Texas A&M Professor James Kolari on The State of Community Banking

Helping community bankers grow themselves, their team, and their profits. This is the Community Bank Podcast.

Eric Bagwell: Welcome to the Community Bank podcast. I’m Eric Bagwell, director of sales and marketing for the Correspondent Division SouthState Bank. And joining me as always, Caleb Stevens. Caleb is our marketing manager here at the correspondent division, and also as a producer and host of this podcast. Caleb, how are you?

Caleb Stevens: I’m good. It’s good to be back on the show, and I think this might be, correct me if I’m wrong, but I think this might be the first time that we’ve ever had a professor or an academic on the show to talk about banking, kind of a unique perspective, and so excited to dive into this one today.

Eric Bagwell: Yeah, this is going to be really good. Caleb sat down with James Kolari. James is a finance professor at Texas a and m University and College Station, and it’s a good conversation. I’ve been to College Station, seen their campus, pretty cool, neat town, got a huge football stadium, and maybe George will play out there at some point.

Caleb Stevens: They’ve been in the SCC for 10 years and they still have yet to go out there. Funny enough, they’ve been to Athens, but they’ve never gone to A&M, so definitely want to make sure we get out there sometime.

Eric Bagwell: It’s probably coming soon. So, tell us a little bit some details on your conversation with James.

Caleb Stevens: Yeah, you know, most colleges obviously will have a finance degree, but very few have any kind of program specifically related to commercial banking, and Professor Kolari has led the charge in creating a program within A&M business school, specifically designed to help folks get exposed to commercial banking and learn all the things that banking has to offer in terms of a career path. And so, fascinating discussion with him about that. Also, talks about just what he’s seeing in the industry as a whole in terms of headwinds facing Community Banks, and also some ways that Community Banks can find solutions that’ll help them navigate this environment. And so, I hope you’ll enjoy this discussion. Before we get there, if you’re not sure where your bank’s cost of funding is headed over the next 10 years, get our free report, click the link in these show notes, and we will run a report that shows your bank’s historical cost of funding relative to short-term rates all the way back to 1990, And we’ll also show whether they’re projected to head over the next 10 years. Get the clarity you need to make better decisions, understand your cost of funding, where it’s projected to head, and we would love to talk to you more about how we can help you and your bank make better decisions this year and manage your interest rate risk. So, click the link in the show notes to get that report, and with that, here’s my discussion with Dr. James Kolari.

All right. Well, professor James, thanks so much for hopping on the podcast today. It is great to be speaking with you. How are things out in College Station?

James Kolari: It’s a beautiful day here, a beautiful fall day. Just love it here in Texas, in the fall.

Caleb Stevens: Well, give us a quick flyover of your career. How did you get into the banking world, the finance world, and the academic world? Tell us a little bit about your experiences and what you do at Texas A&M?

James Kolari: Yeah, I am originally from the Chicago area later, got a PhD from Arizona State University, married my wife, and headed out there. And we fell in love with the South, Southwest and took a job here in 1980 with the Texas A&M University. Now, one of the largest universities in the country was 75,000 students. I’ve been here for 43 years, in the in early 1980s. I left for a couple of years Caleb to work at the Federal Reserve Bank of Chicago. They thought they lost me, that Chicago boy goes home. But we love Texas so much we came back. I worked in the bank policy group with the Fed in Chicago and kind of off and on. Over the years, I’ve worked with them on different research problems because my research, at least in banking, focuses on measuring bank risk with models and things like that.

So, when I worked there, I got very familiar with camel’s ratings. I think your listeners all know those. But one of the interesting things I learned when I did my analysis was that different parts of bank risk are interrelated, you normally think of capital as separate of asset liquid, asset quality is separate from management, is separate from other areas like earnings, liquidity sensitivity, and interest rates and other market conditions. That’s camels. But actually, those things interact and the risk of the bank comes from the interactions of those things. That was kind of a unique thing I learned over the years.

Caleb Stevens: Yeah. Any other lessons you learned working for the Federal Reserve? I would imagine that was probably like drinking from a fire hose when you first started there. I know for me starting out in banking, there is so much to learn, so many very specific topics that if you’re not in the banking world every day, you really have no idea what all goes on behind the scenes. Anything else you learned working for the Federal Reserve?

James Kolari: Well, back then we were deregulating in the early eighties, and throughout the eighties and nineties we were deregulating the banking industry. And that raised competition tremendously instate out-of-state, international, etcetera. Now, we even have non-bank, non-traditional FinTech-type competition. So, competition in my lifetime has just soared, and it’s a really tougher world out there in banking. It’s much more complicated than years ago when I was at the Fed in the early eighties, and banks are really all about risk management today with all the competition they have and risks they’re facing. So, that’s what I’ve learned over the years Caleb, about and that’s what I took away from my work at Federal Reserve Bank of Chicago.

Caleb Stevens: Well, talk about the shift into the academic world coming to Texas A&M as an instructor, talk a little bit about what prompted that shift and your tenure at Texas A&M, and what all you do within the Department of Finance?

James Kolari: Yeah. When I was a young guy coming out of Arizona State in 1980, I had no clue that I would like research so much. Teaching of course is a duty of every professor, but the research aspect is something that was unexpected to me, and I just found that I really enjoyed it. I’ve written many articles, maybe as many as a hundred articles in banking and finance and I have as maybe 25 books I’ve published. At my age, you’d think I’d slow down, but I think I’m publishing about a book a year now. So, I seem to be picking up in my older age and through the years, I’ve seen a lot of things I think in the markets and different financial crises and learn quite a bit, and I try to pass that along to my students, you know, to try to make… I work on a banking program; I started it a little over 10 years ago.

It’s grown in to be the largest commercial banking program in the United States. And even the world academically speaking. We graduated 40 to 50 banking students every year. They all get summer internships, they all get placed into good banking jobs, we have work with over 50 banks, and the program got so big, Caleb, over the last 10 years that we hired a banker, Dwight Gary came in from Energy Bank in Houston, and he’s the executive director and runs it on a day-to-day basis because it just was too much for me to handle with my research duties. So, research obligations that I have as a professor here, research professor. So, anyway, Dwight Gary’s running the program and we’ve got a tremendous banking program. I think we’ve created a model for banking programs across the United States, and oddly, most finance departments in the US do not have a class in banking, in commercial banking. Doesn’t that seem strange to you?

Caleb Stevens: I think so. Well, when my father, he’s a community banker here in Georgia, and when he was coming up that was back in the days of the management training programs, which those seem few and far between these days. So, it seems like you’re filling a big need.

James Kolari: Yeah, you can’t go to almost any little town or big town in the United States and not run into a bank on every other street corner. I mean, they’re ubiquitous, they’re everywhere. So, you’d think we’d have banking classes for Pete’s sake in the universities, but it’s not true. Your listeners can check here. I think our success with our banking program is causing other universities to now start having banking classes and even some banking programs. So, hopefully, we’re kind of a trend leader in that.

Caleb Stevens: Well, I think that fills a big need, and the war for talent today is a buzzword that we hear all the time, and I know for me, when I was coming out of business school at the University of Georgia, all of my peers in business school, they all were going to work for JP Morgan and K P M G and Deloitte and EY and McKenzie, and firms like that, big firms that have recruiting presences on campus, many of them honestly may have really enjoyed banking, maybe even community banking, but I think the awareness of a career path in that field just wasn’t there. And so, I think that’s a huge need in terms of, banks are looking for bright, talented folks, and I think there are a lot out there that would enjoy a career in banking if they understood, you know, the ins and outs of the industry and all the opportunity that there is.

James Kolari: Absolutely. Caleb, we have community banks, small community banks, we have regional banks, and we have the big banks, the big corporate banks, Global Corporate Banks. So, we have everything in our banking program, but across all of them, there’s one common denominator. The most valuable asset in any bank is the bank managers. And interestingly, that barely shows up on the income statement or balance sheet does it. Even though the number one most valuable asset in the bank is the man the bankers themselves. So, we think we’re playing an important role in the world, graduating people who want to become bankers and get some training, we have bankers come in and help us teach the classes too, by the way. So, they get some rear very practical training, we work with the Risk Management Association in the United States out of Philadelphia, and provide a credit essentials course. So, they learn credit analysis and become certified, credit analysts one ranking ratings before they graduate. So, anyway, they start learning real banking before they graduate.

Caleb Stevens: Well, that’s really encouraging to hear you talk about your passion for the next generation and the next generation of bankers. I’d love to drill down a little more into today’s banking environment as you see it, you know, you’re in the classroom each day teaching students about banking as it relates to what’s the industry’s facing today, how the industry works, from your perspective when it comes to community banks, what are some of the challenges or headwinds that you see community banks facing today?

James Kolari: Well, number one, we’ve been already talking about it. Number one challenge is competition. It’s increased we got FinTech now coming into… they can go anywhere; they can get into any small town and start selling their services. And so, competition is the number one problem, and the way to meet that competition is really, we already talked about that too. It’s just having great bankers, hiring really good talent, and making sure they’re getting the right training, and that’s the way to meet the competition. The second biggest thing I think impacting banks today, I think everybody would agree, is inflation. Inflation is here. It seems to be sticky now. They said it was going to be transitory, but it seems like it’s more persistent, has fallen from a little over 9% last summer down in the seven range now, but seven still ways above the fed’s target of 2%.

So, we’re way above the rates, and my own personal view of it is that based on my lifetime of dealing with inflation bouts throughout my life. So, I’m from the 1960s, 70’s, 80’s, etcetera, this is going to go on some years, this is not going to be a short type of thing, this isn’t going to some people in the market I think this they see it go down from 9’s to the 7’s and they think, oh, the inflation’s just going to go away. It’s not, it’s going to persist longer. At a minimum two years, that’s a minimum two years and probably further out, and the main drivers right now are just too much fiscal stimulus, I’m not a politician, Caleb, but it seems like congress, whichever side of the aisle you’re looking on, they just can’t stop spending money.

And so, we just have a fiscal, we’re always facing fiscal stimulus, and now everyone’s looking to the Fed to stop this inflation. While the fact is that with a fiscal stimulus that’s going to be very difficult. The second major driver is energy prices, oil, and gas, prices I think are going to stay sticky, they’re going to be high for a number of years. We got the Ukraine war; we also have the green movement in the US which kind of is at war with the US oil and gas industry. So, that tells me with high energy prices, which go into everything, don’t they even go into your electrical bill, electricity bill, but the food prices, everything, that means this inflation’s going to stick around. And even the fed, if the fed’s rate keeps cranking rates up, maybe they push us into recession.

And that could temporarily pull-down inflation temporarily. But back when the economy starts to recover again, assuming energy prices haven’t been mitigated or gone down, and I don’t think so. Inflation will just come back. So, it’s here, it’s the reality, and we’re going to we’re entering a new era, in our financial markets and interest rate markets over the next five to 10 years. That’s my opinion. So, those are the two really biggest challenges, and those things are going to squeeze. What happens with those things? Net interest margins get squeezed, net interest margins technology costs and labor costs rise. They’re going to become more expensive due to the inflation, and that’s going to squeeze net profits and what can you do as a banker? Well, you’re going to have to find some non-interest revenue somewhere.

That’s one solution. One solution is find non-interest revenue, and number two, you’ve got to better manage your risk than you did in the past, really. So, you just got to get sharper at your game, you got to be better than in the past, and the consequences of not doing that is you’re going to start to experience an erosion of your capital base. And then that means more regulation, because if your capital starts getting dinged, then you’re going to see regulators all over you. So, regulatory compliance costs will then be another cost. But it all starts with those two forces, competition rising and will continue to rise, and inflation, which is kind of here to stay for a while. That’s how I see it, Caleb.

Caleb Stevens: Yeah. Good. That’s all very real for our listeners, I’m sure as they’re waiting through all of those issues. On the flip side, we hear it often today how challenging it is to be a community bank, particularly a couple of years ago when rates were really low. That’s challenging. We hear about regulation, we hear about technology, and the need for scale, and we hear all the time about how difficult it is to be a community bank. But on the flip side, do you see any advantages or any opportunities that maybe a community bank and this environment may have over a FinTech or over a larger national bank? Anything that on the positive side that you see for community banks right now?

James Kolari: Absolutely. Well, community banks are just famous for their good personalized service and close relationships to customers. It’s all about relationship banking, and they’re very close to their customers and borrowers. They know them even personally, and I think that personal relationship bodes well for the community bank to be, to listen to their borrowers, ask about their needs, and try to meet those needs. You know, in this inflationary environment we’re in right now, I think one of the big needs is and this relates to your bank, SouthState Bank, and your services program you have for hedging interest rate problems is the ARC program. And if you’re a business borrower in a community bank, you probably have a variable rate loan and you just don’t want to have that in this interest rate environment. That’s not a good thing to have.

It’s fine for the bank to make variable rate loans because then they’re dollar gaps or their gaps on their balance sheet, they’re gaped out. They have variable rate liabilities and variable rate assets. So, I mean, the bank’s fine with that, the bank’s fine with variable-rate loans. But the problem is the borrower’s variable rate loans for them are going to be a potential risk that could really hurt them, badly hurt their profits, and potentially drive some of them into bankruptcy. If interest rates go high enough, if we do get an economic recession in 2023, that’s going to cut into profits for small businesses or community banks, customer business customers. And then if they’re having to pay higher interest rates on top of that due to inflation, that’s going to kill some of the customers, that’s going to really hurt them badly.

So, if I were a community banker, I would be trying to figure out how to help my borrowers, my small business borrowers, and borrowers in the room, you could take them in one at a time or just invite them all into the bank for a special seminar on how to manage that problem of inflation and variable rate loans. And you have a pro… I know you have a program called ARC that allows people to convert a business, could convert a variable-rate loan to a fixed-rate loan. And I think that’s just an amazing product, by the way, that’s an amazing product a borrower can convert. Essentially, it’s like a loan conversion from the variable rate program to a fixed rate program, and I think Caleb, this is a real no-brainer. So, anyway, go ahead Caleb, if you have another question.

Caleb Stevens: Well, I was just going to say, we appreciate the shout out and it’s a program that we’ve worked hard to refine for our community bank customers in terms of helping them offer long-term fixed rates to their clients while they book a floating rate on their books, and we’ve tried our best to eliminate all of the reporting and the complexities that come with an interest rate swap, a typical back-to-back swap. We’ve tried to cut all of that out to make it very simple, where the bank just has a floating rate on their books and their borrower gets a long-term fixed rate loan, and alluding to your earlier point, it’s also a very good driver of non-interest income from a fee income standpoint. If folks want to learn more about you professor and get a little more insight into what you do to help community bankers and you’re building a talent pipeline, how can they find you?

James Kolari: You can Google my name. I’m not pretty probably all over the internet because I’m a researcher. James Kolar, K O L A R I, James Kolari, there’s only one of me there in the world or you could email me at J K O L A R I @ M A Y S. T A M U.edu. Jkolari@mays.tamu.edu and I’d be glad to interact with you about this if you wanted, or some other aspect of our commercial banking program at Texas A&M too. If you’re interested in that as a community banker, please do contact me. We’d love you to join and become a member of our banking program, we’re not just restricted Texas banks, any bank, we’re interested in any bank. We have banks throughout the region in the South, Southwest in involved in our program. All right. Caleb, anything else?

Caleb Stevens: No, this has been fantastic. We appreciate your thoughts and encouragement to the bankers, and I can just say on behalf of all of the community bankers listening, thank you for what you do to invest in the next generation of bankers because this is an industry that we believe in and are passionate about and it won’t keep going and sustaining unless there’s new talent coming into the fold. So, thanks for developing that next generation.

James Kolari: Absolutely. And thanks to you guys for creating a really innovative program that can help small banks and can help their customers a lot.