In the Spotlight: CFO Committee

George Boyan, III; EVP/CFO Unity Bank Jeremy Goss, Partner, Forvis

Q. What indicators or trends are you closely monitoring to gauge the health and stability of the economy, and how do they influence your strategic decision-making process?

BOYAN: I closely track a diverse set of indicators, which can be broadly categorized into two main groups. Let’s delve into each category:

1. Traditional Indicators:

  • These are the tried-and-true metrics that policymakers, including the Federal Reserve, pay close attention to. They provide valuable insights into the overall economic health. Here’s what I focus on:
  • Quarterly GDP Growth Trends: Analyzing the ups and downs in our region’s economic output.
  • Average Non-Farm Payroll Reports: Keeping an eye on employment figures across various sectors.
  • Inflation Measures: Examining inflation rates and their impact on purchasing power.
  • All these data points inform my perspective on the trajectory of short-term interest rates.

2. Customer Insights:

  • The second category involves listening to our valued customers at Unity Bank. Their experiences and feedback provide crucial context. Here are some key questions we explore:
  • Small Business Performance: How are our small business customers faring? Are they thriving?
  • Supply Chain Challenges: Can they easily source materials for their operations?
  • Hiring and Staffing: What’s their experience with recruitment and staffing?
  • Homeowners and Real Estate: Are homeowners finding good deals or caught up in bidding wars? How are home sellers faring in terms of asking price?
  • By actively engaging with our customers, we gain insights that complement the traditional indicators.

Much like a pilot flying an aircraft, I encounter a multitude of indicators. The challenge lies in their often divergent messages. Rarely do all the indicators align perfectly. However, when we weigh them collectively, the overall picture reveals that despite significant monetary policy tightening over the past 18 months, the New Jersey economy remains robust.

GOSS: Many seem to ‘feel like’ we must be in the later stages of the current economic cycle. The yield curve has been inverted for almost two years with less than stellar consumer confidence and delinquencies creeping up in certain credit classes. Because these conditions exist in a period of inflationary pressure and significant monetary policy tightening, recession fears loom. Yet other key indicators such as employment, GDP, housing prices and corporate profits (while admittedly lagging) remain relatively strong compared to historic norms. Competing narratives create uncertainty which is only compounded by the current political environment.

Success is measured not by results in any given period, but by the ability to consistently put yourself in a position to take advantage of openings when they do arise. Especially in uncertain times, FORVIS looks for prudent opportunities to broaden our future prospects, whether through hiring new talent, releasing new products and services, expanding into new markets or through strategic partnerships with like-minded firms. Delivering unmatched client experiences is our primary focus in any stage of the economic cycle.

Q. In light of recent economic developments, what adjustments, if any, have you made to your bank’s investment portfolio and lending practices?

BOYAN: In 2023, the Federal Reserve implemented tighter monetary policies, leading to significant developments in the financial landscape. One of the most notable changes was the scarcity of deposits. As COVID stimulus funds were depleted, customers actively utilized their excess liquidity. Simultaneously, the failures of Silicon Valley Bank, Signature Bank, and First Republic reverberated nationwide, further exacerbating the deposit shortage.

In response to these challenges, our institution adjusted its approach. We intensified our efforts to gather deposits, focusing primarily on owner-occupied businesses rather than investor-owned commercial real estate. Additionally, we strategically managed our investment portfolio as both a diversification tool on our balance sheet and a source of liquidity.

Overall, 2023 marked a year of adaptability and resourcefulness as we navigated the changing financial landscape.

GOSS: While the pace of new lending has slowed slightly given the interest rate environment, banks are still lending to high quality borrowers. Given the uncertainty in certain lending segments (e.g., office), some banks are seizing the opportunity to reduce exposures in one area while expanding lending in others. We have also seen banks increasingly consider duration, structure and hedging strategies to position loan portfolios for margin expansion when the rate environment shifts.

Banks are taking a fresh look at marginal credits in sub-concentration areas to assess the impact of potential volatility and micro-market shocks over the next year (e.g., hospitality real estate in an area where seasonal tourism has been stable, but stagnant—asking whether a pool of credits are relying on a banner year to turn things around and stressing the impact of alternative outcomes). Along these same lines, we also see a trend of banks supporting their qualitative ACL adjustments through more objective data than in the past.

Q. How do you anticipate changes in government policies and regulations will impact the banking industry and the broader economy?

BOYAN: The bank failures of 2023 serve as a stark reminder of the value of FDIC insurance. This insurance, coupled with the regulations that accompany it, constitutes the lifeblood of the U.S. banking system. It is what distinguishes our system from the rest of the world. Our responsibility lies in comprehending the regulators’ perspectives, understanding their objectives, and ensuring that our institutions operate safely and soundly, in alignment with both the spirit and the letter of the regulations.

However, I’ve long been concerned about the lack of coordination among different policymakers. For instance, while the Federal Reserve aggressively combats inflation, the housing market—representing approximately one-third of the consumer price index—remains persistently heated. As you may recall from your Economics 101 course, prices are determined at the intersection of supply and demand curves. One effective way to lower prices is by increasing supply. Ideally, the Federal Reserve would like to witness an expanded inventory of homes, leading to natural price cooling.

Yet, simultaneously, the FDIC and OCC (Office of the Comptroller of the Currency) scrutinize commercial real estate (CRE) loans and banks with substantial CRE exposure. This scrutiny is justified, especially considering the sharp declines in office sector values. Consequently, banks instinctively reduce their CRE lending to comply with regulatory requirements.

Here lies the challenge: Residential construction loans, which play a crucial role in boosting housing supply, fall under the definition of CRE. Consequently, the heightened scrutiny on CRE has inadvertently curtailed residential construction lending—precisely when the Federal Reserve desires more housing supply.

A straightforward solution would be a two-year exclusion of residential construction loans from the regulatory definition of CRE. Such an adjustment would stimulate housing supply and contribute to the Fed’s goal of achieving 2% long-run inflation while maintaining the safety and soundness of the banking system. Coordinated efforts among regulators would benefit both banks and their customers.

GOSS: A primary focus of our U.S. financial regulatory regime is maintaining the safety and soundness of the banking and financial services sector. We can all agree this is a worthy mission and one of our greatest competitive advantages. That said, the ever-growing cost of compliance means an increasing level of scale is necessary to maintain customer service standards and operate profitably. Meanwhile, the deck is not always stacked the same for non-bank market participants (e.g., tax subsidies and lack of compliance requirements for similar activities). Unfortunately given political stalemates, these conditions may continue for the foreseeable future, fueling further consolidation in the banking sector. At the same time, completing a merger in the current political and regulatory environment is often a monumental challenge in and of itself, seemingly requiring banks to battle on both fronts. The good news is that the community banking sector as a whole is strong, and well-positioned banks with the capital and liquidity to grow could see tremendous opportunities in the coming years.

Q. With the rise of digital currencies and fintech innovations, how do you see traditional banks adapting to stay competitive and relevant in today’s economy?

BOYAN: Cryptocurrencies like Bitcoin and Ethereum challenge traditional banking models. They offer decentralized, borderless transactions, often faster and cheaper than traditional systems. Some banks are exploring ways to integrate cryptocurrencies into their services. For instance, allowing customers to buy, sell, or hold crypto within their accounts. Banks can leverage stablecoins (pegged to fiat currencies) for cross-border payments and remittances. Banks can adopt blockchain for secure, transparent, and efficient transactions. However, banks must address risks related to volatility, regulatory compliance, and security.

Fintech startups disrupt traditional banking by offering specialized services through payment solutions, lending platforms and robo-advisors. Peer-to-peer payments, mobile wallets, and contactless payments. Lending platforms include online lending, crowdfunding, and microloans. And robo-advisors generate automated investment advice.

Rather than compete, some banks collaborate with fintechs. Joint ventures or white-label partnerships allow banks to offer innovative services. Fintechs operate with agility, iterating quickly. Banks can learn from their nimble approach.

These competitive forces have created customer expectations for a strong digital experience with personalization and 24/7 accessibility. Customers expect seamless online banking, intuitive apps, and real-time updates. Fintechs excel at personalized experiences. Banks must enhance customer journeys. Digital currencies and fintechs operate round the clock. Banks need to match this availability.

Community banks must continue to make a local impact by balancing relationship banking and innovation. Community banks remain vital for local economies. They understand community needs and support small businesses. Personalized service and community ties differentiate them. Community banks can adopt fintech solutions while preserving their core values.

In summary, traditional banks must adapt by embracing technology, collaborating strategically, and staying customer-centric. The coexistence of digital currencies, fintechs, and community banks ensures a dynamic financial ecosystem.

GOSS: Community banks are still the gold standard of security and trust in local markets. However, for many customers nowadays, security of non-bank technology platforms is assumed (right or wrong), and features like ease of access to funds, investment options, connectivity to other applications and analysis of data are becoming increasingly important. Nimble banks will be better positioned to keep and grow the customer relationships of the future. For example, community banks have an advantage over larger institutions in the ability to be agile in decision-making. Banks can exploit this advantage by developing the ability to execute an objective-based, repeatable process for evaluating and adopting any new product or service. Having a systematic process is likely more important than adopting any one innovation or technology. Further, the unique understanding community banks have of their local markets can provide opportunities to build niche products and services tailored to particular challenges their customers face. The technologies and innovations then become tools to support those core niches and specialties rather than the ends themselves. 

Q. Given the current economic climate, how are you positioning your bank for sustainable growth while managing potential risks and uncertainties?

BOYAN: In any economic climate, including today’s, Unity Bank remains committed to its core principles. We aim for mid-to-high single-digit growth annually.

How do we achieve this? Primarily though our customer-centric focus. We listen to our customers and provide the products and services they truly desire. Our commitment to exceptional customer experience sets us apart.

Secondly, we have financial discipline, in both pricing our products and services and in managing our expenses. We maintain pricing rigor, ensuring fairness and sustainability. And we are mindful in controlling our expenses.

We maintain a steady resilience. We avoid impulsive decisions during lean years and resist overindulgence in good times.

This steadfast approach has served us well across various market cycles. While it may seem unexciting to some, our consistency is our strength.

GOSS: In my opinion, there is no silver bullet. However, creating optionality in the business model is key to facing any economic climate with confidence. For example, locking down risk in select areas can serve as the basis for and enable future growth in other areas of less certainty. Every market has unique tailwinds and headwinds. And each market will be impacted by the larger macroeconomic environment to a different extent. Knowing your options for leaning into the tailwinds in advance (e.g., new or growing industries, demographic changes) and protecting against headwinds (e.g., balance sheet management, compliance risk management, capital planning, credit risk mitigation) can help ensure performance in any part of the cycle. Engaging the right partners and advisors to assist in these efforts is key as well.

Q. How do you envision the role of traditional banking evolving in response to shifting customer behaviors, technological advancements, and macroeconomic trends?

BOYAN: Banks need to continue to evolve and remain relevant to their customers. This has been true throughout the history of the banking industry. Traditional banks must adapt to changing customer preferences by embracing digital channels and enhancing user experiences. Our banks also have access to incredible amounts of data that go largely unutilized. Leveraging data analytics and artificial intelligence can enhance operational efficiency, risk management and personalized services. In summary, traditional banks should proactively embrace digital transformation, prioritize customer experiences, and remain agile in a rapidly evolving financial landscape. By doing so, they can continue to serve their communities effectively while staying competitive and relevant.GOSS: In my view, traditional community banking is and will remain an essential pillar of our financial ecosystem. No other model has been as successful at efficiently allocating capital to businesses and individuals at the source while also supporting their communities through jobs, local sponsorships and other efforts. This level of granular involvement means much of the information necessary to adapt to changing consumer behavior and technology likely already exists collectively within the bank.  Where gaps exist, trusted advisors can offer unique perspectives from having worked through similar challenges across the industry. The ability to tap, organize and turn that knowledge into actionable strategies is where the rubber meets the road.  The most successful banks of the future may be those with a clear vision (i.e., strategy/purpose) that are able to maximize optionality (i.e., preparation) which creates capacity for investment as the right opportunities arise (i.e., execution). FORVIS is excited to be on the journey with you!