and CEO of Midland-based Chemical Financial Corp.
- Ray Reitsma, senior lender and West Michigan president at Grand Rapids-based Mercantile Bank Corp.
- Sean Welsh, executive vice president and regional president for West Michigan at PNC Bank.
Here are some highlights from the discussion.
From each of your perspectives, what’s the lay of the land? What are the conditions as we head into the new year?
KONING: There are a lot of challenges, but there are also a lot of opportunities. From an economic standpoint, we don’t think there’ll be another recession, but we’re not looking for significant economic growth, either. We need economic growth to actually generate loans. If I see a challenge in the future, there are not enough loans for all of us to share in. Deposits, there seems to be plenty of, but loans are going to be the challenge for most of us.
RAMAKER: I would agree in the sense that I see a continuance of the economy in 2016 versus 2015 and actually 2014. From that standpoint, there is some economic lift in the marketplace, but it’s also market-share grab that we’ll be taking as we look for our growth. I, however, think there are enough opportunities from a lending standpoint. What we’re focused on is trying to figure out how to grow our deposits. We need fuel as we move forward, and I think that as the industry continues to evolve over the next couple of years, deposits are going to be more precious, quite frankly, than even loan growth.
WELSH: 2015 and ’16, economically, will be very similar. The opportunity in ’16 and going beyond is how do we show up where our clients want us. When you look at the transaction counts for our retail business, I think we’re up to 54 percent of our clients don’t use our branches, but they are still our clients. We’re trying to figure out how do we be relevant and add value where our clients are. As I tell people, we have to serve my mother and we have to serve my daughter, and they both want to be served very differently. That’s a challenge in our industry that we’re all trying to figure out how to do.
REITSMA: There’s no question the trend toward electronic banking is continuing at an accelerated pace. The economic cycle is certainly maturing, but it hasn’t matured, so we have a little bit of run left. We’ve rung out a tremendous amount of excess in the Great Recession, so the ability to sustain a good economy post-recession is enhanced by the severity of what we went through. We have a ways to go in this.
KURAS: We’re hearing a lot of similar things. No one’s expecting a large uptick. There are some complaints about there not being enough good loans out there, and where there are, there is some very heavy pricing competition.
IRWIN: I think it’s a great time to be a borrower. You look at where rates are, you look at the liquidity of the banks — all of us are chasing the same customers. People have lots of choices, so it’s a great time to be looking at their balance sheet and their capital structure and figuring out what they want to do for the next five years. (It’s about) being present where the customers want us to be, it’s about giving them choices. … We have to have all of the access points to capture the market share.
What do you see ahead for interest rates in 2016 and how will they affect access to credit and capital?
Editor’s note: The roundtable was held prior to the Dec. 15-16 meeting of the Federal Open Market Committee of the Federal Reserve.
IRWIN: All of our banks and our investors already have an interest rate increase factored into what they’re going to be doing in terms of our earnings forecast, so that’s already baked in. A quarter point here or there, if that’s going to make the difference for your business to borrow, then we want to take another look at it.
Those of us around the table here, some of us who have been in banking a long time remember when in 1980 the prime (rate) was 20 percent. The Fed, in my opinion, isn’t going to do anything drastic to change the course of action here in terms of where we’re going. They want to see it controlled and I think that’s what we’ll see. I don’t think things are going to change from a credit perspective.
WELSH: If you really look at it from the client’s standpoint, there are two clients here: The depositor and investor, and then there’s the borrower. The borrower, if we see a quarter point or something minor that we will probably see, that’s not going to change the decision on whether I buy a new car … or if I expand my plant. What’s really impacting the economy is our potential retirees and our savings. Everyone thinks increases in rates are a bad thing. But there’s also a good thing in there. We have become much more of a savings nation, and that’s something that did come out of the deleveraging of the 2009 Great Recession. So you have to look at it from two angles.
KONING: Relative to access to capital, I don’t believe there will be any change. There will be significant availability of capital for businesses with good business plans.
REITSMA: I would agree. Interest rates aren’t going to change the landscape of the borrower. In fact, if anything, they’re just going to continue to see there is more economic activity and they do need to continue to meet and fulfill those orders and so forth — whether that means buying equipment to make that happen or expanding their buildings to put in a new line. It’s still going to be a process that’s going to continue to happen. If anything, as we move through next year, we might see more of a flattening of the curve and that will mean that, obviously, the long-term rates will probably hold so that the borrower that’s potentially fixing for a while is not going to see a lot of movement in those rates. The opportunity is still going to be there to borrow.
IRWIN: The biggest issue all of our customers have is not the direction of rates, it’s the ability to attract talent. They cannot find the talent to fuel their growth and attract the jobs. Talent is a bigger issue for businesses in West Michigan than interest rates or the economy, in my opinion.
What are some of the issues and trends you saw surface in 2015 that will continue on 2016?
WELSH: (Banks) are investing in technology because that’s where our clients want us to be. That’s been a big trend. It’s been coming slowly, but I think it really went on steroids this year when we saw a jump in the out-of-the-branch activities. In the fourth quarter of 2013, we were at about 45 percent of the transactions that happened outside of the branches. We’re now up to 54 percent. That’s going to do nothing but accelerate.
RAMAKER: One (issue is) technology and where that’s pushing us and how that’s going to help us deal with our customer base and provide additional opportunities for them. … From an electronic perspective, we’re trying to figure out and provide to the customer the various ways they want to touch us, versus we dictate how they touch us. It’s a huge thing for our industry and it’s truly ramping up.
But then on the opposite side is the regulatory side of the equation and the increased burden that we’re facing because of that technology and what we need to do from that standpoint in order to meet those needs and protect the information that our customers are entrusting us with. We have both sides of that equation we’re having to deal with. One’s positive from a growth perspective, and the other one is really reeling in that side of it.
KURAS: Protecting that data has been a real interest to boards. In particular, I think it’s tougher from some of the smaller banks to spread out that cost of managing that technology, making sure you have the right systems, and getting your systems audited. That’s been a real issue on people’s minds.
KONING: And branches are changing. They’re changing from transaction centers to sales-and-service centers. I read an article recently that maybe as many as half the branches in the United States won’t be needed in the next five to 10 years. You may see wholesale closing of branches for banks.
We’ve heard so much the last few years about how the federal Dodd-Frank Act has significantly raised the regulatory burden and costs for banks. How has the law affected your businesses and do you see any relief coming?
WELSH: Dodd-Frank … is directional legislation and the legislation is now being effectively interpreted by the regulators and what the intent was on that. There’s a lot of really good regulations and they’re protecting the banks to make sure there is liquidity, which is effectively what most of the banks got into with the mortgages they had on their balance sheets. They’re protecting from capital things, but there’s always the unintended outcomes that come out of that legislation.
Our hope is that it evolves as we go forward. As we talk to our legislators, we try to show them here was the intent and here was the outcome. Will it be easy in a presidential year? No. But those discussions continue.
The goal of the government is to ensure steady liquidity for businesses and consumers, and the business that the banks are in is to supply that. Our goals are in line so it’s really just trying to understand how we get to that middle ground.
What are some issues you see arising in 2016?
IRWIN: We know we’re looking at fairly modest growth next year — 2.5 percent (GDP growth), or wherever that ends up — so I don’t think any of our customers are going to be blowing the doors off. I do think they’re all positioned for conservative, long-term growth. All of our customers that made it through the down cycle are much better prepared for anything that they face going forward, so that’s the good side of it. But it’s just going to be a little choppy, I think, next year.
RAMAKER: I think it’s going to be more of the same. I don’t see 2016 being a whole lot different than 2015. I think you’re going to continue to see consolidation. You’re going to continue to see the opportunity for growth for our borrowers. The growth in electronic banking will continue. More regulation will roll through. So changes will happen from that standpoint. I think it’s just really a continuing picture. I don’t think there’s one market segment that’s better than the others at this juncture.
WELSH: We’ll probably be sitting here a year from now talking about the same issues but they will have moved forward a little bit. We’ll go from 55 percent or 54 percent of the transactions outside of the branches to whatever … 58 percent or something. My hope is that regulations will become a little clearer. Again, Dodd-Frank was not a clear document. It was more directional (legislation) with the intent of where they wanted to go and the regulators have been interpreting that. And interest rates, I don’t see a lot of change in that a year from now.
There still seems to be a fair amount anxiety out there from the Great Recession, even though the economy has largely recovered. How’s that affecting business from commercial borrowers and their lines of credit?
WELSH: They will use 99.9 percent of their capacity before they buy a new machine, whereas in the past, maybe when you got to 85 (percent) you started thinking about it. (Now) you’ll fill every square inch of your plant before you think about expanding it.
REITSMA: I think they are willing to fund their working capital requirements first, then fixed assets like plants, equipment — that type of thing — because it’s somewhat involuntary. You generate a receivable, you have to finance it. But in terms of mindset, they are in no hurry to go further in debt for capacity they may need. They’ll certainly do it for capacity they do need.
WELSH: They’re waiting until the last minute. They’re doing everything that they can do to maximize their productivity, and then at the last minute they’re expanding from an equipment perspective or whatever. We have businesses out there with much better management teams, much better ownership, much more experience on how to work through all of these issues. That’s what they’ve learned, so that’s what they are putting into place. Quite frankly, from our perspective, I think that’s better for us, too.
REITSMA: They appreciated the downside that they didn’t maybe in 1996. There’s much more appreciation for the downside that can occur in an industry and the general environment.
What would surprise each of you in 2016?
WELSH: The Cubs win the World Series. (Laughter around the table.) Actually, I think they will. This is their year.
RAMAKER: A recession would surprise me. I just think fundamentally, there’s still room to grow. The Fed needs to increase rates to show it has the ability to increase interest rates, but there’s still plenty of opportunity for ramp-up. If you look just in this state and look at the automobile industry, the number of cars that are being bought at this point in time just continues to drive the thought process that the economy in 2016 is going to be solid. Is it going to be outstanding? No, but it’s going to continue to show some growth. So I don’t see a negative in the forecast.
KONING: And the Fed’s not going to increase interest rates to the point where it’s going to shut everything down. They’re just not going to do it.
IRWIN: I would be surprised if anything happened that impacted auto sales or home buying. Those are two areas that are so important to our regional economy. (The Fed is) watching those numbers really tightly.
WELSH: There are events out of anyone’s anticipation that can occur, but you can’t plan around such low-percentage events.
Where do you see M&A activity in the banking industry going in the next year or so?
KURAS: The past couple of years, we’ve been saying, ‘This is the year it’s going to shake loose.’ It’s simply because there are so many banks that probably should. They’re not troubled, but they’re at that asset size. If you have $200 million in assets and compliance costs are up, it’s very difficult long term to see where you’re going to go.
In some of these communities, you still have the local-investor model. These people are aging. They want a market for their shares. But then you see a lot of deals break down for the smaller banks because those social issues are a very big deal for them. Who’s going to stay on the board? Are you going to sell to another community-type bank or a super-regional bank? That type of thing can really delay things or (cause) some reluctance on their part to make some of the moves that they probably should.
RAMAKER: I’m getting an announcement a day, maybe twice a day, about M&A activity that’s coming across my email from around the country. So I think we’re going to continue to see consolidation. There are roughly 120 banks headquartered in Michigan at this point in time. We’re probably going to be somewhere — I’ve been saying, in the next five to seven years — around 70 to 80.
KONING: Not all of these banks are in desirable markets to be in, either. There are a lot of no-growth areas in Michigan. There are probably some very good markets, but there are also some markets that only a community bank could want to serve.
WELSH: If you look at the environment that banks operate in, where they are investing now is technology. They’re investing in revenue streams that bring solutions to their clients and that add on to the loans and deposits. It may be asset-management businesses. It may be servicing businesses, it may be technology businesses. Banks have really become information-management companies for their clients. We hold their money, we bring them solutions, but we’re doing a lot more. So for the investment of capital on behalf of a bank, the options are so much wider and so much different than they were 10 years ago.
If Gov. Snyder were to call and ask for advice on what he could do to help Michigan’s economy next year, what would you tell him?
REITSMA: Reduce the (regulatory) burden on our borrowers. Make their ability to comply greater. They have the same issue that we have as an industry. Almost every industry has its compliance challenges. To simplify those would help our borrowers a lot. They spend their resources just like we do (in) trying to figure out what the law is and comply with it. It takes them away from whatever it is that makes their company great at what they do.
RAMAKER: (State government) has to continue to treat the tax base and the taxpayer as customers and (acknowledge) that we need an answer. We don’t need a delay. Delays are trouble for all of our businesses. Give us an answer. Whether it’s good or bad, we just need to know. Give us something.
REITSMA: You just want certainty.
WELSH: And I think he has done a lot of that.