Northern California bankers reveal what businesses should watch for in 2022

With interest rates likely rising and the North Bay economy struggling to get its footing with pandemic uncertainty, the Business Journal asked significant lenders in the region to give readers some sense of where it is all going.

Answers were edited for clarity and brevity.

Digital banking, in which transactions are done on smart devices, continues to gain a toehold in the industry. What are the next steps you look for in the continuation of this trend?

Marie Askew: Digital banking is here to stay. Small businesses will continue to see banks and fintechs innovate in this space. Expect to see digital banking allowing a business owner to work on their business while systems are working together to offer simpler banking solutions.

Chris Call: Traditional branch banking may not go away entirely but will largely be replaced by technology that allows the vast majority of banking activities to be conducted at the consumer’s location of convenience.  More banking services will be transitioned to automation and remote access to minimize the need for a network of brick and mortar branches.  Bank branch closures will become more frequent.

Jared Cooley: Fintech will continue to progress and expand beyond traditional banking platforms.  For our industry there is still a need to create a relationship. When we lend a client money, we first assess our risk, which includes a story, something that isn’t told easily with an app.  The continuous changing environment does affect our clients in many ways, and we are constantly learning about these changes and how businesses are adapting to them and utilizing these tools in their business.

Tom Duryea: We see digital banking as a way to enhance, not replace, the personal and trusted relationships we have with our customers, while making sure they have a choice in how they interact with us. We will also stay on top of cybercrime by implementing additional protection technology and defenses to mitigate that threat.

Stephen Fleming: Digital banking advancements and adoption are increasing at a staggering rate. The past 18-24 months have created a need to access financial platforms remotely for a variety of reasons: remote workforces, labor shortages, changes in payment methods, etc.

Both businesses and consumers have either further embraced or surrendered to the need to automate both their procurement and payments processes.

From mobile or remote deposits to automating their payables and receivables, our clients are leveraging these tools to gain both efficiency and convenience. It seems the level of adoption builds upon itself: as customers begin to implement and gain confidence in digital platforms, they become far more likely to adopt larger, more complex applications as their needs expand.

Jason Foster: During the pandemic, Bank of America business clients adopted our digital and mobile platforms at record levels and we don’t see that trend going away.

For example, 81% of our clients are digitally active, the highest in the industry. One of our latest digital advancements for businesses is applications for business credit cards and loans that can now be done electronically online, making the process far more efficient and streamlined for the business owners.

More and more businesses are also using our mobile technology to monitor cash flow, track credit and debits, receive automatic cash flow projections based on scheduled transactions, and easily connect with Bank of America bankers for guidance.

A trend that will also continue is the use of artificial intelligence in banking and business.

Brian Kilkenny: Mobile is a driving force in technology, not just in the financial industry but also in people’s individual lives. Consumers expect to have the same functionality on mobile as they have on their computers, so we’re doing everything we can to meet members where they want to be.

Celia King: While most day-to-day transactions are already able to be performed on smart devices, I see an increase in self-service options with more complex transactions traditionally warranting in-person servicing.

Alison Martin: Our corporate clients have much more complex types of banking tasks than the average consumer, but they still expect the same types of easy, streamlined experiences they’re used to as consumers in their private lives. Which is why we’ll continue to see a rapid expansion of improved digital tools into the corporate segment – it’s a big priority for us at U.S. Bank.

When we can digitize manual interactions for customers by streamlining client workflows and other operational tasks, giving them simplified solutions, it both saves time and reduces costs. There is a proliferation of smart, intuitive, simple digital tools coming to corporate clients, and it’s an exciting time to be in the space, leading the way.

Nikki Sloan: We continue to invest in new digital platforms, capabilities and services to meet customers’ evolving preferences for digital banking.

Traditional branches and face-to-face interactions remain important across our Northern California footprint. However, we are fully aware that individuals and businesses are managing a larger proportion of their financial lives online. The social distancing measures put in place to slow the coronavirus in 2020 only accelerated what we view as an ongoing trend.

We think this is ultimately positive because it creates tremendous efficiencies and conveniences for our customers.

Congress has yet to pass the Safe Banking Act which would presumably reduce the reluctance of bankers to service the cannabis industry. Is that enough to allow more banking institutions to bank the cannabis industry. If so, why?  If not, what would it take in your opinion?

Chris Call: NBCU has been safely banking the cannabis industry since 2017.  The SAFE Act is not needed for financial institutions to start banking cannabis operators.  We have even created an entity to perform cannabis banking compliance services for other banks so they don’t have to invest in the personnel and technology to meet legal and regulatory expectations.   There is now no good reason why banking for cannabis should not be widely available.

Jared Cooley: Because we are a private lending institution, we are able to and do finance some cannabis related business, so Congress passing something would not change our view.

One challenge some businesses in the industry are facing that affects lending to them has been their thinning margins.  When cannabis was new to legal business, money was flowing, and margins were high.

In some areas of the industry businesses have been caught off guard by slimming margins forcing them to reinvent.  It can be a risky industry with all the regulations (similar to alcohol) and volatility, so banks want to ensure they make a return on their investment.  Cash flow and guarantor support is what really affects their borrowing power for Hansel Leasing.

Tom Duryea: I do believe the Safe Banking Act should entice more banks to enter the cannabis space. Having experience with the cannabis businesses at a previous bank, I don’t think there will be a flood of new banks entering this space given the very labor-intensive compliance requirements associated with running a safe and sound program.

Stephen Fleming: The primary purpose of the SAFE Banking Act is to protect banks and other financial institutions who choose to serve the legal cannabis industry within their state’s legal and regulatory framework.

While the bill has passed the House five times over the past eight years, it has yet to pass the Senate. This impasse suggests there are a number of issues to be resolved, not the least of which is the ongoing prohibition of cannabis by the federal government.

Federally regulated financial institutions like ours do not want to find themselves in the midst of this situation until the rule of law, and our role within it, are very clear.

Brian Kilkenny: The passage of the bill into law would certainly improve the availability of financial services for the cannabis industry, particularly as relates to credit card and other electronic payment methods.

It’s a start, but it certainly doesn’t solve the largest hurdle and challenge currently faced by legal businesses in the cannabis industry and federally insured financial institutions, which is the fact that cannabis is still a Schedule 1 federally illegal drug.

This bill offers some protections and paths to success, but the risk mitigation associated with the industry will still hamper complete acceptance.

We welcome further legislation and focus on this matter, as it is plainly evident that these legal businesses and business owners are not provided with a clear and safe path to bank successfully. Federal legalization is what it will take to level the financial services playing field for the industry. Anything short of that will guarantee continued challenges. That being said, this bill will provide some relief.

Celia King: Ratification of the Safe Banking Act would ease some reluctance among bankers to service the cannabis industry, however cannabis would continue to be illegal under federal law and therefore retain higher risk of criminal activity. Banks would need industry training and additional regulatory support to ensure potential clients are operating within the legal framework.

Brandy Lee Seppi: Until banking the cannabis industry is legal federally, it will be unknown how many banks are doing business in the industry and to what extent.

The Safe Banking Act will most likely not be enough for all banks to open their doors to the cannabis industry – as each institution will look at the opportunity through its own lens of risk and reward when determining if it should enter the space.

Eric Stacey: Assuming the passage of the SAFE Banking Act at some point in the intermediate future, there is a path to accepting deposits and payments from the cannabis industry.

This also assumes the effective decriminalization of cannabis by removing it from the list of Schedule 1 controlled substances.

However, the truth is always in the details. Moving an industry from a generally cash-driven business model to traditional banking will require significant Know-Your-Customer, Anti-money Laundering and Bank Secrecy Act considerations that will take time.

Earnings and deposits in 2021 were strong for the industry.  Are you expecting the factors which drove this trend to be still in play for 2022? Why or why not?

Marie Askew: The pandemic has shown the resiliency of entrepreneurs that pivoted quickly with the times. As the nation’s leading SBA lender, Live Oak sees the grit and determination small business owners have had in the last couple of years and we don’t see that waning.

Chris Call: We expect continued strong financial performance in 2022 after a record breaking year in 2021.  The niche markets we serve will continue to grow and look to us to meet their needs.  The broader banking industry may, however, see a retreat from 2021’s performance as real estate lending slows.

Tom Duryea: In part I think 2022 will be similar to 2021. Given the upward rate pressures that the Fed is currently considering, this should positively impact banks with a strong relationship-based deposit base like Exchange Bank.

However, the one-time fees associated with helping our community’s small businesses in 2020 and 2021 through the PPP loan program will likely not happen in 2022, thus impacting virtually all banks’ earnings.

Stephen Fleming: Our earnings are directly correlated to the strength and success of our client base. While there were clearly sectors that have struggled over the past 12 to 24 months, we had a record year of growth in 2021 because the largest segments we serve continue to perform well. Commercial real estate lending continues to be a focal point for our business, and we saw significant activity in 2021 thanks to low interest rates and strong demand for multi-family housing and light industrial/warehouse space.

Investors and owner-users were active in both the acquisition and refinance markets. Our business clients, in general, saw both increased and more consistent demand for their products and services as 2021 progressed. In fact, 4Q 2021 saw record loan demand and significant growth in deposit balances for River City Bank.

As we move into 2022, the growth rate will clearly be impacted by Fed monetary actions and the evolution of the pandemic, both of which are very difficult to predict at this point.

Jason Foster: Bank of America has grown consumer market share across the North Bay by a half-billion dollars year over year ($5.8 billion-plus in 2021, $5.3 billion-plus in 2020, $4.8 billion-plus in 2019).

We expect deposit growth to continue in the region, driven by our combination of brick-and-mortar retail locations along with advanced self-service digital and mobile technology platforms that clients have adopted at record rates, making it easier than ever to move money, invest and save.

Brian Kilkenny: Deposits were incredibly strong across the industry based mostly upon federal, state, and local stimulus. This stimulus plus the resilience of individuals and businesses produced a stronger economy than many expected.

We don’t anticipate the same level of stimulus activity in 2022 but remain hopeful for a strong economy in the coming year. That being said, the unknowns associated with the pandemic have us all focused on developments, and we’ll continue to monitor closely. What we do know is that we’ll be here for our members and communities, no matter what.

Celia King: Rising interest rates and the cease in federal aid may negatively affect the strong deposit and earnings we saw in 2021 as businesses and consumers continue to face challenges driven by variants of COVID-19 -- and are forced to dip into savings. Interest rates typically slow down the demand for leverage but given the historic low rates we have seen in the last two years, a return to pre-pandemic rates may not be enough to warrant a substantial dip in earnings.

Alison Martin: Deposits have been strong over the past year in part because of the amount of government stimulus in the economy.

We do expect things will normalize some as stimulus dollars slow. At the end of 2021, we started seeing strong growth in both auto lending and credit card balances as government stimulus slowed.

We have also had very strong mortgage numbers based on both the housing market and refinancing. We are beginning to see more activity in areas such as commercial lending and commercial real estate. Most customers have PPP loans forgiven and are looking to invest in their businesses, given many growth plans were put on hold during the pandemic.

Nikki Sloan: Sentiment among our customers is optimistic moving into 2022, and we are hopeful that they will deploy cash or seek financing to fund growth as the economy recovers. We are well positioned financially and strategically to support our customers’ needs as they pursue opportunities.

Eric Stacey: A unique set of circumstances in 2020 and 2021, generally centered on COVID-related policies, has led to significant liquidity in the marketplace.

Combined with employment shortages, real estate price growth and government stimulus, businesses and individuals have made financial choices that have increased bank deposits.

Although I believe the economy to be robust and expect interest rate increases in the near future, deposit bases will likely hold steady. There is still enough uncertainty surrounding COVID for small businesses, that business capital and investment will not be deployed in great enough fashion to depress the deposit base.

And, although interest rates will increase, the increase will not be substantive enough for customers to consider riskier investment options for those funds.

Specifically, how will your opinion change if the Federal Reserve does up interest rates in a significant way? How will earnings and lending patterns change if this happens?

Chris Call: As interest rates rise, mortgages will become less affordable, especially in the high-priced North Bay real estate market.  The refinancing activity we saw in 2021 will likely dry up.  One of our specialties is manufactured home loans which will continue to be in strong demand as these homes become the primary option for first-time home buyers.

Jared Cooley: Rising rates can be beneficial for a lending institution in our situation.  Our interest rates are a little higher than a traditional bank, so rising rates can be a benefit to our business.  We lend to newer businesses or to businesses that may be viewed as a little riskier, so they expect to pay a little higher interest rate.  When banks increase their borrowing rates, we are able to be more competitive in the space.

Tom Duryea: Margins should increase slightly for those banks with a solid lower cost deposit base, but for most community banks there will likely be very little discernible impact on margins.

Stephen Fleming: The underlying economy and overall employment are strong.

However, inflation concerns are also very evident, driven by huge consumer demand coupled with supply chain issues and labor shortages. It will continue to be front and center and be disruptive to our clients.

The Fed seems to be signaling they will raise rates as early as March. Barring any unforeseen, sharp rate increases, my outlook for growth in 2022 remains unchanged. With that said, many of our clients remain bullish and are looking to make investments in 2022, and we intend to support them.

Jason Foster: The consensus is that the federal reserve will have to take action to raise rates in 2022, as they have communicated.

We see this as a healthy reflection of the economy transitioning out of a highly accommodative stance in response to unprecedented uncertainty presented by a global pandemic.  We see the U.S. economy as strong.  Unemployment has largely recovered to pre-pandemic levels.  Inflation concerns remain in focus but have been made worse by supply chain disruptions.

We are hopeful that once these issues catch up, inflation pressures will moderate.  These conditions bode well for corporate earnings to continue to grow, although at a more moderate pace than has been reflected over the few years.

On the lending front, we see that consumers and businesses have taken great steps to simplify their balance sheets coming out of the latest crisis.  Even with the expectation that rates may be on the rise, rates remain incredibly low, so for those that have needs to borrow to grow their business or buy a home, now is a great time to be locking in long-term borrowing solutions.

Brandy Lee Seppi: At Summit, we manage the bank to be as interest rate neutral as possible, so we do well in both a rising rate and a declining rate environment - and do not take interest rate risk. Thus, we do not anticipate drastic changes to either our earnings or lending patterns if the Federal Reserve increases interest rates this year.

Nikki Sloan: A gradual rise in interest rates, from Fed policy makers, is expected. For asset-sensitive banks like ours, that will positively impact earnings. Additionally, this could help tame inflation and prevent the economy from overheating as it rebounds from the pandemic.

Eric Stacey: I am anticipating interest rates to rise in 2022, as the whole of the industry is projecting. Deposit rates will not follow as quickly, not placing significant pressure on core deposits. With lending in mind, the economy is robust and a steady rise in interest rates will not stop any business expansion with great effect.

However, refinance activity will more than likely slow down as rates rise.

In this market, do you see activity in mergers and acquisitions in the industry stepping up in 2022? Why or why not?

Marie Askew: Business acquisition is on the rise and will continue to be.

Chris Call: Increased M&A activity will likely result from regulatory demands that make it difficult for smaller institutions to remain operationally efficient.  Competition, coupled with the economic squeeze caused by rising interest rates, may lead many institutions to seek a business combination to best serve their customers’ needs.

Jared Cooley: With historically low interest rates for so many years, I think too many banks have started to compete solely on rates, which have shrunk their margins, and this will come back to bite them resulting in more mergers over the next five years.

Tom Duryea: Yes, I believe increased M&A activity is possible, but over the past 10-15 years there is always talk at the beginning of the year, yet it has never occurred at the levels experienced in the 1990’s and early 2000’s. Regardless, Exchange Bank, given our unique ownership structure, has been helping Sonoma County for over 130 years, and we remain committed to supporting our community for many years to come.

Stephen Fleming: The U.S. banking industry has been consolidating since the 1980’s, shrinking from about 15,000 banks to about 5,000 today. We expect the consolidation to continue.

M&A activity in financial services for 2021 was at its highest levels in over a decade. Dominated by some of the largest regional banks in the country, the trend was largely driven by a desire to gain economies of scale, pressure on net interest margins, and challenges for smaller banks in keeping up with technological change.

On a local, community bank level, there have been a few deals in Northern California over the past couple years, but not many. This dearth of local M&A activity is largely driven by the small number of Northern California, community banks that are open to an outright sale or a “merger of equals.”

Brian Kilkenny: Mergers and acquisitions are always possible and offer an interesting topic of conversation. I don’t anticipate 2022 to be any more or less active in this regard. We have seen quite a few regional mergers and acquisitions over the past decade, and the overall number of financial institutions continues to decrease, driving down the opportunity for the merging of companies.

That being said, in these lower interest rate environments, profitability becomes more difficult, which can drive the appeal for merging or acquiring.

Celia King: I do not see a significant increase in mergers and acquisitions in the industry in 2022 given the current economic climate. As we begin to see the full effects of the pandemic in late 2022 or early 2023, there may be opportunity for further consolidation in our industry.

Alison Martin: Locally, there have been a lot of mergers and acquisitions activity following the yearlong slow down during the onset of the pandemic when it was difficult to value a company because revenue sources disappeared overnight.

Right now, we are seeing many companies flush with cash given they cut expenses during the pandemic and sales have rebounded. Valuations are high and we expect M&A activity to continue to be accelerated in the near term, but potential rate hikes and inflation could bring down multiples and activity level in the latter half of the year.

Brandy Lee Seppi: M&A activity has been on the rise and is anticipated to continue. COVID reset the life priorities of many people and institutions followed suit.

There are a variety of reasons why a bank may sell but one of the key factors is that they struggle to grow. A common saying in the investment banking world is that you earn your independence every year through growth and performance.

Nikki Sloan: Activity rebounded in 2021 after M&A paused amid the initial fallout from the pandemic. We were fortunate to participate with our acquisition last year of American River Bankshares in Sacramento. Acquisitions provide geographic and business line diversity, new teams of talent, and scale needed to invest in technology and growth. We expect these catalysts will remain firmly in place and M&A will continue at a steady pace in 2022.

Eric Stacey: Following a strong second half of acquisitions in 2021 throughout the banking industry, I expect 2022 acquisitions to continue. Institutions with strong balance sheets and robust liquid positions will continue to look for growth opportunities.

Deployment of that cash is either in the form of deeper lending/investment activity or acquisition. The consolidation trend of the number of banks and branches in the North Bay will continue into the year.

What is the one thing that gives you comfort, and the one thing that keeps you up at night about 2022?

Marie Askew: Small business is the backbone of our country’s economy and will continue to be. The last two years have shown that a global pandemic has been devastating for some while others were able to weather the proverbial storm. As a bank dedicated to serving small business, we strive to find ways for entrepreneurs to invest in their success and pursue the American dream.

Chris Call: I worry about the divisiveness in our country and the government’s mismanagement of its stewardship.   I am encouraged by the resiliency and ingenuity of people to work through hardship and prosper in the face of adversity.  I am optimistic for a year of high notes in 2022.

Jared Cooley: There will continue to be beneficial advances in Fintech and banking in general, but it won’t all be without drawbacks.  The ease of consumer banking will receive the most benefit but ensuring banking safety should be priority to ease, in my opinion.

Tom Duryea: Definitely what gives me comfort is how strong and resilient our team, customers and the Sonoma County community have been facing fires and now the pandemic. The deep sense of caring for one another is truly amazing and gratifying and in some ways unique to Sonoma County.

The impact the pandemic has had on our team, customers and the economic and social stability of our community keeps me up at night. It’s hard on everyone, but that being said, we are extremely grateful to have such a strong, resilient team, clients and Sonoma County community. Together, we will get through this.

Stephen Fleming: I take great comfort in the adaptability of our employees and their proven ability to perform at the highest level in the face of numerous challenges over the past 24 months.

A majority of our team has been working remotely, while our branch staff has been on the frontlines still serving our customers in-person.

As we all know, both environments have their unique challenges, but our team has responded with resilience, dedication and a level of adaptability that gives me great confidence and pride going forward.

With that said, retaining and hiring top talent is what keeps me awake at night. We have been able to organically grow our business 20%+ per year over the past seven years and as we expand our efforts across the western states, we need the highest caliber people in the industry, and they are in seemingly short supply.

Jason Foster: In the North Bay, we live in one of the most dynamic, innovative, and resilient economies in the nation, and possibly the world.  This represents a tremendous opportunity for us to expand and grow with the needs of the consumers, investors and businesses we serve.

One of the best parts of my job is that every day is different, but what matters most is gaining understanding of what our clients need and working to deliver for them.  I am comforted to know that as much change and challenge as we have all been through over the last two years, our purpose has not changed; we are here to help people accomplish their financial goals.

As for what keeps me up at night, I see equity and inclusion as key factors that must improve for our community to move forward together.

From an economic mobility standpoint, when it comes to issues like food insecurity, affordable housing, access to healthcare and living wage jobs, the growing disparity among those that have the opportunity to move forward in this economy concerns me.

I feel we all need to do more to open doors for more people to experience the promise our country and our region should afford.  Recent events give me hope, but there is much work ahead.  I am excited and optimist that in 2022 our team will collectively raise the bar across the North Bay for our clients, our employees and our community.

Celia King: The overall strong savings rate in households gives me comfort that as a community we may be somewhat prepared for a possible economic downturn as a result of the Pandemic.

The Great Resignation is a concern as small businesses continue to struggle, not only with changing guidelines surrounding the Pandemic, but also with continued staffing challenges as some industries do not have the increased patronage to compensate for higher wages.

Alison Martin: I find comfort in knowing that U.S. Bank is extremely well positioned to help our customers deal with the headwinds of 2022 from inflation to supply chain issues. What keeps me up at night is the uncertainty as to if and when we will be able to get back to a more normal lifestyle and what that will look like compared to pre-pandemic life.

Nikki Sloan: Economic growth is expected to continue through 2022, which should drive demand for loans and other banking services. I am comforted by Bank of Marin’s investments in market expansion and talent development so that we can best support the growth of our customers and communities.

What keeps me up at night is that if monetary policies aren’t put in place to slow inflation rates, economic growth could stall. This would negatively affect our customers and, in turn, the banking system.

Eric Stacey: I am confident of the economic recovery for the year to come. There is significant liquidity in the marketplace and a rising rate environment will steady business expansion. The hurdle that causes concern is the tight labor market. This will affect the bank’s business customers as they work to retain their employee base. This will cause higher wages (inflationary pressures) and limit expansion. The labor market, especially in the North Bay, will be the key challenge this coming year.