The past several years have brought many changes to the banking industry including new security threats, a distressed market and changing customer expectations. Nevertheless, the industry works to push through these issues and carry on into the future. Recently, executives representing banking met at the Las Vegas offices of City National Bank to discuss what the future of banking looks like and the lessons learned from the past.
Connie Brennan, publisher and CEO of Nevada Business Magazine served as moderator for the event. These monthly roundtables are designed to bring together leaders to discuss issues relevant to their industries. Following is a condensed version of the roundtable discussion.
What is the biggest challenge this industry faces?
Reed Radosevich: Besides compliance and a new regulatory environment, the biggest challenge for most institutions is a low-interest rate environment because it compresses the margin on foreign deposits.
John Guedry: In addition, slow job recovery has really held the economy back.
Ryan Sullivan: Sustainability and continued profitability are probably the biggest challenges for the industry for a variety of reasons.
James York: The recovery of the economy is definitely a challenge given the fact that there was a lot of real estate lending in the past; the regulators are still very controlling about that.
William Uffelman: My job is keeping the association afloat. It’s these guys that are under pressure and the association is under the same pressures. Coming up in the November 2014 elections is a so-called legislation initiative, a margins tax. The banking industry has the privilege of kicking in the first $5 million in year one to get the state geared up to begin collecting the margins tax. I’m on the team of folks who are coordinating that position. It’s not that we’re opposed to funding education, but a margins tax in that bill is the wrong way to go. Then on the other side there is all the regulatory issues and the foreclosure environment here in the state, particularly in Southern Nevada.
John Sullivan: I would have to agree, it’s the net interest margins and the regulatory environment [that are challenging], especially the uncertainty. The things that we would like to do, we don’t want to do because we don’t know what the rules will be in 2014 or 2015. Those affect the industry as a whole and they’re a subset of challenges depending on the size of the institution within the industry itself.
Terry Shirey: Everybody has summed it up pretty well, especially industry-wide economic challenges like net interest margin. It’s more acute here in Nevada because historically there’s been such a reliance on real estate for the economy, and especially for banks.
John Wilcox: The pressures on the margins are huge and finding ways to replace that is huge. There’s uncertainty – not just for us but for all of our clients – trying to determine how to plan their future and how to respond to a future that’s uncertain. It’s a challenging environment.
How does the health of the industry compare to last year?
Arvind Menon: Things are marginally better this year than last year. What we’re also seeing is there is more competition. More banks are willing to lend now, and it’s getting aggressive. Pricing has become a challenge especially for community banks, where cost of funds is higher than a regional or national bank. But I think conditions are a little better. I wouldn’t go out and claim that things are so great but I think it’s slightly better. We’re all optimists, that’s why we’re here. We expect the next year to be better.
Wilcox: And “better” is a relative term, you know, it’s not going to be pre-2007. Marginal is the key word. It’s not going to be a leap. It’s going to be a slow creep up, but we’re seeing signs of life. There are people that are starting to think about reinvesting and that’s a good thing. Real estate prices have certainly helped a bit but it’s going to be a slow, steady growth.
Radosevich: The increase in real estate values over the last year have certainly helped in being able to refinance and restructure some real estate-secured loans. That has worked in the banks’ favor.
Shirey: I think what’ll be interesting is what’s going to happen to loan demand as interest rates rise. We’ve all been fighting over deals as people are refinancing into lower cost debt. As rates begin to rise, what’s going to happen to that activity?
Has the image of the banking industry improved?
Guedry: In part, the rhetoric that we heard in the national news daily, where everything that went wrong in the economy was blamed on the bankers, was a really broad-brushed stroke of anybody in the financial services sector. Most of the problems that occurred were in the investment banking world and Wall Street. Commercial banks, the community banks, the credit unions – if you were a financial services company you were lumped in with that and the media just jumped all over it. Certainly the politicians weren’t raising their hand taking credit for it, but they were a big part of it as well.
Ryan Sullivan: We’re climbing out of that though. We obviously took a reputational hit in terms of the industry in the past several years. But it’s really returned to the basis of what we do, which is still the role as a trusted advisor with our clients and not necessarily focusing on transaction by transaction, but looking at a more long-term approach.
Is finding qualified borrowers still an issue?
Guedry: It’s not just a matter of finding qualified borrowers, it’s finding borrowers that are interested in borrowing. Right now many business owners are in the same holding pattern we’re in. They’re waiting for something on the horizon to show some signs of sustainable improvement.
Radosevich: We still see a lot of borrowers and businesses de-leveraging, so demand has picked up modestly in certain industries and sectors and not just across the board.
John Sullivan: One thing that we have seen with borrowers and loan demand is that they’re much more realistic these days, They days of 80 percent loan-to-value going in are gone. Now, at least at our bank, it’s in the 50 to 60 percent range, which is much better for the bank and certainly takes the heat off of us from the regulatory reviews. Expectations are more realistic. [Borrowers] don’t go into a bank expecting 100 percent financing or 90 or 80. They’re much more reasonable with what they expect and they’re concerned about becoming over-leveraged again and suffering the fate of their predecessors.
Have regulations and Federal oversight eased up at all?
Uffelman: Depends on the status of your bank.
Gene Galloway: Over the last four or five years the regulators have been nothing but fair with us. Hard? Yeah, [but] normally for the right reasons. In defense of the regulators, they’re getting tremendous pressure from the political people and I think that’s where the disconnect is. They’re in a no-win situation and we in our industry have to work with them to make them look better. If they’re too loose, we pay the price, but if they’re too harsh we pay the price. It’s really a partnership; I don’t think a lot of people historically have looked at that.
How big of an issue is security with new technologies coming out daily?
Ryan Sullivan: The rate of change in technology just seems like it is increasing exponentially so that is an issue on the risk side and potential losses and fraud is a multi-billion dollar cost to the economy. But, it also presents an opportunity. We’ve found ways to increase productivity and efficiency and deliver services. Even for small banks, there is available lines of technology that just didn’t exist a few years ago.
Uffelman: I’m on the attorney general’s cyber crime task force. You sit in there with the computer experts and law enforcement’s computer people and it just scares the beejeezus out of you. Everybody spends a lot of time [working on this]. The small business man that uses Quickbooks and Gmail or has a website, they aren’t doing that. The ability of the bad guys is to introduce something into his system that doesn’t affect his system but now he talks to the bank. And, welcome aboard. [Businesses have] got to keep up with software, spyware, all of the protection systems. If they have questions, talk to the bank.
Galloway: You have to take them seriously and I don’t think a lot of small businesses do.
Guedry: One of the areas we all deal with is attempting to stay a step ahead and add new protections for the customer. Some of those create inconveniences; password replacements and signing on to systems and limitations that they have and customers get frustrated by that. We try to explain to them, this is for their protection. Unfortunately, not everybody is doing the same level of diligence in protecting the customer. They go find somebody that isn’t and that’s when they expose themselves. One of the things we try to remind customers is, even though this is not as convenient or as simple to use as you’d like it to be, there is a reason for it, we’re trying to protect your data, your accounts, your money.
Wilcox: Our job is to be a trusted advisor; all of us try to do that. This is one of those areas where it’s really critical. It may be a little bit clunkier but it’s for your benefit. Our job is to advise you on what’s best for you and your business. It may chip into that service level because you have to change your password multiple times. It may mean you need to update your security systems. It may mean you need to question your employees and colleagues from time to time. That’s the nature of the world that we live in. If we’re paying attention, we’re changing them frequently. We’re asking about transactions that don’t make sense and are willing to question anybody. Your team, the bank. That seems arduous to some folks.
Galloway: If we don’t do that and they do lose money, they’re going to call us and say, you lost my money.
Is staffing an issue?
Menon: We lose people every once in a while for whatever reason, they move across the street or the commute is long, whatever it is, people change for different reasons. It’s not always because they’re unhappy with their current employer, it’s just things have changed. It’s a lot harder now to get people to move. I’m sure all of us feel the same way. There was a time when you hired somebody and they’d say, “Oh, I can bring a $20 million book of business with me” and then I’d get about $15 or $18 million of that twenty. Not anymore; today you cannot count on it.
Ryan Sullivan: I thing the challenge from a staffing, personnel aspect, is we’re competing over good, quality relationship bankers but what’s that next wave? Who are going to be the next generation of bankers that are going to take over? We know that it’s highly regulated, that we’ve taken a reputation hit over the past couple of years. Who are the people that are coming out of college that really are excited about becoming a commercial banker? That’s the challenge as an industry we’re all going to have to overcome.
York: From a small banker’s perspective on hiring issues, we don’t need that many senior people and compliance people, we just need a couple; they’ve been available for us to hire. What I have found on the lower level, when you’re looking for new accounts and tellers and those type of positions that what I’m getting are a lot of resumes from senior people. They want to come in as a teller, new accounts or lower level position and are way over qualified. It just doesn’t work out when you hire somebody that’s used to working at this level and now you need them working at this level, it’s not a good mix. It didn’t work out and we’re back on the street looking. Our challenge has been more at the entry level.
Will the industry be in a better position this time next year?
Ryan Sullivan: There is cause for cautious optimism now. There’s been moderate improvements. We still have a lot of work to do for the industry and the economy as a whole. But, we’re going to see some year over year improvements in the next few years.
York: We’re better this year than we were last year and next year we’ll be better. But, it is a slow crawl.
Galloway: You’ve got two issues. You’ve got a macro banking environment, record earnings. Then you’ve got Nevada, a micro banking environment still struggling. We’re evolving here. You’re not going to get all the construction jobs back and you’re replacing the same number of jobs with lower earning wages. That has a trickle down impact. There are a lot of macro and micro issues going on.
York: That’s very true. Wall Street has recovered much quicker than we have. Main Street has been really slow [to recover] and that’s where the jobs need to be created and are going to be created. We know that the GDP is driven 75 to 80 percent by small businesses. Wall Street doesn’t lend to those guys, we do.