Chief executives from Nevada’s banks gathered at the Four Seasons Hotel on June 10 to discuss challenges and issues affecting the banking industry. The gathering was part of Nevada Business Journal’s monthly Industry Outlook series. Connie Brennan, publisher of Nevada Business Journal, served as moderator for the roundtable discussion, which included issues such as interest rates, staffing, new federal regulations and competition with credit unions. Following is a condensed version of the discussion.
Tom Van Overbeke: Southwest USA Bank is a de novo bank, started in May of 2001, and we have concentrated our efforts on private banking services. We spent a lot of our first year and a half assembling the type of team who will do a large part of the sales and administration of that service. In addition to trying to grow the bank, we’ve concentrated mainly on riding through the wave of all the interest rate shifts that we’ve seen, and so we’ve been busy.
Connie Brennan: Could you explain for our readers what de novo banks are?
John Guedry: They are banks in their first three years of operation. They tend to be treated a little differently by the regulators during that period of time. They’re given a little bit more flexibility to get up and running and stabilized. They’re also watched very closely by the regulators.
Dave Funk: Regulatory oversight is a lot stronger, and you have capital requirements you have to maintain that are typically higher for that three-year period. Our bank now has to maintain 8 percent capital, and that’s relaxed from my days at another new bank where it was 10 percent. After that three-year period, you can do what you wish with capital, but it’s still monitored by the state and also the FDIC.
James Bradham: Nevada Commerce Bank is three years old. If this meeting had been held three years ago, just as we were opening the bank, I would have had all the answers. However, most of those answers have been kicked out of us in the last three years, and we’re learning to live in an interest rate environment that we certainly had not anticipated, but we intend to continue to keep our head down and make progress.
John Gaynor: The biggest challenge I see is management succession. We’d all like to think we’re not getting older, but we are, and who will take our place? I don’t know where the next generation of bankers is going to come from. It used to be real simple. The small banks would wait until the big banks ran their training programs, and then as soon as people got a couple years under their belt, we’d just go out and offer them a couple thousand dollars more a year, and we’d be able to pick them off like cherries. That’s not true anymore, because none of the big banks have training programs, at least to the extent that they did back in the ’70s. We’re not developing that middle tier of management. I don’t think there are mentors out there anymore, because a lot of the old-time bankers have gone on to other things. With mergers and acquisitions, we’ve lost a lot of good people who have decided that enough is enough, and they have gone into other fields. So I look at human resources issues as being very predominant for us.
Guedry: Small banks really struggle with having the resources to handle some of the things that were thrown at us over the last three years. The interest rate environment is hard for us to monitor. We just don’t have the resources on staff, so we rely very heavily on outside companies to assist us. The same is true in recruiting and technology. We don’t have a whole room full of employees to deal with the bank regulators. We have had to become jacks of all trades.
Jay Kornmayer: Wells Fargo is the only really big bank represented here today. We are evolving ever more aggressively into a total financial services approach to the banking industry, which means whether it’s mortgages, financial services, insurance or traditional commercial banking, Wells Fargo is putting itself in a position to provide for needs across all business cycles and across the customer’s life cycle, as he or she goes from being a borrower to a saver to an investor. We want to handle the 15 products the average consumer needs in the financial services industry. The more of those we can provide in the same shop, the better the service and the better the price for the consumer. As far as challenges, I think the people around this table represent a huge challenge for all the larger banks. The community banks tend to find a great little niche to attract some of our best customers, and it’s always a challenge for us to act like a community bank and deliver like a national bank.
Connie Brennan: So, does Wells Fargo still have the training programs John [Gaynor] mentioned?
Kornmayer: We do not have the type of training program that John was referring to, where each independent affiliate would provide its own in-house training. We actually have two different versions: One is a modular program, where we have three weeks of on-the-job training, and then a one- or two-week intense training session that lasts for about six or eight months. The other type is a six-month intense training session in San Francisco.
Jim Howard: Desert Community Bank has been open nearly four years, and it was the first of the Capital BankCorp banks that we opened up in Las Vegas. Tom Mangioni and I got together in late 1998 and decided to take this venture on. These banks are a little bit different than the average de novo, because instead of a small group of investors getting together and forming a bank and finding a president, this company finds a president and says, “Now, go sell the stock and open your bank.” That scared me to death. But, it turned out that selling the stock was easy – it’s running the bank that’s hard. For example, I don’t know how we manage to balance the Privacy Act against the Patriot Act when they conflict with each other. Also, I’ve always been an Alan Greenspan fan, but I’m beginning to wonder if there was one class he didn’t go to, which would have taught him that if you run the interest rate down low enough, banks don’t make any money making loans. So it doesn’t necessarily fuel the economy like you would want it to.
Dennis Guldin: Our biggest challenge has been in the staffing area, not just because of competition with other banks, but also because of people deciding to re-engineer their jobs. They’re getting romanced out into the development market or they are going into other careers, or maybe going out and taking over a business. So the available labor pool is getting smaller and smaller. In the last few months we’ve been looking for people more out-of-state than in-state, because the pickings are very thin here. Most people who are any good are well taken care of, as you all know.
Larry Woodrum: Bank West of Nevada is a nine-year-old bank, with about $950 million in assets. Our major change this year has been that our holding company now has banks in Arizona and California. They just opened this spring and are doing well. Our biggest challenges are the interest rates, finding qualified people and managing growth. We opened our bank with the philosophy of keeping things simple and sticking to traditional core banking. We’ve done a very good job at relationship-type banking, and it’s very difficult to keep it simple when you’re the size bank that we are. We’re just trying to keep going and keep the 20 percent growth each year and the 20 percent return on equity each year that our shareholders want.
Funk: Nevada Security Bank is about 16 months old, and total assets are about $115 million. We have a location in south Reno and another in Incline Village. Our Incline Village market is premiere personal banking with the folks who do business there, and our location in Reno is more geared to the business client. Our main issue is capital, as fast as we’re growing. We’re looking at a secondary offer, and I think we’ll bring in some more money shortly. It seems the timing for that is very good. Most folks that we talk to about the possibility are excited that we are going to have more stock available, since none has been traded since we’ve opened.
Barry Hulin: Our biggest challenge is the interest rate environment. I’ve never been a particular fan of Alan Greenspan. He seems to have just discovered that deflation is a problem. He must not have been watching the banking business, where you’ve got a perfect example of deflation: You’ve got falling prices; you have no pricing power; and you’re at the mercy of a central authority. I know a lot of banks have been working with floors under their loans, but that can’t last in the long term. If we have another 25-basis point rate [drop], it’s going to hurt an awful lot of banks. With all due respect, I wouldn’t want to be running a bank that has been started in the last two years. You have to grow so fast to get to a critical mass quickly enough just to cover your overhead. The risks are tremendous.
Mark Daigle: Yield maintenance in this kind of a rate environment, which is unprecedented, is something that everybody has to focus on. There aren’t many fixed-rate loans anymore, as customers put re-pricing pressure on you simply because there’s an alternative to refinance as rates drop. Despite that, we’ve done very well in Nevada. One of our challenges is growth management with respect to the customer base and also in finding appropriate, affordable real estate for new branch locations. Part of that is also the staff retention and development issue. Iif you want to go find good bankers, you have to take them from another bank. We’re also faced with an ever-changing regulatory environment. Banks received new powers through the Gramm-Leach-Blilely Act of 1999, and as soon as those new powers and authorities were there, people started whittling away at them again and tried to take some of those opportunities back away from the banking industry.
Brennan: So how do you manage your business if you’re at the mercy of the federal government and the interest rates?
Hulin: You probably retire. (General laughter)
Interest Rates and the Economy
Brennan: Any other comments on the interest rates – any predictions?
Guedry: Eventually, they’ll go up. That seems like a safe prediction.
Gaynor: Well, I predicted rates would go up at last year’s roundtable.
Daigle: At our last roundtable, we all felt it would be difficult for rates to go much further down, yet look where we are today. Rates are already so low, it’s hard for banks to pass much of a rate benefit out into the market. After the last few cuts, banks are becoming more disciplined in maintaining floors and in variable-rate loan pricing, more disciplined in enforcing prepayment penalties, simply because we don’t have a choice anymore. The margins have gotten too thin – the rates have gotten too low.
Hulin: They need people to start investing in capital equipment and in longer-term assets. Cutting the prime rate does nothing for that. The businessman is not going to make those long-term decisions based on short-term interest rates.
Gaynor: If they do that, it will change the unemployment situation. We’re sitting at about 6.1 percent [unemployment] right now, and that’s a huge number. The more we invest in capital, put into business, into inventory and expansion, the better off the job market will be. The feel of the market is that the second half of this year should be better than the first half. What’s going to trigger that is investment. There’s a lot of pent-up demand in the stock market right now – a lot of money sitting on the sidelines waiting. So you’re seeing some things that may signify the start of a recovery. I don’t know that we’ve made the turn, but we’re certainly into the turn.
Guldin: When we hang our hat on manufacturing, we have to realize that, as the economy declined, a lot of companies relocated out of the country. We can’t depend on selling cars, when a lot of the components of cars are being produced out of the country now, and that’s not creating jobs here.
Hulin: Moving the manufacturing jobs overseas has been very visible, but one of the dirty little secrets is that we’re starting to move a lot of service jobs overseas. When you talk to somebody about your credit card, he or she is somewhere in Asia. This trend is still kind of under the radar, but one of these days it’s going to pop up and really create a furor, particularly when you’re dealing with credit cards and personal information. You’re going to have all that information in countries that don’t have the kind of protections we do. I think there are some real issues there.
Credit Unions: The Uneven Playing Field
Brennan: We had a fairly lively discussion last time at the roundtable about the credit union issue. Is it a level playing field?
Howard: No, and it hasn’t been for years.
Guldin: It’s not going to change. They have too much lobbying support.
Hulin: The credit unions are going to get new powers, and they’re going to go make commercial loans and other transactions, but they don’t have the people who know how to do them. They’re going to end up taking huge losses and there will be a bunch of credit union failures, just like there were with the [savings and loans]. The thing will come back full circle to where they’ll get some regulation, but I don’t think they’ll ever be taxed. However, if you put all the credit unions together, they don’t even represent one big bank.
Brennan: Then, why are they such a powerful lobbying force?
Kornmayer: Grass roots support.
Daigle: As much as our customers love us, if we call them up and say the credit unions have an unfair advantage over us, they don’t care. They’re not going to write letters to Congress about that. However, contact credit union members and say, “Somebody’s trying to take away your advantageous financial relationship,” they all get fired up and send letters. There’s a huge lobbying force out there that we just simply don’t have the ability to respond to.
Daigle: Anytime you have a tax-subsidized business competing with a non-tax-subsidized business, it’s not a fair playing field. Our challenge is this: The more they try to do what we do, it’s our job to make sure we do it that much better. Because the reality is, if you can provide the product, the service, the function, better than a competitor from a quality standpoint and still be reasonably competitive on price, you’ll still be able to grow and retain your business. The way we succeed against competition is by doing our jobs well.
Guedry: In theory, that’s great, but when a third of your profits, or more, are being paid in taxes, and you’re competing against somebody who doesn’t have to pay those same taxes, pricing is considerably more favorable on the credit union side. As Barry was saying earlier, I think as [credit unions] move more and more into the arenas that we compete in – the business/commercial arenas – without the expertise to do so, they’re going to take some losses because they don’t understand that type of business as well. Their regulatory agency doesn’t understand that type of business either. It’s going to require a fairly large credit union or a handful of credit unions around the country to suffer some losses and be shut down.
Hulin: In Alaska, two credit unions got into some deals with no idea what they were doing, and the credit union people were very clever about keeping it quiet. When these credit unions go upside down, they arrange mergers. They’re not like the FDIC that marches in on a Friday and closes the building and puts a big sign on it.
Daigle: We need to promote the fact that we protect the customer through our credit quality programs, our professionalism and our knowledge of the business we are doing.
Hulin: Frankly, I think the ABA (American Bankers Association) has been obsessing too much about credit unions. That’s a reflection of bankers who do want to try and compete with them. We cannot compete with them. We cannot compete with them on car loans or mortgage loans, so we don’t. We do things we can do well, and build relationships and price reasonably.
Kornmayer: Their expertise is not anywhere near what a commercial bank puts on the table, so at some point in time, consumers are going to differentiate. When they need to go out and do something a little bit more sophisticated, they’re going to look for a more sophisticated source.
Banks as Real Estate Brokers
Brennan: Are banks going to be allowed to sell real estate?
Gaynor: Well, the real estate issue is still hot and heavy. All the Financial Modernization Bill (Gramm-Leach-Blilely, 1999) did was to try and level the playing field. Most of us in here may not even go into real estate. It may not be something we want to get into. What we want is the ability to do it, and the lobbying effort is going to be just like the credit unions. You’re not going to find our customers out there writing letters to congressmen, but you’re going to get thousands of Realtors sending in letters for every five or six letters they’ll get from bankers. Gramm-Leach-Blilely was debated, and the Realtors were allowed to give their input, but they were asleep at the switch. Now, after the bill went through, they want to say, “Stop – we didn’t understand.” They had their chance to debate it. The Realtors are very unhappy about it, because they think we’re going to take money out of their pockets.
Daigle: The Realtors right now are fighting to take away the ability for banks to sell real estate, yet there’s no prohibition for virtually any other type of business in the United States from picking up that line of business. Sears can start selling real estate, or General Motors could put out its brand of real estate agents, but they want to keep banks from doing it. We were just asking to be able to do what everyone else out there can do. In addition, I think [the new legislation] represents an opportunity for Realtors. There is a huge amount of capital now available to go into their industry. I can’t predict whether or not Colonial is going to have an interest in getting involved in a real estate brokerage line of business. At the same time, if I were, I would not try to train all my people to be real estate agents. They already have full-time jobs. I would affiliate and bring capital into play to help an existing real estate business become bigger, better and more profitable. That’s where I think Realtors are being short-sighted in terms of the opportunity represented here.
Van Overbeke: That’s a really good point. The insurance industry, especially the independent agents, went through the same thing. When they finally got past it all, they realized that what we added was franchise value for them. They had a new market in which to sell their agencies, which may just die on the vine if their kids don’t want to take over. Interestingly enough, when you start to read their trade magazines now, they all talk about “how to find your best opportunity and your local bank to merge with.”
Daigle: You’re right. The independent real estate brokerage has traditionally been a partnership or sole proprietor type of business, and those folks do have a succession planning issue.
Bradham: I’ll give you some more history on that. In the 1980s, I was involved in the Nevada Bankers Association, and we were testifying at the state level, attempting to get expanded powers. Owners of insurance agencies were testifying to limit those powers. When I left Carson City, I had the business cards of two agency owners who wanted to talk to us about us acquiring their agencies.
The Regulatory Environment
Brennan: Since we’re discussing legislation, let’s talk a little bit about the Patriot Act. How does it affect banks?
Bradham: It angers your customers who don’t understand what you are doing. You need substantially more documentation to identify customers. You may have a customer you have dealt with for 20 years. Now he has created a new limited partnership or something else that involves opening a new account, and you have to tell him he’s going to have to bring in his wife and have her show her driver’s license before she can sign on the new account.
Howard: We’re expected to observe conflicting regulations. Privacy regulations tell us we are not allowed to keep copies of customers’ identification on file. But then we have the Patriot Act that insists we keep copies of customers’ identification on file. And we have lists of people and countries that we can’t do business with. It’s an onerous responsibility, and as Mr. Bradham points out, our customers don’t understand it at all.
Gaynor: Interestingly, we have become the enforcement division for a lot of different federal agencies. We are kind of a Big Brother, even though we don’t want to be.
Hulin: The penalties are horrendous for doing business with anyone on those lists..
Daigle: There’s nobody sitting in this room who wants to knowingly or unknowingly deal with somebody involved in drugs or terrorism. We would just as soon be able to stop that flow of money. The issue is how much of that responsibility falls on the private sector and the banking industry. There are significant penalties for noncompliance, although noncompliance could be simply a very innocent oversight or mistake. Not only that, but the system isn’t perfect. We keep getting new lists because new aliases are created by the hundreds every day. Trying to keep up with those things is extremely challenging.
Guedry: It required some investment on the part of all of our banks for software to search and check for names that pop up on these ever-changing lists, and lots of time is spent on it as well.
Hulin: For the big banks, it’s millions and millions of dollars.
Guedry: Everything is relative. For the small banks, you’re pulling resources to be doing all of the checking and reporting that you’re required to do now. The government didn’t say, “Here’s a grant for you to put this in place.” They just said, “Do it.”
Brennan: So there are no contributions by the federal government to help offset the costs.
Daigle: In a sense, it’s a back-handed tax, because we have to incur the costs for enforcement of a federal legislative action.
Funk: From the consumers’ standpoint, you’ve created more problems for them because it’s more time-consuming. All of us around this room have relationships with long-term customers, but you can’t just say, “I’ve known this guy for 25 years, so I don’t need all this.” You can’t do that anymore. You have to make him come in with a copy of his driver’s license and everything else.
Howard: It’s a lot like the airline industry, with those stupid questions they used to ask us. Every time I flew, I would ask myself, “What in the world could this possibly prevent?” It puts us in the same position of asking dumb questions and checking dumb things on the off-chance that we might actually be aiding and abetting a terrorist.
Brennan: If somebody comes into your bank, though, who is on the list, and you do the transaction with him, then you’re penalized for it.
Howard: You could probably go to jail for that.
Brennan: How extensive are the lists?
Van Overbeke: Tens of thousands of names.
Hulin: You get these pages and pages and pages, and all the names look the same. They’re all variations of Arab or Muslim names or Hispanic names.
Gaynor: If you’re an international bank, like Wells Fargo, I would guess there’s a staff of at least 30 people who do nothing every day but sit there and look through the lists. I can just visualize the headlines if you missed one: “Bank Aids Terrorist.” It would be just devastating for public relations. Plus, the person who let it happen is going to probably end up being chastised – put in jail or whatever. You have federal agencies like the INS whose sole responsibility is to know the people who are coming into this country, and they can’t seem to filter everybody out. So bankers are supposed to do a better job than the federal government?
Daigle: We can’t open an account or transact business with them. But, on the other hand, we can’t call the FBI and say, “I got this guy in my lobby – come get him.”
Hulin: If you did, they would say, “Okay, we’ll be there in about three days.”
Daigle: At the same time, it doesn’t prevent anything. If you tell somebody, “Your alias is on this list, so we can’t open that account for you,” then he knows it’s time to get a new alias. He gets new identification, comes back the next day at another branch, and manages to open that account.
Hulin: How can you argue with the thought that if somebody had nabbed Mohammed Attah at some point, maybe [the Sept. 11 attacks] would never have happened? That’s what you get thrown at you if you complain about it.
Daigle: We want to do whatever we can reasonably do to prevent that flow of funds. It’s just an example of how a good principle suffered when it got to legislation. They want to make you the criminal if you don’t catch it. If they can’t catch the criminal, they have to catch somebody.