Trends Every Community Banker Should be Paying Attention to with Mark Kanaly

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

CALEB: Well, hello, and welcome to the Community Bank Podcast. Thanks for joining the conversation today. I’m Caleb Stevens back with another episode on the state of community banking. That’s a topic we’ve discussed off and on over the past year, and we like to talk to different individuals who have their ear to the ground, who are on the streets every day talking with community bankers about their most pressing issues. And today we speak with Mark Kanaly. Mark is a partner with the law firm Alston & Bird based in Atlanta. He runs the banking practice for that firm, and so he speaks with bankers like you all the time talking about their most pressing issues. And so we really run the gamut in this discussion. We talk everything from the declining rate environment, we talk about funding pressures, we talk about M&A, we talk about banking as a service and fintech opportunities as well as pitfall, we talk about corporate governance trends. Pretty much anything you can think of, we cover it probably in this discussion. And so we’re excited to play that for you right now.

CALEB, continued: Well, Mark, it’s great to have you back on the Community Bank Podcast. It’s been a few months, maybe even a year, since we had you on last. So welcome back, catch us up. How are things in your world?

MARK: Things are great. I really appreciate the invitation, Caleb. Great to be back with you. Things have been busy. It’s been a much better year for banks as we’ve bumped along. I think that, you know, it’s a space we’re in that’s craved stability. And we’re starting to see maybe people use the phrase, you know, that we’re in a trough and we’re going to be in the trough for a while, but it certainly improved as we look towards lowering rates. So I’m kind of excited to talk about what might be happening next with you.

CALEB: For folks that missed our first conversation, remind us about you, your role, your firm, and everything you do to serve community and regional banks.

MARK: So, I am a banking lawyer, head of our banking practice out of Atlanta. I’ve been with the firm 28 years. The firm is Alston & Bird, and I have, just as I said, of practice, focused on community banks. That’s both public and private and across the spectrum in terms of size. It’s been a ton of fun. I would describe myself as kind of an M&A and Capital Markets and Corporate Governance lawyer with some bank regulatory sprinkled in there. Got a great team and it’s been a great time to be in this space the last 25 years or so.

CALEB: And the only firm you’ve worked for since you graduated college, is that correct?

MARK: I’m really boring in that respect. Yeah, I’ve been at the same FIRM all long and it’s been a great ride.

CALEB: Well, that you’re you’re a rare and dying breed, for sure, to spend your career at one place, but that’s admirable to stick with one place and speaks to both your work ethic and loyalty, as well as your firm’s.

MARK: I’ve been fortunate.

CALEB: Fantastic. Well, I know you speak with hundreds of banks, you know, every year across the nation. I’d love to start here. We probably have a rate cut that’s imminent. By the time this episode airs, it may even have happened. I’m not sure. But I’d love to get your take on, as you talk to banks across the country, do you get the sense that funding pressure will begin to ease? Do you think there are banks out there that will still feel like they need to be reliant somewhat on brokered funding? Do you think the funding pressures will come down quickly or will remain stubborn? I’d love to just open the floor and say, as you think about the rate cuts that are probably coming, what are you hearing from banks out there?

MARK: Well, so first of all, it’s impossible to talk about broker deposits without mentioning the new proposal. And there are plenty of published materials out there on the new proposal, so, I am not going to do a deep dive of everything that’s in the new proposal. I will point a few high points though. I think one is, you know, we had a stable broker deposit rule for a number of years and then in 2020, the FDIC went out of its way to really deliberate and think about how to overhaul the rule in light of what was going on in the digital banking world and the realities about how people banked. I make the joke sometimes that in some ways, everybody’s their own deposit broker nowadays, right? We all have access to technology and can rate shop and place our deposits where we like easier than we ever could before.

MARK, continued: But I think, looking at what’s happened when they adopted the rules that we’re currently under in 2020, it was easy enough to define what a broker was. Defining a deposit broker was a little more challenging. But the part that mattered is that when the dust was settling, Chairman Greenberg made very clear he did not like that new rule. He was not supportive of it then. He was a voice of dissent. He was vocal about it. And so, I look at what’s going on with this new proposal as being largely reflection, I think, of his disdain for the original rule, wanting to roll it back. If you contrast, you know, the new proposal that’s out there, it doesn’t have and reflect the same amount of deliberation and thought as the 2020 rules did, right? Those are the culmination of a couple of years of research that the FDIC did.

MARK, continued: This felt more like a knee-jerk reaction from the SVB and liquidity events of last year. And so, I kind of start with that because as you frame up broker deposits, they really have developed a negative connotation that I don’t know if it’s fair or warranted. If you talk to bankers, I think most of them will tell you what some of the most reliable stable funding they can find. If you look at SVB and the liquidity events last year, it was not the broker deposits that were fleeing those banks. It was other relationships. And so, I do kind of feel like the new proposal misses the mark, and I mentioned it because I think banks are, to your question, Caleb—to actually take that on—I think they are … we are seeing a space that’s grabbing broker deposits in the last couple of years, especially, as liquidity has been so tight. And so, you already look at a space that’s carrying around some brokers and say, “Well, what if the rule changed and now we characterize even more of this as brokered?” I think that’d be a a really bad thing. So, I can’t resist to comment on the new rule.

MARK, continued: The other thing I’ll say is, you know, on the brokered front, besides the fact that those tend to be sticky, you know, reliable deposits. The only reason it even really matters from a textbook perspective about whether you characterize something as brokered or not is, you know, number one, if you become less than adequately capitalized, you have to have permission to hold brokered, and that permission usually is not granted. You’re encouraged to run that off. And then number two, brokered are obviously treated and assessed differently under the Deposit Insurance Fund, or DIF rules. And so, I mentioned that because that’s the textbook answer. I think there’s a real answer, though that’s a little bit different, which is most banks don’t want that, if you’re heading into an exam, to start the exam off by telling the exam team, “Hey, we’ve had a big run up in broker deposits since you were last here.”

MARK, continued: There is a negative taint or stigma that is attached to that, and that stigma is what I think the question you’re asking really is getting at. Which is, if you’re a bank and you are relying upon broker deposits, under the existing rule, certainly under the new rule as well, I think in terms of how some of these are being treated as a practical matter, there’s a stigma that’s developed there. And so, broker deposits as a practical matter just aren’t as popular in the space right now for banks that don’t have to have it. But there are, to your question, plenty of banks that are relying on brokered right now to continue their funding. They just have to—liquidity has been so tight.

CALEB: And for folks that are lenders or not executives or just don’t deal in the balance sheet management funding world every day, can you clarify for us what the previous rules are and what exactly the new proposals are now?

MARK: Well, so the previous rules that—let’s go all the way back to like the 2016 time frame—even before that. The rules painted a vague picture of what a deposit broker was in terms of if you took a fee of some kind for placing a deposit. That was the analysis. What happened, of course, is with all the technology that’s rolled along since the original rule, in 2020, the FDIC took a step back and did a deep dive into, you know, how are banks picking up deposits nowadays? And they looked above and beyond whether someone was getting paid for it, but looked at, you know, sort of the concentrations from that someone or whether it was a relationship that had exclusivity to it, which could avoid them being brokered. So, it was really someone that wasn’t just a broker, but was really working on your behalf. There were all kinds of exceptions made. Banks have been travelling under those exceptions since 2020. Cynically, you’d say, well, some of that was a function of COVID, right? That technology took on a larger role in COVID. But the rollback that the new proposal reflects is really getting rid of all the new way we’ve had of looking at broker deposits. So, it would go back to the old original rule from, you know, 2016 or prior which was that simply if you are taking a fee in respect to deposit placement, your deposit broker and it makes the deposits broker deposits. Just to oversimplify it.

CALEB: Okay. Yeah, that’s helpful. It’s funny, during COVID, that was a piece of our business here at the Correspondent Division that was virtually dead. And the past year or two, it’s been a great revenue source for us, as banks have experienced funding pressure. Speaking of rate cuts, it’s not just funding that’s a big talking point right now. It’s also how will this impact M&A, and particularly the AOCI barriers that have been prohibitive for a lot of banks on the M&A front over the past year or two. Anything you’re hearing there? Do banks feel like things are going to continue to pick up and improve?

MARK: Well, I mean first, if you look at the headlines, there’s been plenty of M&A activity lately. And I’m not talking just about cash buyers, like credit unions buying small banks. I’m even talking about the larger banks. There’s been plenty of splashy announcements where people are seeing past this. When AOCI and held-to-maturity losses really first became an issue, that there were sort of two things that people struggled with. One was the novelty of it, right? This is a space that was not accustomed to having to think about their balance sheet the way of, you know, how do we think about a loss we haven’t realized yet or AOCI and what do we do about it? The second was the valuation that goes with that, which is if I’m looking at a seller, I know that that seller is going to have to be priced in a way where when I move all their assets to my books, I’m taking the adjustments as part of that. And so, the sellers develop kind of an allergic reaction to the idea that you’re gonna look at my balance sheet and price me based on these losses.

MARK, continued: And so, what’s happened is, to your to your question again, we’ve moved past all that, right? The novelty of it has kind of burned off. We talked a lot about it last year and beginning of this year. But as people have seen their net interest margin models stabilize and become more understandable, right? The velocity of prepayments has slowed down, or at least becomes stable. Deposit repricing and disintermediation has really stabilized. We’re starting to see that people now do value this into a deal. And, so what I say a good deal is built around that we’re seeing in the markets now is relative value, which is: I look at my bank relative to your bank, I figure out what should the pro forma ownership be. That’s the part that matters. What will your shareholders own in the aggregate as a percentage of the combined entity? What will my shareholders own in the aggregate percentage of the combined entity? And that’s how deals are largely being put together.

MARK, continued: And I’m not talking about the old investment banking contribution analysis. I’m really talking about value where you look at one another. And for public companies, obviously they look at their traded stock prices and those are supposed to be a reflection of value. For private companies, investment bankers are really having to go through the effort of what I call “mapping it out.” Which is you sit down and you figure out the combined model and what that looks like and figure out how do we put this together. So, I think M&A is really returning. It’s, you know, the cash buyers may have a slight advantage at the moment. You could imagine doing a stock-for-stock deal. You know, the equities are still not back at full multiples. One of the things our space has always suffered from when it comes to to a bank wanting to be a seller in an M&A context is what I call the “country club valuation.” Which is, if I ask the average seller, “What’s your bank worth? What would you take for it?” I think a number of them think of it as a dollar amount where they’d say, “Well, we all bought shares at, you know, $10 a share. And it’s been some number of years and we’d take $16 for them.” And that sounds good. It’s completely numb, though, to the fact that you have to base your pricing based on what’s happening in the market. And then the again, the AOCI math that we’re talking about. And so, that’s one of the reasons that we are seeing the proliferation of credit union deals that I mentioned.

MARK, continued: I kind of started off with that. We’re seeing more and more of those because they have the raw advantage of coming in and speaking country club valuation, which is “We will give you 2 times book,” or “We’ll give you $16 a share,” back to my example. That’s a number that appeals to the the selling bank. It’s obviously gotta be netted out for taxes in the credit union deal. They’re cash buyers, but the credit union don’t worry about what I call “bank deal metrics.” They don’t worry about tangible book value dilution and earn back period. They don’t worry about pay-to-trade ratios. They don’t worry about having to raise capital again. The only capital they really ever raise is with subdebt, which they’ve been permitted to take on. And so, that country club valuation gives them an advantage in the current market. That’s why you’re seeing a lot of those deals done. For a lot of the smaller banks, that’s a good thing. They wouldn’t necessarily have a buyer right now at the current valuation that they could get comfortable doing a deal with, and instead you see them go partner with a credit union.

CALEB: You make an interesting point too, about the novelty effect. I had not thought of that. You hear past two or three years, just about the math, the math, the math. But did you make a good point. When this issue first presented itself, it was a shock to the system. It was a sticker shock for a lot of bankers, and now maybe even there’s a mental side of it that it’s not new anymore and we’ve kind of adjusted to it and we can work through it.

MARK: I think one of the things that really helped with that, Caleb, there were some good pioneers out there. I won’t name any banks, but a number of folks that figured out: How do I create a little bit of capital? Whether it’s through like a sale lease back transaction, restructuring, a sale of some assets or something else. How do I create a little capital and then use that capital to reposition my portfolio so they get rid of some of my lost bonds? If you will. Some of the much lower rate paper and replace that with new paper. Now, those doing it last year, that was a a little more forward thinking because what they wanted to develop was some picture of how their earnings model would be improved for 2024. We’re seeing more of that today. So, you talk about the novelty wearing off. People have already kind of penciled out what their losses would be to do a portfolio repositioning, but the goal is how do I, you know, set the bank up for better earnings going forward in 2024-2025, et cetera? And that’s made everyone kind of take a hard look at this. I think later on I’ll make some comments about capital implications of that, but in terms of where the space is not AOCI, I do think we’ve adjusted to it, yeah.

CALEB: Well, switching gears totally over to the technology side. I know one of the areas that you’ve been paying attention to is the “banking as a service” space. And, you know, we hear the phrase all the time. “You got to innovate or you have to die,” and “you’ve always got to be innovating,” “AI is coming,” you know, “Fintech is becoming more and more pervasive across the whole industry. So, you’ve got to be thinking about what are you doing to stay ahead of the curve and ahead of the game.” It’s funny though. A few weeks ago, we had on a gentleman, on our podcast, who said, “I’ve never actually heard of a bank that failed. Maybe they got acquired, but that, outright failed because they did not innovate.” And so, I’d love your take on as you look at banking as a service and some of the negative headlines with banks that have gotten into trouble with certain fintech partnerships, where are the opportunities for the community banks out there to pursue some of these areas and what are the pitfalls that they need to be paying attention to so they don’t, you know, make the headlines?

MARK: Well, first, you know, banking is an interesting space, right? If you go to the average bank—Pick your favorite town in the country and you pull up. It’s the one space that they don’t seem to ever be able to get rid of any of their old, outdated delivery systems, right? So you still have some customers that want to use a phone to call in and bank by phone. You still have some who want a drive-thru. You have want some who want a website. You have some who want an app. But it’s really rare to see any of those ever go away. So, there is a balance here, which is you are in the business of serving customers. And so, I do agree that the innovation is incredibly important. I don’t know that I’ve seen a bank fail because of lack of innovation, but it certainly helps I think on the, you know, kind of looking at bank banks wholly. We really have a need for more technology in the space. I mean, the whole reason that Fintech or bass or whatever label you want to put on it, it really is nothing more than people bringing really good technology to the banking space.

MARK, continued: It’s just those partnerships. And that’s inherently healthy for banks to be getting into that and trying to do things they can’t do on their own. Most banks don’t have the resources to build out their own platforms internally. They don’t have the people, they don’t the time, they don’t have the money. Partnering with someone else who’s already solved that is incredibly helpful. So, on the opportunities I see from it, you know, I mean just going through a few. I mean, one is, I mean, look: the rate at which you can bring good products and services to your customers is much better with good technology. It’s better for the bank tracking its success and hits, cross-selling, retention efforts, and the like. Picking up new deposits and loans, especially in niches that you might not already be in—also very good. And, you know, leveraging technology someone else has built. I mentioned that, but if you have to build your own, the cost is prohibitive. You’d never get around to it. It would take forever.

MARK, continued: And then I also think that there’s enhanced valuation for your shareholders. If you can show that what you’re doing is working and you’ve got a reliable revenue stream from this, that’s all a good thing for the shareholders of today as well. So beyond the customers and beyond sort of the diversification of the bank, it’s also good for the shareholders. And I also think with the talent battle that banks are in right now, you better be innovating some. It’s hard to attract young people to the old stodgy bank model sometimes, depending on where you are and what their preferences are. But on balance, they want to see that the bank is doing something interesting. Now, you asked about pitfalls as well. You know, the biggest challenge we have right now is things are moving so quickly, the regulators are just having a hard time keeping up with it. And so when you read about all the consent orders and MOUs that are out there and the regulators, you know, beating people about the head in the name of bass and fintech. I don’t want to sound sympathetic to the regulators on this, but in fairness, they’re tapping the brakes. This is all happening so fast, it’s hard for them to appreciate the totality of the risk involved. And when I say risk, that’s not just sort of operational execution risk. That’s risk management, that’s compliance, that is the risk that the third party you’re working with does not itself have good data management protection, good practices of its own. There’s a lot you get exposed to, and so that brake tapping has taken several forms.

MARK, continued: We all remember the vendor management rules for a few years back that if you’re gonna partner with a third party, you’re supposed to do diligence the third party and then monitor them going forward. So, some of the brake tapping has been accusations by the agencies that “you really didn’t do your diligence here.” Some of it’s been around oversight, which is if you’re going to partner with a third party who’s in fintech, and you don’t have personnel who understand that fintech, how are you expected to oversee and supervise your relationship with that third party? So, the oversight is important. I mentioned risk management. You know, the regulators are a horse-before-cart kind of outfit, that where you build out the compliance program first and then you bring to bear on it the product that will require the compliance, not the other way around. And then the biggest one I’ve seen that has been really problematic in some of the recent consent orders is dependents.

MARK, continued: If the regulators can point to say, “You have become overly dependent for the origination of new deposits or new loans,” or “Your core system functioning properly,” whatever the partnership may look like in those situations, they worry you become too dependent. You’re now reliant upon this third party. What happens if you were to break up? And so, I would say those are the biggest pitfalls to me. Now, the banks that have the MOUs and consent orders, I think they get a little bit of a rat bad rap. It’s kind of that old expression that, you know, pioneers get arrows and settlers get land. I think that there’s some of the pioneers in this space and that they will work through it. But, we’re all kind of in this together. I think this needs to be an area of kind of common sympathy and support for one bank to another as we all welcome technology coming into the space.

CALEB: Yeah. So, it sounds like the takeaway is, “Don’t write it off. Explore it, you know, understand what your options are, how you can better serve your customers, but do it in a way that you’re doing your due diligence, you’re understanding the regulatory requirements, you’re aware of the risks, you’re choosing your partners wisely, don’t go into it, you know, just without it, you know, just throwing caution to the wind trying to the first mover.”

MARK: Yeah. I’d say the four big takeaways I give our clients is number one is the due diligence. You mentioned that. But on that due diligence, involve your legal counsel and your auditors. The auditing piece is important as well. Get your board involvement decision. The regulators want to see that the board looked hard at this, understood alternatives, asked good questions, and there is that oversight function I described. I think the third one is, there should be some contingency planning. You should have a written plan about “What happens if this doesn’t work? How do we unwind it? How do we exit this?” And then the last one is don’t dabble. I see a lot of banks say, “Well, you know, it’d be good to have, like, you know, 1% of our portfolio in, you know, sort of consumer paper that’s high yielding. Well, that’s fine if that’s what you want to do, but recognize that you’re doing it and treat it like it’s a real thing. Don’t treat it as though you’re dabbling where you don’t really pay attention to it and you just add a little paper to your portfolio. You need to get serious about it. That’s not to say you should scale it or make it big. Maybe 1% is right for you, but it is to say you got to go away from that dabble mentality where you do have to still take a hard look at it because it’s something that you’re going to be held accountable for.

CALEB: Yeah. Well, Speaking of boards, I’d love to hear your take. Any other corporate governance trends or things that you think community banks need to be paying attention to as you’re having conversations with banks across the country?

MARK: So, I’ll go through a few actually, Caleb, if that’s okay. You can stop me if there’s one you want me to move on from. The first one is, you know, charter changes. We’re all reading the same headlines. But we are seeing a rash of banks look at whether they’re in the right charter. I look at that as, that’s a good heads up thing for a board to do you should be talking about operational risk and whether you’re presented with one. I think the eye opener here was in the spring this year, the FDIC and the OCC both rolled out new M&A guidance, and it had some sort of progressive and subjective elements to it that caught people’s attention. Still uncertain how that will all be applied, but we’ve seen people express an interest in becoming a Fed Member bank. Nice thing about a Fed member bank, of course, as you go to one federal regulator. Just the Fed for both your holding company and your bank. Fed’s known as having more of a holistic approach to risk management. And I think they’re also regarded as being pretty sophisticated and responsive along the way. So there’s a prohibition, as you know, in Dodd-Frank that prohibits charter shopping, so you gotta be careful there. And there’s even a recent M&A deal that’s kind of calling that into question. But the fact of the matter is, I think that you’re going to continue to see people looking at changing their charter to Fed membership.

CALEB: So, on that note—I’m sorry to interrupt—what would constitute charter shopping? Just out of my own curiosity.

MARK: So, the regulators would say you should not change charters if you’re just unhappy. Putting that in kind of air quotes, with your current regulator. So, for instance, if you got bad findings in your recent exam or you’ve been told you shouldn’t be doing M&A, don’t go change charters just because you want a different answer. Instead, there should be some reflection of a strategic alignment between what the new agency would offer to the bank and what the bank’s looking for. And every agency has kind of its own reputation in different things, whether it’s, you know, a Fintech initiative, M&A or otherwise. What they’ve suggested is you should be looking for that long-term partnership and strategic alignment and not doing sort of a kneejerk move because you’re unhappy.

CALEB: Gotcha. Okay, that’s helpful.

MARK: Yeah, I’ll also mention ditching holding companies. We are seeing some people jettison their holding companies. It’s not as popular as it was a few years ago, just to give a few kind of thoughts there. You know, this is another effort largely geared towards reducing regulators. You get rid of the SEC if you’re a public company because bank securities are exempt. Holding company securities are not, which means that if you got rid of your holding company, you would make your filings with your primary federal regulator rather than SEC. And so, you’d say, well, why is everybody doing it? There’s really kind of a few thoughts there. One is smaller bank holding companies—that is less than 3 billion in consolidated assets—still don’t have to do consolidated regulatory capital treatment. And so that means that if you take a Tier 2 instrument like subdebt in it, your holding company, you can contribute that to the bank and have it count as Tier 1 capital. That’s been an advantage for smaller banks.

MARK, continued: Second is, there are some things that are better undertaken than a holding company. There may be loans or investments that are not permissible at the bank level that you want to do at your holding company. The last one is, you know, if you want to be a financial holding company or Gramm Leach Bliley, in order to do that, obviously you have to have a holding company. And so, the financial holding company rules permit a larger number of activities than just the bank can do. We are also seeing, Caleb, as you and I kind of exchanged emails about advance of this, we are seeing people move to the York Stock Exchange as one other sort of corporate governance maneuver. I think, you know, I’d make a few observations there. One is the NYSE has been pretty aggressive in making sure that it aligns its cost with that of NASDAQ so that it’s more competitive. They used to be perceived as more expensive. They also advertise a lower bid, excuse me, tighter bid ask spread than NASDAQ does, which is supposed to take some of the volatility out of your stock. But I think the truth of it is one of the big reasons is NASDAQ has just exhibited more of a willingness to adopt corporate governance rules. Some of those reflective of, you know, kind of progressive thinking in the minds of some of the bankers. And they feel like that’s intrusion. And so they’ve instead looked to the NYSE as being a place to escape some of that.

CALEB: Going back, real quick, to the holding company point. Stock buybacks, I mean, I’ve heard that’s one of the advantages of having a holding company. Where does that sort of play into this discussion?

MARK: So, it’s a great question you asked. The sound bite you probably have on that is when you think about stock buybacks, most of the state banking codes contain a provision that for a bank to do a stock buyback, it has to have shareholder approval. And that if you think about a bank with a holding company, that’s easy. You have a holding company to approve it. Or, to say it differently, the holding company is not subject to that really. For a bank on a standalone basis that doesn’t have the holding company to approve it, the bank instead would have to get shareholder approval. Now you do sometimes see people get creative there, you know, whether it’s through a blanket charter amendment or something else. But the fact is, it is harder to do stock buybacks in just a bank if you don’t have an end-around on the corporate statute.

MARK, continued: A couple of things I said I’d come back to if I could, Caleb, just, you know, I mentioned capital earlier. What I’m going to say on capital is, you know, in the bank regulatory world, capital is the panacea to virtually any problem. It doesn’t matter whether it’s liquidity, it doesn’t matter whether it’s, you know, CRE or something else, AOCI. Capital is the panacea. And so, if you rollback the tape to maybe 15 years ago, there were about 35 to 40 institutional investors who stood by it to recapitalize banks whenever they needed it. Today, we’re down to about eight, and they are tending to migrate towards either severely distress situations or M&A transactions. You’ve seen in the recent M&A announcements, they’re almost certainly coupled by capital, if it’s at the larger bank level because you pick up capital when you can get it.

MARK, continued: The advice we’ve been giving our clients is to be sensitive to what we’re calling a capital allocation strategy. I think a lot of banks have capital policies, which means, if we go below X, then we’ll go do Y and Z or improve our capital. This is more of a strategy that reflects, “We have some limited amount of capital. We may not have the access to capital that we think we would. So you know, can you get what you need and are friends and family rates, for example, uncertain at this point?” Family offices even seem to have backed off of bank investments. And so the question is, what is our capital allocation strategy? Are dividends the most important thing we do? Stock buybacks? Supporting growth? M&A? Portfolio repositioning? There’s only so much capital to go around. And so we’ve really encouraged banks to be thinking about what is most important to you, as you do your strategic planning.

MARK, continued: The other thing I did want to come back to was financial restatements. There have been a rash of announced financial restatements, and when people ask me about risk and what I see in the space, the the two risks I’ve been talking the most about are capital. I just went through that. And then the other one’s been financial restatements. Which is, I don’t think that people appreciate that the accounting firms—the auditors in the banking space have gotten larger. Some of them combined with one another. There’s greater PCAOB scrutiny, and what they’re really looking at in the hard way is relationships the bank has with a third party. Like a fintech, like a mortgage subsidiary, some sort of joint venture they have, you know, with with a third party. Maybe it’s an SBA group. And the accounting where you have indemnities and waterfall features can become really complicated, and you’ve seen in recent times a number of restatements that have been announced out there. I think audit committees in particular need to have their ear to the ground, making sure they’re following the developments around these dynamics, because they’ve caught a number of folks, you know, kind of unexpectedly.

CALEB: Going back to the capital raising discussion. Do you see more banks looking to raise capital over the next 12 months given all the uncertainty and funding pressures and such?

MARK: I do. I think the dynamic that’s driving it is, there are a lot of banks that are still carrying around stuff in the securities portfolio they would like to get rid of. And that really is the driver. It isn’t so much that they’re light on capital. It isn’t so much that they’re scared of the boogeyman of CRE. I really think that they would like to take advantage of, “I want to get this stuff off my books, so rather than let it burn off over time, let’s just take my lumps all at once, and let’s put some new capital of the books. I get a stronger earnings engine for future periods.” So yeah, I do think that there’s a demand for capital. It’s one of those things in our space where it’s going to take a few more banks doing it on a standalone basis and kind of sucking it up on pricing before others will follow, but I know from talking to a lot of the investment bankers in the space, they’re starting to see some of that discussion at the board level about whether they have the stomach for it.

CALEB: Yeah, couple investment banking buddies of mine are saying the same thing. At least that’s what they hope.

MARK: Well, I think some of it’s hope, but also, you know, back to the comment about it is the panacea for our space. Capital kind of fixes everything in our world. You don’t want to be caught with your capital light and then have to go to market or it’s gonna be really hard on the pricing side.

CALEB: Well, Mark. Man, we’ve covered the gamut. I feel like you’ve given a great state of the industry. You’re going to be at our conference. So, the Elevate Banking Forum on October 10th and 11th. So, we’re looking forward to having you there. Any final words of encouragement to the community banks listening before we wrap?

MARK: No, I really appreciate your podcast series. It’s a real treat to be on. And good to be with you. I’m looking forward to your upcoming event. Thank you for including me.

CALEB: Fantastic. Well, thanks for being on.