Dear Fellow Shareholders,
The last year was filled with both challenges and progress.
The Federal Reserve launched and is maintaining an interest rate increase effort unparalleled in its over century of existence. The magnitude and velocity of
these increases has predictably created strains and pressures within the industry and the economy.
Newtons third law instructs us that for every
action, there is an equal and opposite reaction. The laws of physics consistently, and somewhat remarkably, have application beyond the physical world. The world experienced a historically long period of low interest rates following the Credit
Crisis, which was then extended with monetary and fiscal stimulus of previously unimaginable proportion as a reaction to the COVID-19 pandemic. The equal and opposite reaction is current Federal Reserve
policy. Time will be the judge of the prudence of the magnitude of these actions, and as Newton taught us, we should be expecting a reaction in the economy commensurate with the force generated by the accelerated, intense rate hikes.
The banking industry, for the first time in 15 years, finds itself shifting to paying elevated rates on deposits in the middle of a significant decline
in systemwide deposits. Meanwhile, assets accumulated during years of low interest rates are sitting on bank balance sheets. This will create earnings pressure in the short-term for the industry. Noninterest income, expense management, and asset
quality will remain critical factors for success during this time.
Accelerating Technology Changes
We all see headlines every day about rapidly unfolding changes in technology, including artificial intelligence and machine learning. While we cannot invest
the dollars available for firms like JP Morgan Chase & Co., we can be targeted and selective in identifying areas to enhance productivity and client service. Marcus Aurelius wrote in Meditations, for the mind converts and changes
every hindrance to its activity into an aid; and so that which is a hindrance is made a furtherance to an act; and that which is an obstacle on the road helps us on this road. Aurelius describes our perspective on technology in simple
terms and more eloquently than I can.
The significant technological evolution underway is a competitive and resource allocation challenge, however we
embrace and recognize it as a call to action and an opportunity to create value to shareholders and unmatched service to our clients. Not all of these actions and investments will generate immediate results, and they are not intended to do so. We do
believe that they will create outsized returns and franchise value for years to come.
It is difficult to understand and forecast the changes in the
consumption of financial services. In 2021, in an attempt to project the future, I gathered industry call report data. I had and maintain a simple theory; due to improvements in financial technology and wider adoption of digital usage, the same
trends we witnessed in consumer lending over the first two decades of this century would be replicated by small business and commercial lending over the next decade. I looked at data for banks between $1-5 billion in assets. The result
surprised me.