3 min read September 2022 — Merchants Bank has been serving Minnesota for over 147 years. It is a community bank providing commercial banking solutions and small business financing support to a diverse client base, ranging across personal finance, agriculture, equipment financing and real estate. Invest: spoke with President and CEO Greg Evans about how the bank is dealing with current challenges and how it is using a blend of new technology and personal customer relationships to continue growing.
How are you navigating interest rates and inflation, and what are you hearing from your clients about what that new normal will look like?
Interest rates have been so low for so long that I think there is more of a psychological objection to what we’ve seen, although it has been more of a normalization of interest rates. Historically, what we’ve been through the past few years is unprecedented. The rates were so low for so long that people took them for granted. In 2020 and 2021, our industry probably experienced the lowest margins in its history. With the recent Federal Reserve shift and the increased rate environment, we started to see some improvement in margins but now we are starting to feel pressure from deposit customers because the deposit rate increases lag. The excess liquidity in the financial system causes banks like ours to have depressed loan and deposit ratios, so until that liquidity flushes through the system, our motivation to increase our funding costs is diminished by the fact that we have excess deposits. Pre-Great Recession, a healthy target was 4%. In 2021, we were below 3%. Now that we’ve seen some normalization, we’re starting to talk about even lower margins in 2023. Low margins are here to stay and there will be no shortage of challenges.
What have been the shifts in demand for the services you provide?
The biggest strength of this franchise is the diversification of the market, lines of business and our loan portfolio. That has served us very well. We are a community bank that has limited loan concentrations. We have wealth management, which is a fee income revenue generator. We have a strong residential mortgage lending operation and the shift in demand has been significant with a 50% decline in mortgage origination through mid-year 2022. Core commercial lending activity has once again become a primary source of revenue. It has picked up and we’ve performed very well. We are still well ahead of our forecast and we expect to have a very solid performance this year.
How do you see fintech impacting the industry and how do you engage with that?
Our industry is experiencing significant disruption and the fintech space is a source of that, but it’s also a source of innovation that we need to embrace. We’ve dedicated a fair amount of discovery to fintech and its different aspects. We look at it from the standpoint of our customers and their expectations, which is what motivates our technology investment. We’re looking at technology that will expedite automation, including robotic automation of backroom processes. We’re also looking at fintech in terms of driving efficiency. We continue pushing our primary technology strategic partner Fiserv to meet customer needs. The pandemic accelerated a lot of that. We don’t have unlimited resources but investment in technology is a priority.
Regarding branch activity, what is the future of the physical branches?
We take an intimate approach to care and support for our customers and I don’t think the branch will ever be irrelevant for us. We are situated in suburban and rural markets. We are not insulated from the disruptions from fintechs and digital banking. We have to deliver a very robust suite of digital solutions for our customers, but the importance of in-person interaction and bankers as possible problem-solvers cannot be replaced so easily. When a consumer has a problem, the branch employee is still an extremely valuable asset for the success of our business. Over time, we will probably be sleeker in terms of staffing, leveraging technology to distribute expertise through the branches. The customer experience is still No. 1. We have a lot of real estate, much of it in small communities, so we are thinking of ways to repurpose some of the real estate with different staffing models to make things more efficient without sacrificing the customer experience.
Merchants Bank just turned 147 years old. How have you seen the bank change and grow?
I’ve been here for 33 years and our rich history is a testament to the fact that we have been adaptable and very aware of disruptions in the industry. The number of banks is cut in half every eight to 10 years, which shows that we have been adaptive enough to continue thriving in a consolidating industry. We have very loyal and dedicated shareholders. Earned independence, long-term relevance and shareholder expectations keep us performing at a level to meet these challenges. The region is blessed with tremendous capitalists and entrepreneurs and those stakeholders know the importance of a community bank that serves them.
What is your outlook over the next two to three years?
We are cautiously bullish. We have great communities in which to do business. There’s a rich entrepreneurial spirit and a tremendous work ethic here. There’s tremendous vibrancy due to the level of higher education. We won’t have any shortage of challenges. The biggest issues will be required investments in technology and the cost of regulatory compliance. Bank regulation continues to intensify, which can hinder innovation. Another challenge is the rising costs of wages and healthcare, which forces us to seek more revenue in ways that have not historically been done. We have to be manic about finding ways to grow revenue and optimize earnings. If we do that, we will continue to thrive.
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