CEOs of Nevada banks met recently to discuss issues vital to their industry, which included topics such as staffing, competition, fraud and taxes. Connie Brennan, publisher of Nevada Business Journal, served as the moderator for the event as part of Nevada Business Journal’s monthly Industry Focus series, which brings CEOs together to discuss pertinent issues in their industry or profession. Following is a condensed version of the discussion.
How concerned are you about competition from credit unions?
Corey Johnson: We understand the credit unions’ original genesis was to provide services to borrowers with a common bond, and also to provide access to credit for those of modest means. That was why they were granted a tax exemption. We’ve seen them move past that charter, and now credit unions are doing everything we’re doing. This hurts us because they don’t have to pay 34 percent in taxes. The primary issue is they’re doing loans that are competing with us, especially in commercial lending, and they have an unfair advantage because they don’t have to pay taxes, which means we can’t compete on price. I just got through with a meeting in Washington D.C. about this issue. It really is a national problem. I think banks are making headway in Congress and seeing some movement. The other thing is that credit unions don’t have to comply with the Community Reinvestment Act (CRA), which requires banks to make investments in local communities. Multibillion-dollar credit unions are going into our markets doing SBA loans, commercial lending, leasing, they’re doing bulk management, they’re doing all the things that a bank’s doing and yet not paying the same price, either from a tax standpoint or from the regulatory side.
Edward Jamison: Their power base in Washington used to be unstoppable, but I think we’re making headway in getting our story told in Washington. People are starting to ask, “Why are they doing this if their original purpose was to provide credit for those of modest means with a common bond?” Now they really flaunt it, advertising, “If you can breathe air, you could be a member of a credit union.” Well, that’s not the purpose of the common bond. I think people are getting a little offended by that. There are some members of the House who are very strongly opposed to expanding their powers.
Peter Kingman: Credit unions are now starting to qualify their customers. Instead of serving all who come in the door, they’re going up the demographic scale, and getting the kind of people banks might be focused on. Consequently, it’s about the level playing field. If the playing field doesn’t give them an advantage, then I think everybody in this room is ready to compete.
Connie Brennan (Nevada Business Journal): In responding to complaints from banks, people from the credit unions have said, “If banks aren’t doing well, why don’t they change their charters and become credit unions?” amison: That’s easy for them to say. Likewise, if they want to be banks, let them change their charters. If they want to do what we do, then let them fulfill the CRA requirements, the regulatory requirements, the stockholder requirements – all of those things – and pay taxes, too. Let them be real banks, not banks with a credit union veneer.
Peter Atkinson: Some of them have tried. In Texas and Michigan, credit unions wanted to switch from being credit unions to being a mutual savings bank. Their own regulatory agency did everything they could to torpedo that effort, so they couldn’t do it, but they recognized that they wanted to do more banking business and wanted to stop being credit unions.
John Guedry: It’s an easy comment to make, because they know it won’t happen. Shareholders in banks across the country aren’t going to vote to change their charter.
Jackie DeLaney: I think we need to point out that the banking industry doesn’t have a problem with credit unions being what credit unions were intended to be. There are small credit unions that really do serve their membership charter, and no one has an issue with that. If they do what they were designed to do, then the banking industry is fine with that.
Guedry: We have received calls from credit unions from out-of-state wanting us to participate with them on loans outside their market area. That’s really rubbing it in. Naturally, we said no.
Brennan: Are credit unions getting more aggressive?
DeLaney: Very much so.
Atkinson: Weren’t they also requesting to reduce the capital requirement, which makes them a much higher risk to insure?
Jamison: They’re trying to pass legislation to expand their powers even more than they are today, which would give them more ability to do commercial lending and reduce their capital requirements. You have to understand that they insure themselves, really. When they start taking away loans from commercial banks, we have an issue with that.
How big an issue is employee recruitment and retention in your industry?
DeLaney: It continues to be a problem across the board. We’re finding it with compliance people, with Spanish-speaking people, even with tellers. We recently ran an ad for tellers, and got hardly any responses.
Brennan: Do you have a pool of qualified people who just jump from bank to bank?
Tyler Olson: As we all draw from the existing pool, we’re all stealing from each other. There’s a limited supply. Bringing in new qualified people is a challenge in the lending area. We’re also seeing it in the front-line people, because they are so important to our customers.
Brennan: Are you training a lot? Are you hiring kids out of college who show potential?
Olson: We have an intern program in place, from tellers all the way up. We grow our own.
Brennan: Do you think it’s a national issue, or is it more prevalent here in Nevada?
Phillip Burns: It’s national. Thereare banks in the Midwest that are experiencing some issues, but some of those have been in the making for some time. Regulators used to be a great resource of employees for bankers, as they interacted with regulators and made personal connections. However, there are a lot fewer regulators now. Also, large banks used to have very broad training programs, so you could go to them when you needed somebody. It’s always better to hire somebody with a broad area of expertise, and they’re just not there. Even the very large banks hire people and send them down a career path that’s very specific, and that’s the only aspect of banking they ever get exposed to. So, it’s a combination of things, and the end result is that community banks have a chronic shortage of qualified employees.
Atkinson: Our bank is looking outside Nevada in areas of the country that are not as economically vibrant as Nevada. But it’s an expensive gamble to bring in loan officers you don’t know, who don’t know the area and who don’t bring in local business. Then you have to pay to relocate them. Some of us have done that, because it’s been so tough to find people locally.
Brennan: Has it been your experience that people will jump ship for a few thousand dollars a year?
Atkinson: No. Obviously, money is a factor, but they’re also looking at opportunities. My bank is very small, and there’s only so much room to advance. Some of the larger banks have a much broader base, and there are more opportunities to be promoted. Very rarely does anybody make a lateral move without additional funds, but that’s not the only motivating factor.
Banks are currently paying a higher tax in Nevada than any other industry. Is there hope on the horizon to get the bank tax repealed?
Jamison: Some candidates say they will work towards parity. It’s hard to justify that tax when the state has a huge surplus of half-a-billion dollars. Why segregate one industry for more tax than others?
Guedry: Working to repeal this tax is not just for the protection of our industry, but it’s for the protection of the entire business community. We don’t want to set a target on any one industry, because the next time legislators come up short, instead of trying to manage a budget, they just look toward that industry as a target. I think for the health of the business economy, we should be working to create parity in the tax structure.
Atkinson: I believe one of the senators was quoted as saying, “Well, at least we got the banks.” That certainly shows we weren’t the only industry that was being considered for extra taxes.
Guedry: Legislators have been working with us to try and get this reversed, and I think they will continue to do that, because they recognize that it’s an unfair tax.
Wal-Mart, Home Depot and other large corporations are trying to offer banking services at their retail locations by forming “Industrial Loan Corporations (ILCs).” How will this impact banks and consumers?
DeLaney: It’s a special type of charter that was actually established some time ago, but not many people took advantage of it until they realized there was an opportunity to create a different sort of financial institution. My concern is that they’ll compete for our business without being held to the same standard as banks. They’re not regulated by a holding company, so they can be owned by anyone. We can’t. We have to be held by a company that’s regulated by the Federal Reserve. They can be owned by Wal-Mart, Home Depot, or anybody else. And then there’s the Community Reinvestment Act (CRA). The local ILC bank is getting credit for contributions the parent company is making in other parts of the country. For example, the national headquarters makes a $1 million donation to some charity, and they’re counting that in the CRA of their bank in Nevada. They’re getting these outstanding CRA ratings because of something that’s being done by their corporate non-bank entity, and that isn’t benefiting our communities at all. The biggest issue for me is that it’s a charter that’s going to allow them to do things because of their corporate structure that we would not be able to do because of the regulations that apply to us.
Brennan: Are consumers at risk from these ILCs?
DeLaney: At the bank level, they have the same FDIC insurance coverage that we provide. For me, it’s more of a competitive issue. If they want to compete, they need to play ball the way we play ball.
Brennan: Is there legislation pending to deal with this?
DeLaney: At the federal level, they are re-evaluating it right now to see if they can close that gap, because there is some mixing of the commercial sector with financial services.
There have been two or three mergers lately of bank corporations holding Nevada banks. Do you think this is the start of another wave of mergers and acquisitions?
Jamison: We hope there is a wave. Mergers and acquisitions follow any consolidation of the market. There are fewer banks potentially to be merged. Western Alliance took two out of the market [Nevada First Bank and Bank of Nevada]; we’ve taken two out of the market. However, five new banks are now being chartered. So, is there going to be a wave? I don’t know.
Johnson: When looking at mergers and acquisitions, you need to consider the size of the banks that are being acquired. The high cost of government regulations and compliance makes it attractive for smaller banks to sell out to a larger bank to help bear that cost of compliance.
Brennan: I’ve talked to a number of bankers who say when they form banks, “I’m in this for the long haul.” But you suspect that, in the back of their mind, they’re planning to do a four- or five-year deal and turn it around, yet publicly they won’t admit it. Is this market ripe for a lot more banks coming on line that will eventually be bought out?
Kingman: When we started our bank five years ago, 10 banks started in that year. So five banks, if that’s all that’s done this year, is really a fairly modest pace. What we’re really talking about here is economies of scale and market share, and a bank can get to a certain size where it has a market momentum that can carry it to the next level. Probably in this market, that’s a $500 million bank, and at that point, there’s a decision whether to sell out or to hold course. That really is a decision made by the board and shareholders of that bank.
How big a concern is banking fraud?
Johnson: It’s huge.
DeLaney: Fraud is a huge business, and it’s ever-changing. There are new technologies coming out to help us in the long term. They can flag unusual activity so we’re not accepting fraudulent deposits and other transactions. However, it involves a lot of extra cost, time and energy to do that.
Guedry: You’re constantly having to stay on top of Internet scams, and it’s tough. You constantly have to be diligent.
Brennan: Do you think Nevada is worse than other states because of the gambling here and the transient nature of our population?
Pat Moore: It’s the only market I’ve ever been in where you might see a backhoe carrying an ATM machine down the road at 3:00 a.m. In our offices we’ve had five or six remote ATMs picked up by backhoes and carted off. So it’s not even that sophisticated. In one case they brought the backhoe back to the equipment company they had stolen it from and left it there after they got the ATM.
Brennan: Did you catch him?
Moore: I don’t think so. We only caught one out of the five. Robberies are really a big problem, too.
What changes have you had to make to accommodate federal security requirements enacted after 9/11? Is compliance costly?
Guedry: It’s very costly, because you can’t do it manually, so you have costs for computer systems and software. In our small bank, we have one person who spends half his time focused on reporting all the required items of banking transactions.
Atkinson: There are potentially huge penalties if we don’t do it right.
Brennan: So the bottom line is that the burden is put on banks to monitor suspicious activities, and there’s no reimbursement.DeLaney: Yes, and it’s very expensive. There are also new regulations in the works regarding disaster recovery that were proposed after Hurricane Katrina.
Jamison: Part of that is having procedures in place in case employees can’t get to your location because of a natural disaster.
DeLaney: The government may talk about regulatory relief, but for everything they try to relieve, they create another problem. So truthfully, I don’t see it changing. I think if you’re going to be in this business, you have to know it’s a highly regulated industry and learn to live with that. It’s going to continue.
What will be the biggest challenge for banks in the next five years?
Guedry: I would say the biggest challenge is going to be hiring experienced people.
Kingman: I agree with that. It’s about people: getting the competency, getting the experience and getting the longevity in the marketplace, and that’s where I think each one of us competes very fiercely.
Guedry: Partially because that takes time to develop. It’s not just something you can teach. It requires some years of experience. It doesn’t happen overnight, and the industry’s quick, the market’s quick.
Kingman: There’s a very fierce competition for deposits, and that goes upstream a little bit to the level of marketing – coming up with new products that have appeal to the consumer and making sure there is an economic justification for each one of our enterprises. Just to pay more money for deposits doesn’t really improve the profit margin, and each one of us is focused on our profit margins. Our costs are going up, and they’re not easily passed through.
Guedry: But would you agree that it’s somewhat cyclical because we’re in a rising interest rate environment and people are looking for higher yields?
Kingman: Sure it is, and it’s not hard to make money when deposits were costing 1 percent, but when you get up to the levels of today and if it goes beyond, you’re talking about interest rates. What’s going on now in the Middle East will increase the cost to our federal government and what will that do to the budget? What will a renewed pressure on the deficit do to inflation? We may be in a temporary hiatus for the moment on interest rates, but I think the Fed has learned to react quickly [to raise interest rates] if inflation rears its ead.
Brennan: What’s your take on where the interest rates are going to be this time next year?
Kingman: The scenario can go either way, but I don’t think they’ll be down. If government spending does accelerate, they may go up.
Atkinson: There have been articles in banking magazines that the future for us won’t be the same as the past. We’ve always mademoney on the interest margin. In the future, we have to look more to fee income from other services and other products. We can’t continue forever trying to survive on the difference between what we pay on deposits and what we charge on loans.
Kathy Maynor: I recently read that Wells Fargo now gets 50 percent of its income from fees and services.
Brennan: But isn’t the market resistant to those fees? Doesn’t everybody want free checking and free everything?
Atkinson: That’s true, but there are other things, like online stock market trades, wealth management, managing assets and pension funds. The customer is used to paying those fees to somebody, so we’re just competing with a different group of folks.
Guedry: The entire financial services sector is starting to cross-sell their services, and ultimately I think we’ll see the financial industry offering more services, which is good for the customer.
Atkinson: We’re adding what had not historically been bank products to our portfolio – things we can do for our customers. We’ve known for years that the more services you supply for a customer, the less likely you are to lose that customer.
Olson: The key is to expand the relationship, and if that relationship calls for a new service and I can do it, I will.
Burns: Some of it is customer-driven. Studies have shown people don’t want to go to nine different providers for financial services. Banks have been the provider of choice for consumers, and it’s very natural that they want to be able to get a whole realm of financial services there. It’s good for bankers and consumers.
Brennan: Doesn’t that bring up another whole set of government regulations?
Moore: If you’re going to offer investment products or insurance products, you come under those regulatory concerns, and you have to respond to that. CitiBank has just about every service you can think of, so the large banks are setting the tone, and we’re competing. One-stop shopping has been the direction of the industry. Now you have CPAs who are offering investment services. We’re all competing for the same customer.
Once you build a relationship, are clients loyal or do they just bounce from bank to bank?
Olson: Generally, they’re fairly loyal.
Moore: If you’re talking about the senior citizen, the CD rate shopper, there is absolutely no loyalty. They have banks on speed dial, and they’re going to call around until they get the best deal they can get. (Laughter) They’ll move $200,000 for .01 percent. However, if you’re talking about business clients, there’s a lot of loyalty in those customers. It’s very competitive. You really have to beg and cajole and just keep showing up.
Guedry: Our customers are a cross-section. You’re going to have some customers who are rate-sensitive, and you’re going to have some customers who are relationship-oriented. Most banks would like to have relationship customers because we work hard to develop that relationship and you don’t want to lose them, but we also understand that there is a segment of the market that is rate-sensitive, and we have gear products towards that segment as well.
Kingman: The relationship is the basis of the franchise value of each of our banks. True core deposits are a premium on acquisition. In an acquisition, what the acquirer is looking for is expanding its franchise value with brand loyalty. So how do you build brand loyalty that starts within a relationship? How do you grow a relationship to add value to that relationship? That’s the question each of us labors under every day.