I have been asked over the last several days by customers and employees what potential impact the outcome of the election may have on the Bank. To answer this question, it is important to understand that since the economic downturn in 2008 the community banking industry has faced two major headwinds.
First, the interest rate environment has been at historically low levels for a prolonged period of time. The effect of this environment has been to cause net interest margin compression across the industry. Net interest income is the largest source of revenue for community banks. The reduction of this revenue source has been a primary concern for the industry.
The second major headwind that the community banking industry has had to manage during the last six years has been the increasing burden of consumer compliance. The crisis that affected the national economy in 2008 had its roots in the mortgage industry and the imprudent practices undertaken by Wall Street and banks too big to fail. The fallout of this crisis was increased regulation in the mortgage industry saddling those engaged, and those not engaged, in risky practices. In order to comply with this additional regulation, significant resources have had to be expended.
The impact of these two issues, margin compression and consumer compliance, results in pressure on bank earnings, reducing our net income available to shareholders.
Since the election many bank trade groups, including the Independent Community Bankers of America and the New York Bankers Association, have issued statements predicting regulatory relief for the community banking sector from the incoming Presidential Administration. Specifically, they point to an existing bill referred to as the “Financial Choices Act” crafted by Texas Republican Jeb Hensarling, the Chairman of the House Financial Services Committee.
In addition, the U.S. Treasury rate has increased by approximately 35 basis points since the election to 2.20% as of November 14, an increase of 19%. This has been the result of a selloff in the bond market as investors expect the change in administration to effect Federal Reserve Bank Policy leading to further rate increases in the future.
Finally, bank stocks have rallied since the election as displayed in the accompanying graph. This increase in value of the bank index funds of approximately 10% is further evidence of investors’ perception of what the impact will be for banks.
Although it remains to be seen, we have renewed optimism, based on the election results, that there may be light at the end of the tunnel in the form of a normalized interest rate environment and a reduction of regulatory burden.
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