"They Don't Sit Still" with Nathan Stovall of S&P Global

In this episode, the guys are joined by Nathan Stovall, the Director of Financial Institutions Research for S&P Global. Nathan shares his observations on deposit trends, how banks are the "thermometers" of local economies, his outlook for M&A activity, and why it is so important for banks to "not sit still" in an ever-changing banking landscape. 

For more insights and ideas, visit DCG at DarlingConsulting.com or follow us on LinkedIn.

Transcript

On the Balance Sheet® S4 E3:  Nathan Stovall, S & P Global

00:00:05 Vin Clevenger

Welcome to On the Balance Sheet® Season 4 Episode 3. Great episode. Today we are joined by Nathan Stovall from S&P Global. Zach, give us Nathan’s bio.

00:00:13 Zach Zoia

This is a real treat for us. Nathan's out there in the news, and he's the Director of Financial Institution Research for S&P Global Market Intelligence.

00:00:24 Zach Zoia

And he has his own blog called Street Talk. He has a podcast by the same name, which is terrific if you're into the banking industry and some of the insights from leaders around there. He does a terrific job there. They also have quarterly outlooks, you know, via S&P right on the banking industry, looking at different trends and projections. So he's a he's a call him a thought leader, obviously, and we have a great discussion planned for our listeners today talking all things banking with someone of the caliber of Nathan. So we were really, really pleased to have him join us today. 

00:00:55 Vin Clevenger

So without further ado, Nathan Stovall.

00:01:02 Zach Zoia

We are very pleased to be joined today by Nathan Stovall. He's the director of financial institutions research from S&P Global and he also has a terrific podcast called Street Talk that I think anybody who's interested in the banking industry, you know, should listen to. But Nathan, how are you doing today?

00:01:19 Nathan Stovall

Great. My pleasure to be on. Thank you for having me.

00:01:22 Zach Zoia

No, the pleasure is all ours. And Vin and I are both listeners to your podcast. I know you've come across DCG folks over the years too. And I think just to kind of level set before we get into some of the industry discussion and research, can you just give the listeners a little bit of background about what you do at S&P and kind of how you got to where you are today?

00:01:42 Nathan Stovall

Sure. So I lead our financial institutions research team, which is a team of 23 professionals covering U.S. banks, US insurers, US real estate and then global banks, which would primarily be European and APAC banks. We produce proprietary research on all of our sectors, which includes quarterly outlooks for those sectors, but also deep analysis of trends that are going in the space and how we think that it will impact institution strategies going forward. I myself am the US bank guy. That's what I've been for about 20 some years covering the US bank space - all banks, public and private, large and small. And what I try to do is create benchmarks of where we think performance is going to go and then how do we think that's going to change decision making within the C-Suite at various institutions of various sizes and various geographies, and I kind of ended up in this space by accident, honestly.

00:02:45 Nathan Stovall

I was a business journalism major in college. I came out and joined a small company in Charlottesville called SNL Financial. I thought, you know, maybe I'll do this for about a year. We'll see where it goes, and they got their hooks in me, and I fell in love with the bank space, quite honestly and love how many smart, intelligent people you meet in this sector, and I also think it's an awesome way to learn the country. You know, there's that old line that makes our thermometers, our economies. I really feel that they're thermometers of their local markets. So, the Texas banker feels like a Texan. The Florida Baker feels like a Floridian. I'm in North Carolina. They feel like North Carolinian and so on and so forth. So, fell in love with the space and have been doing it since 03.

00:03:32 Zach Zoia

Terrific background in the research you folks do and the articles and all the reports you folks put out or are always a must read for us and we always like to look at that. And I haven't heard the SNL name in in a while and it's been a long time since that acquisition. But as we kind of jump in here, you recently had an article, Nathan, in Bank Director, and the title was “Banks Must Remain Laser Focused On Deposits.” So, I kind of want to start there as you wrap up Q1 deposits have been a huge discussion in the last couple of years. What are some of the themes you're seeing on the deposit side, whether it's cost, whether it's balances, whether it's just discussions you're having with bankers around the country, can you, can you kind of level set us with what you guys are expecting from that front this year?

00:04:19 Nathan Stovall

Certainly - going back to that specific piece is just a bit of a level setting. One of the points there, I think, that I wanted to drive home is that that's the true value of our franchise. And I'm fearful that after we had this fever pitch of focus around deposits of liquidity in 23, there was some thought of “this, too, shall pass.” So, we can kind of move on and not have to be as focused on it. Because I think for a huge portion of the banking and, really, adult population, deposits were easier to come by over the last 15 years. And I think the last two years has reminded us that it's not necessarily the case. We did, we have seen liquidity pressure subside. We have seen deposit balances hold, and it feels like that that's continuing this year, not really strong growth, but we're holding those balances and we're holding those balances even as we're cutting rates. The question is, rates are going to go down. The question is how fast. And we've been in the camp that we saw a lot of improvement in Q4, but we don't know that the pace of improvement is going to accelerate from here. And one of the things we look at, we have weekly rates data, and we just zero in on the one-year CD because everybody went back to the well, and lot on their CD portfolios when they needed to attract new funding, and if you look at that the rates have come down, but you're seeing a little bit of stabilization at still pretty high levels in terms of the rates that banks are offering, and we had monitored at a number of banks offering CDs at 4%. That's plunged, but at this 3 1/2 percent level, you're not seeing much improvement in Q1 relative to Q4. So that's just one marker in the idea that these books are turning over as CDs are maturing, and we think they're going to reprice at the market rates, and I feel the things like the H8 data you see that CD balances are down a little bit. So maybe we're losing some of that business, but we don't think that banks are going to be able to plunge rates - more steady, marginal, incremental improvement through the year, if they want to keep those balances, we think that's going to be the case.

00:06:32 Zach Zoia

Now makes perfect sense. I know we have some data, you know that we see from our side too with some of our analytics talking about you know the CD side is definitely seeing some balanced reductions and we're still seeing that mix shift.

00:06:46 Nathan Stovall

Mm-hmm.

00:06:46 Zach Zoia

We're not seeing the deposit outflow as much and no maturities anymore, but we are seeing the shift out of checking low-cost savings to the higher yield savings, money markets, are you guys seeing similar things in terms of the balance and the mix shifting and what you're expecting from the growth side there?

00:07:01 Nathan Stovall

Absolutely. And that's a really important point because when you look back from a couple of years ago, you know, we were all so deposit rich, our non-interest bearing balances were the highest concentrations they’ve ever been. We were all the best deposit gatherers ever or so we thought.

And it might have pulled us into a little bit of false insecurity. I mean, it's amazing what happens when you throw $5 trillion at a problem, but that shift it hasn't, those balances haven't declined as fast as they were, you know, in 22 and 23 and early part of 24, but we're still seeing that shift. Non-interest bearing balances are still elevated over long periods, long timelines when you look at them compared to historical standards. So, we've assumed that there's a little bit continuing if that makes out of our best pocket into our more expensive pocket even as rates go a little bit lower there there's another mixing, and I'm sure we'll get into it. But at the same time, the other side of our balance sheet’s remixing in a positive way as well. So, we still think, you know, margins can expand as that happens, but the idea that you're going to see funding calls really drop very, very quickly. It's, we think it's going to be challenged. It's going to be sort of more of a slow steady pace down.

00:08:21 Vin Clevenger

Yeah, Nathan, this is Vinny. And thanks again for joining us. I would agree with you know, all of what you said. It's kind of interesting because for the majority of the community banks that Zach and I and our colleagues are working with here, it was sort of our glass is half full or glass is half empty type of story. You had bank, if you go back to kind of the end of last summer thinking, my gosh, we're really going to get some funding cost alleviation if the Fed really gets moving down, and it hasn't happened. But at the same time, we did get 100 basis points out of the Fed since then and most of the models we look at, they're kind of showing deposit, there's nice tailwind that's going to kind of bring your deposit costs down because of chunks of CDs coming through here. So, I think I agree with that. It feels like it's going to go sideways, but probably down. I'm really more curious on a comment you just made, which was on the loan side and loan repricing, is one comment that we keep hearing over and over, is that demand is way off at so many banks on the loan side. Just kind of curious what you're hearing and seeing because that's very frustrating to so many community bankers who were hoping to sort of be able to participate in higher yields on the asset side after several years of having 3, 4, and 5% yields and that just hasn't happened. So, what are your, what are you hearing and seeing and what are you folks thinking about in regards to loan pricing?

00:09:45 Nathan Stovall

We are hearing the same thing, and the more remixing I'm talking about is just assets put on in 2021 whether loans or securities that are they're maturing and rolling off. And even if we're just letting our bond books just reinvest in cash flows or maybe even letting them shrink a little bit and our assets are flat, that remixing looks favorable, but your point is spot on coming out of the election, sentiment was jumping up and down pipelines for the best we've ever seen and have heard that. But the growth isn't there. It's been sort of more of the same if again H8 data, if you look at those annualized numbers, it's kind of what we've seen last year and, you know, why would that be the case when everybody was feeling really good and sentiment, not magic reality? Well, there's a lot of balls in the air right now. You know, we've got huge policy changes that, even if you’re in favor of them, huge policy changes being talked about, but I think it's hard for people to kind of digest what they mean for the business, whether that's tariffs and some of them we haven't seen in many, many years at this level. And they're also changing quite often, but also changes of regulation. Yeah, I think it puts people on the back burner. Even if they like the direction of where some of the things are going, even if they like something like a dodge and what it's trying to do, create more efficiency, we're not really sure where this all kind of shakes out. People say markets don't like uncertainty. Businesses don't necessarily like uncertainty, either. It's kind of hard to plan against. And when you have more certainty, you're more willing to expand. When you have less certainty, I think you're more to wait and see. Honestly. So, I'm not in the camp necessarily that this is a debt issue and that we're never going to get the elevated loan growth we were hoping to see come to pass in 25, but I think we are still in that wait and see mode. And don't forget, too, we're also, there's an argument made that we're late cycle. We're getting in the later innings of a credit cycle too. And you don't necessarily want to run towards that. I mean, we spent lots of time talking about commercial real estate. Thankfully, the worst-case fears there, I don't think are gonna bear out. And some of the alarmist comments they weren't there, but the consumer is holding up, but is a little bit more stretched, you know, delinquencies are rising, they're still not back to pre-pandemic levels, but those are not the kind of things you tend to run towards all the time. So, you put those two things together. I'm not shocked that we are where we are right now, and it does feel like it's just kind of more of the same and that again, the sentiment hasn't...the hope hasn't really manifested into stronger growth yet.

00:12:25 Vin Clevenger

That's certainly a little bit of clarity as we move forward here - might be a real catalyst for Q2, 3, and 4. But then again, we don't know when will the clarity will actually emerge. If you do, let us know, but maybe that's a perfect segue for our listeners. Again, Zach had mentioned it early on; I would absolutely recommend Nathan's podcast, Street Talk. I've listened, really, to several over the years, and I've listened to really more recently to the last four you did, I believe, and I have to mention one theme that emerges throughout all of those is M&A activity. And for Zach and I and DCG in general, yeah, that's not necessarily our focus as a firm, but it's always so interesting as we kind of talk about it. So, is it fair to say that maybe the expectation for a pickup and loan growth is very similar to your expectations for M&A activity? As we move through the remainder of year, we get a little bit of uncertainty

out of the way, I should say.

00:13:21 Nathan Stovall

Yes, I think there's some parallels there, but I'll give some other nuances that I think are a little bit different that maybe give me a little bit more faith that will become more of reality in terms of what the M&A activity. So, unlike loan growth where I said more the same where we actually had growth, we've had very little deal activity over the last few years going back a long timeline, you'd see 200 plus bank deals in the sector every year, and we've been well down from that. And it's pretty simple that you have rates go up at the fastest pace we've seen in 40 years and the counting associated with those deals became very prohibitive. The required mark that buyers have to take on targets balance sheet often left the target with little equity capital. Plus you had valuations under pressure as margins were under pressure and then, of course, the regional bank failures that occurred in 23 just exacerbated all those issues. So, we kind of hit a bottom called summer of 24 evaluations have been kind of coming back up, and then coming out of the election. And there was great hope that we are going to see things really take off with a friendlier regulatory environment and more pro-growth environment and the worst of the funding pressures behind us hasn't really manifested yet. A couple of things there though, 1) the uncertainty comment is very real, and one way it's played out in a very different way is you had valuations for cover a lot in the group and run coming out of the election, but more recently you've seen the group sell off a little bit.

And it takes a while for these deals to get done. So think about it. You start having a conversation, let's say it starts in November, you get closer, you get closer to deal price, and then suddenly your stocks off 10 to 15%. The seller was like, wait a minute. Last week I was worth 15% more. I think that could gum up some processes for sure, I think things tied to the loan growth, the parallels, they're about concerns about the economy, where we are and uncertainty are very real. I think, though, the regulatory piece is both putting us in a potential holding pattern, but also gives me more confidence about a tailwind here. There's a lot of proposed changes. We need new heads at the agencies to come down to actually see how they feel about this, but once that's in place, I do feel you'll see more deals hit the tape and something else I'll say is that a hang up we had heard over the last few years was the idea that 1) regulatory approval might take a long time, and 2) I might only be able to pursue one deal at a time in terms of one year, and the belief is that both would get better under this administration. We've seen a couple of deals recently come through, including one today, in Cadence FCB, where the regulatory approval came ahead of expectation, so.

00:16:10 Vin Clevenger

I think that was 61 days.

00:16:13 Nathan Stovall

Right. Yeah, right. Pretty darn fast.

00:16:15 Vin Clevenger

So that's, that's actually kind of beat me to the punch. I wanted to ask that follow-up question is…that's a great sign.

00:16:22 Nathan Stovall

It's a huge sign. I think it's a very real marker, and there's been a few of those out there, and I think that has to inspire conference from the buyer and that was one of those transactions, too, that people held up and said this is kind of a both on deal like we would have seen 5-10 years ago.

00:16:41 Vin Clevenger

Right.

00:16:42 Nathan Stovall

But we weren't seeing as many of those because the buyer thought, “I might only get to do one of these a year. It's like I moved the needle enough, so I'm waiting.”

Cadence felt confident they’d get the approval to go through, and I think that that's, I'm not going to say a brilliant green light for everyone else, but it's a nice marker for sure, and seeing how the market digests those which they have been, I think, is also an encouraging sign. And then all the old factors - assess the issues, you're looking for liquidity for shareholders, and there's pent up demand - couple of years of dealing activity 20 was a bad year, too. So, in the last five years you've had earnings down for community banks 22, 23, flat 24, but you only had a few windows open where you could actually pursue a transaction. So, I think we're getting there for sure. It just might be a second-half of 25 event.

00:17:35 Vin Clevenger

Do we presumably then see an increase in multiples? I mean, I think you sort of alluded to the trough of deals where, basically, the summer of last - of 24, is that presumably the low point for multiples as well? I mean, I, obviously we're in a wildly inverted curve like some of the things you were just talking about were all sort of coalesced, you know, but when you start looking at average multiples through the deal space, and you would know these numbers much better than I, but the days of two times book were sort of in the rearview mirror. You saw that really slide down into the 125 to 150 range, something like that. What's your expectations? What are your folks’ expectations for multiples as you move forward?

00:18:18 Nathan Stovall

Those numbers sound right, and the one thing I'd say is that there is not acquisition premiums fully built into these names right now. So, if you start to see a healthier deal environment, I think it's gonna help and it, if they go into the group, that means that buyers have stronger currencies and so they can pay more. So, I think it goes up, but the factor that we've seen recently, and it is an important one, is you've seen the general's community get a little bit cautious towards the group. I don't wanna say that they're completely gone, but they come back in, of course, and the recent policy uncertainty and tariff discussion has made them nervous again, and people mentioning the dreaded R word with, you know, the prospect of a recession, that's always going to hang over the group if something like that pops up, and there's very little, unfortunately, individual banks or even banks as a group can do to kind of prove that wrong except be a show-me story. Just prove over time that that their economies are not showing that, so kind of a push and pull there. I think that, yes, you could see valuations go higher with a rebound and activity and do believe that that is coming, but if you start to get big credit for years again, that could really weigh heavily on the.

00:19:40 Zach Zoia

Yeah. And Nathan, in that in that same light, I'm just thinking about earnings expectations going forward this year. It's certainly better, right, as you mentioned, than the last couple of years. And just thinking about whether it's bank stock performance, whether it's the M&A environment, do you see and let me take a step back, a lot of banks we see have become more liability sensitive over the last couple of years, so if rates fall, if we see the curve, the Fed cut a few more times, it gets up steepness, a lot of banks are in a pretty good spot from that perspective, but I'm just kind of thinking through ahead of, do you think the rate environment and earnings are a bigger kind of piece of this puzzle, or do you think no, it's probably more the fiscal side and the government in regulation and maybe even as a third option, credit. So, if you had to rank some of those 3 in terms of what banks should be worried about, going forward here, how would you kind of look through those 3 things?.

00:20:34 Nathan Stovall

That's a great question. I mean, I think worry about what you can control, which is more the earnings of fundamental environment, your own credit. Now, what's going to impact valuations might be a different discussion. I mean on the fundamental environment, we think earnings are up about 6% this year, 12% next year. The sell side is pretty close to that as well. That's pretty favorable. And if you look at where the group is trading relative to the broader market continues to trade at a big historical discount, so, a more favorable backdrop. And yet we're still not getting that play in. So, I think in terms of where it will trade the, the fiscal environment, things like tariff talk are going to really play a bigger role in terms of valuations with the exception that I mentioned, the show-me story, I just think it becomes a show-me story. If you get through three quarters where we haven't seen credit really move, and we really still haven't seen credit move, those bears saying that community banks are going to blow up on CRE and all these things, it gets harder to prove that point. I think we got there last year, it just, you might have these sort of ebbs and flows back and forth.

00:21:45 Zach Zoia

I think that was a terrific answer. Vin, I was going to change subjects. You have anything else on the M & A bank stock side?

00:21:50 Vin Clevenger

Well, we might as well hold his feet to the fire and ask him in 2030 how many, how many banks will be left? Because there's been a lot of wild things, I'm sure you've you follow me. In 200 banks a year, I mean it's just clearly was the math for a long time and you, you know, you wonder well, geez, there's just so much low hanging fruit.

And sort of cleaned out. There's plenty more to go, but a rate of 200 a year. I don't know. What is it look like over the next 5 or 10 years and in your mind?

00:22:19 Nathan Stovall

So we're at 4,200 today, give or take, 200 a year for five years will put us 1000 lower.

That feels possible, but it might be slower than that. You know, I would have, I would have said that's my gut. Except it hasn't played out that way. And if you think about percentage of the industry consolidating because there's fewer banks, it's around 3 to 5%. We've been at the low end of that for the last couple of years. So yeah, closer to 3,500, probably in five years. You know, maybe 10 years, a little bit less than that, but I've never been in this camp that you're gonna get down to 500, which is a less precise answer, but I think that you want smaller banks to serve those smaller markets. I think people like banking local and maybe getting a little hopeful that maybe we'll get some de novos.

00:22:55 Vin Clevenger

Right.

00:23:06 Nathan Stovall

Back. You've seen a few creep up here, and I think that's important and good for the industry, to be honest. It's important in terms of attracting capital and keeping capital attracted to the space, in part because without de novos, it's harder to think about exits, cuz if I'm running a place, I might wanna do it again, and I don't know if I get another shot running another $600 billion institution, if I'm in my early 60s.

Right. So, I think having de novos is important for that reason. And I'm hopeful that we'll see, we're starting to see some shoots of that, but I'm hopeful we'll see more and maybe that kind of keeps the number from shrinking too dramatically over time.

00:23:50 Zach Zoia

I think that that makes a ton of sense and that that's such an important piece of it. And I know, too, Vin and I have had a number of clients, maybe not de novo, formally, but you know they get some equity money, private equity money and they go buy a shop somewhere out in a rural area and they recapitalize and go that route. It's not the true de novo, but like at least they're doing something different to bring something new in in, a newer entity to the community, which I think is, to your point, really important here, that if we lose some banks, there needs to be a kind of a front door that's open to to allow us to have more of those. And I won't pin you down, Nathan, to a number of banks, but this is more like a conceptual question of in the next 3. 5. 10 years to, to Vinny’s question, what are some of the biggest, we’ll start, opportunities for banks in terms of at least that you're seeing, whether it's in your research, whether it's with the folks you talked to with all your contacts, industry, what are you seeing as real big opportunities for banks, big and small?

00:24:44 Nathan Stovall

So, on opportunity one, very high level one, but I think there's a couple things come with it is that there's optionality back in the sector. I've been talking about this last few months, that I don't think it's been there for some time. Now, what does that mean? It means that there's capital to support growth that wasn't necessarily there. There's capital support, both organic growth and M&A, I think that we're seeing optionality in terms of return to the M&A environment, both if you're on the sell side, but through the buy side and growing that way. And we're hearing from the regulatory community talk about innovation, and we've got the strictest view of working with Fintech behind us. We've got the fintech winter behind us and so you've squeezed out some of the some of the weaker players as a result of that, but I think there's great opportunity now where there is capital and there's also technology available that could really allow people to play offense in a really big way. And that second piece on the tech piece though, it also goes is a potential challenge that and maybe you can say the same thing about the optionality comment period if you're not doing that, if you're not innovating, if you're not trying to grow, if you're not trying to reimagine right now in the next three years, I think that's a risk as a smaller institution. That doesn't mean that you have to be like a big bank. But I think you have to try to make sure that you're staying relevant to your customers and figure out what their needs are and taking advantage of the window being open to kind of do so because some of your competitors will do that now, and they'll be able to be fiercer competitors because of the capital available to them because of the idea that they can work with savvy or tech partners, whether that's for the consumer or for commercial customer. So, I think that that's important, and I would put this is not an opportunity but a challenge. But, I mean, one of the one of the challenges, for smaller banks in particular, I think, is attracting young talent. And so, I would try to find ways to do that. It's in my mind, it's the same way as being a community bank of just being really relevant to your market, to trying to find ways to set up partnerships with local universities or even high schools, or get creative about training programs. I know that costs money, but try to think out-of-the-box of trying to create some stickiness with your community and getting you to be a cool place to work in a place where people can believe in it from a mission driven standpoint; that's part of what we're doing here. So, I think that's something that we need to think about, and we still have the opportunity to do so. So maybe that's an opportunity to say that that's that ship has not sailed, by any means in, and the industry has a decent name right now, and that can't be said of every time in the last 15-20 years, unfortunately, so take advantage of that while it's there.

00:27:38 Zach Zoia

Nathan, my last question just kind of on that same vein, is that I know some of the opportunities you mentioned on the capital and technology side that are available are pretty tremendous, just given the fact that where we were 10,15, 20, 30 years ago. But when you're looking at banks and you’re looking at higher performers, is there, is there anything else that you're seeing across those banks that are routinely high or whether it's stock price, ROA, ROE, or whatever metrics you want to kind of look at that they're doing that maybe other banks should be paying attention to or taking more seriously?

00:28:08 Nathan Stovall

Well, they're not sitting still. That's one. They're finding ways to be more efficient, and that doesn't necessarily mean cutting. Maybe it means growing with less and not necessarily adding, but I'd say that they're very curious and actively shopping for ideas. They talk about the M&A environment is actively dating, but I think that makes sense in terms of tech solutions out there. They're trying to meet their market in the best way they absolutely can, rather than just taking what the market kind of gives them. That feels pretty consistent to me in terms of our best performers. They're not necessarily all getting at it the same way, but there aren't many who just sort of said, hey, yeah, you know, this inverted curve and the liquidity crushed at roughly 23 that just made it easy for our returns. So, they generally had some hustle in them and tried to figure out a different, better way to do it, whether that means a new delivery systems, broader distribution platforms that would allow to gather assets or deposits, you know, more quickly, but I think just always kind of constantly being curious of looking for new ideas, and there's lots of vendors out there trying to get them in front of you. So, if you've got some hustle to you, I think there's options.

00:29:27Vin Clevenger

You know, Nathan, this is Vinny again, and thanks for all of this - makes total sense and, you know, I, like I said, we don't really spend so much time - we're almost caught in a in a world where we're just staring at balance sheets and community bank balance sheets across the country and understanding the liquidity profiles and trying to help them and thinking about the industry as we move forward is sometimes it's a scary proposition for younger guys like Zach and I, and you might fit that bill as well. It certainly looks that way, but you know, like shoot, “Are we in an industry that is going to have 500 banks, you know, like we're going to be dinosaurs.” So, I loved your commentary about de novo formation. I wish that we could do something from regulatory perspective to just incentivize some of that a little bit more and because it's like as a bank disappears, you know there could be another one right there to fill that gap. Are you hearing anything in that regard in terms of any sort of, you know, what the de novos you are hearing about, is there anything from regulatory perspective that might be out there where we might not be aware of just, I didn't know if you had, if you want to elaborate a little bit more on de novo formation.

00:30:38 Nathan Stovall

Sure. Like I said, we've seen a handful come out of the gate. Most of what we've seen in the last decade was very Fintech or even crypto focused. But we're starting to see a handful of vanilla ones. You know, as mentioned earlier, we've seen plenty of those inflatable charters where somebody's going to buy an existing kind of rural franchise over capitalizing and look at the growth that's been more commonplace. And the comment consistently heard was investor dollars, wanted to go there more often because it was more of a sure thing, the pathway to regulatory approval was higher, and you didn't have higher, more stringent capital requirements that would come with the de novo bank formation. I feel like under the new regulatory construct that I, I can't point to anything 100% concrete, but I'm feeling like that there's a possibility that there is more willingness to reconsider it, and and frankly, they should, because there's no real sense of that it's going to pose systemic risk. And one of the reasons why we, there's two real reasons I think why it changed was first and foremost might have post systemic risk coming to GFC. If you need an example, just look at Metro Atlanta - 88 banks failed, many of them that have been de novos and the 5 to 10 years prior there - we are handing out Charters way too easily. We have not done that for a very long time now, 17 years, so I can understand how we got there and also it kind of continued through with the idea that there was a bunch of money raised to capitalize on that downturn, and they wanted to have guardrails for private equity. They didn't want to have the idea that they were giving them, you know, a free lunch, but I don't think either is the case right now at all, and some of the folks like Mickey Bowman, I mean, you've heard her talk, you've heard chairman Hill talk about things like this and the importance of serving communities. So, I'm a little bit hopeful that they'll get there, honestly, but I can't point to anything really concrete and it's kind of early days. This is the kind of thing that we hope we'll see. But it's been two months, so it takes a while for this kind of thing to get through. But I mean they, they rescinded a lot of proposals that were out. They changed the merger guidelines right away out of the gate.  So, I think you could see something more significant here.

00:32:56Vin Clevenger

Yeah. Well, I think we're all very certainly enthusiastic, and I guess we're all probably hoping for the exact same outcome here. More is better, I think, certainly for those who really enjoy this industry, you know. Like you said at the outset of this, you got to see the country and learn a little bit about the economies in each different market, and I, Zach and I get to do the same thing and actually meet people from those places and have real, meaningful relationships with them. And that's kind of why I like the job that we have. And, but I think that's all I had, Nathan. Zach, was there anything you wanted, any parting shots, if you will?

00:33:32 Zach Zoia

No, it just seems like you're positive, Nathan, here about the industry. We're definitely more positive. I mean, it was a tough 23 and in part 24, I think. So, it just seems like there's a more kind of sanguine expectations here for the industry, and obviously things could change tomorrow with regulatory stuff, with fiscal stuff, with credit, with the rate environment. But it does seem like a more positive spin, so I'll flip it back to you. You're a terrific interviewer, Nathan, on your podcast. Anything for us or any parting shots do you do you want to close with?

00:34:03 Nathan Stovall

I am more positive. and I didn't mention one other thing that helps me think about positive. A lot of money chasing after the assets that bank holds - banks hold - that they kind of puts a floor on any distress that be out there. So that makes me, it's another marker that I feel pretty good, but I am curious, what are you guys most concerned about right now, what do you think? That what risk do you feel like your clients maybe are not appreciating enough right now when you look at their balance sheets?

00:34:34 Zach Zoia

Yeah, it's a good question. I'll probably take it two ways. Near term/long term, and I know for a lot of our clients we're talking about near term. It's a reignition of inflation. It's hikes, a couple hikes this year or next year. I don't think a lot of banks will be very excited about the proposition.

00:34:52 Nathan Stovall

Nobody's prepared for higher rates, right? Higher rates.

00:34:54 Zach Zoia

Of that, and people have layered in caps and swaps, and there's certainly more protection maybe than it was a couple of years ago. But I think a re, “Back to the Futures” that Jeff Reynolds is calling it. One of our colleagues talking “Back to the Future,” I think, in terms of you know, what if the Fed gets back to 5.50, that's going to cause some pain. Now that's more near term, right? So, I think making sure you're aware of the whipsaw that could happen there, but I think longer term, it's what we're always worried about, it's rates falling and credit environments and you know, cause you go back to the zero bound. We're gonna have credit problems. It's gonna be recessions. And that's not a great environment, right, for banks. So I would, it's more like the extremes. It's like near term rates shock up a little bit more and longer term rates shock down and if we're in the middle of a lot of these models, we see a lot of these banks ROAs get better, ROEs get better, more just keep getting better with a little bit of slope, seems like, but that would be my one of my answers.

00:35:45 Vin Clevenger

Yeah, I would. I would expound upon that and corroborate both of those points. I think in the near term with high, if you did get higher rates, which looks like the probability is starting to thin out a little bit, but the liquidity sort of issues that will arise once again. And I can't tell you a community banker who is dying to go back through that process of losing 7, 10, 15% of their deposit base that's, 1 I don't know if they could handle it, quite frankly. And on the other side of that, you know, I think I learned a long time ago from George and Matt, the guys that you know, really, you know, the sort of the godfathers of our company, that at the end of the day, like, interest rate risks are not necessarily going to submarine a community bank. And we just saw it right, so if these banks had operated through an inverted yield curve for a year and a half or what have you, and they're still here. Most of them were still profitable - not to the degree they wished, but you go back to a credit environment that we went through, I don't even know how long ago was that now, 15 years or so, and that really that was a problem. So, I agree exactly with Zach's answer. I think that's perfectly put, and I think there are nuances to all of these conversations. As always, right, you know these banks are all located in different places, and they do different things well. And yeah, we'll see. You know, we talked about the credit environment and Jeez, I don't know if rates do go a little bit lower, is that enough to thread the needle on some of the commercial stuff cause it looks like there's a lot of paper that kind of rolls over. It's not really to us yet, it's still just out on the horizon. I know banks we work with, they're kind of curious what that looks like. So, I guess from a credit perspective, in the very near term, can we get through that environment so?

00:37:26 Zach Zoia

Yeah, yeah. And I think to those the loans written and you alluded to it earlier, in 2020 and 21, there was a ton of volume, technical term, a ton of volume is all coming due in five, it's 25 and 26, right. So I think with the rates at, what’s the 10 year at today, 430 give or take? Yeah, five year and four. I think when those were at 5, there was a lot more nervousness about, that's a more of a threat of that repricing higher, whereas like not a good thing because people won't be able to debt service cover it right now at these levels. They, I'm seeing more groups say we'll be able to get through this. We're going to have some challenges on some of these resets, but most  

should recast, to Nathan's point earlier. Higher, you know, into the 6s or hopefully 7s if we are properly priced, maybe in the 6s. Some of the other markets. So, I think that's the good thing is. But if rates pop back up again, I think the credit thing becomes bigger. If rates fall, you're gonna have easier ability to price these things and get them in boxes. But why are rates falling? I think that's always we're trying to get bankers thinking about is they're not following because the feds being nice and trying to give you, it's because they're reacting to something that probably isn't a good thing, right? Right. So, I hope we don't go there, but I think those are things that make us nervous. And the other thing, too, is liquidity has been a huge deal. Now is with SMB and First Republic and all that type of, I think banks are really in a good spot with liquidity because they've learned the lessons; everyone's pledged to the Fed, they're all pledged up to the home bank. They know more about how those calcs work than ever before. They know how to use the brokered market they've been testing. So I think a lot of these groups are prepared for that. But liquidity is definitely number one on like or 1A, I think, on the regulatory side where that's been a laser focus on the past, I'll call it 18 months. From that perspective.

00:39:10 Nathan Stovall

Absolutely. That was, I was an event last week and somebody asked me that question about rates and said, “Which are you more worried about?” and I said rates going higher for exactly the reason you guys say, I don't think anybody’s prepared for it. And then somebody said, “well, what if they go way lower?” I go “I don't think you want that.” Something really bad happened, you know? 25-50 basis points, sure.

Sure, 75, sure. But you said way lower, that means the bottom fell out. We're not we shouldn't pray for that said stable rates will do great, and I think that's a great comment about liquidity and testing the window and things like that that we had not done.

00:39:35 Vin Clevenger

Yeah.

00:39:45 Nathan Stovall

And thinking about concentrations, whether unsure or sector concentrations, you know there's all kinds of granularity and deposits closures that we hadn't seen in 20 years. I've been doing this, I've seen it. So yeah, I feel better there. I just hope that we're actually, and I know you guys, everyone listening, talk to your friends at Darling. And prepare for this, prepare to win in any rate environment. That's what I've been trying to kind of say rather than make a bet will wear the other.

00:40:11 Vin Clevenger

Right.

00:40:16 Zach Zoia

100% I think that's a good way to close it, I couldn't say it better myself, yes.

00:40:20 Vin Clevenger

Yeah, well, that's why we have the professional closing for us, so.

00:40:21 Zach Zoia

Yeah, that's true. But Nathan, thank you so much again for the time, we all it was, it was our pleasure. And we look forward to talking to you next time.

00:40:33 Vin Clevenger

Thanks so much.

00:40:37 Vin Clevenger

And we're back. What a great discussion with Nathan. He was very generous at this time today. And Zach, I'll tell you if I had a major take away from this, it would just be, generically speaking, how positive Nathan is. You think about a lot of different tailwinds he talked about for the community banking industry particularly, you know, as it relates specifically to M&A, which is kind of what they live and breathe and do. But I just can't help but walk away feeling better about this industry than we felt over the past 6-8 quarters or so. So that's my major take away from today's discussion.

00:41:09Zach Zoia

Yeah, he definitely had some positive notes there, and I think all of us are a little more positive about the outlook here. And one of the things I was, I'm curious what his answer would be was when we started to talk about the future in terms of opportunities out there, and we always talk about threats and challenges and, you know, we can be negative. But I think, again, the positivity in terms of a lot of capital, a lot of great technology available, right? So, banks who are not, what did he say? They're not sitting still, so banks who are not sitting still can leverage the capital that's out there, can leverage the technology, continue to grow, continue to be in their communities and serve and be what they need to be to continue to service the clients and the areas that they're at. And that to me is really important. We've had a number of podcasts here in terms of technology, digital delivery, things like that. And that's still a theme and we're not experts in that, but that's why I always like to hear what people like him are talking about because I think that's going to be really imperative for, you know, banks. Future success is being able to do a good job in those in those areas. 

00:42:14 Vin Clevenger

Yeah. And so I think you hit the nail on the head with a lot of that and you talk about not sitting still. I'll tell you who else is not sitting still. That's On the Balance Sheet.

Done so, we've got a lot of great interviews lined up for you folks. Nathan is just the first and a and a line of some stuff we're going to be putting out there. So, we thank you so much. For listening and hope you'll join us again at On the Balance Sheet.

00:42:34

On the Balance Sheet® is a podcast produced by Darling Consulting Group (DCG). All views and opinions expressed by the hosts and guests are solely their own and may not represent those of DCG. All third parties are independent entities and are not affiliated with DCG. This podcast is intended for informational and educational purposes only and is not considered as advice.

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