Enduring a slow economic recovery, the banking industry stays focused on getting businesses back on their feet in the midst of increasing regulations and legislative uncertainty. Nevada banking executives recently met at the Las Vegas offices of City National Bank to discuss the challenges in their industry.
Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues relevant to their industries. Following is a condensed version of the roundtable discussion.
What is the biggest challenge facing the banking industry?
Rachelle Cupri: There’s a weak loan demand. Even though the economy continues to get better, there’s still uncertainty with customers wanting to borrow and expand.
Terry Shirey: Figuring out how to serve our clients to the level that they would expect to be served with the backdrop of increased regulatory burden that we’re dealing with.
John Sullivan: The market here seems to be very heavy in real estate, construction and real estate lending, and there doesn’t seem to be a lot of good borrowers with good businesses outside of those two pieces.
How have things improved in the last year?
Cupri: We’re starting to see more contruction. There’s a lot of retail starting to go up so that does create jobs and a need for loans for tenant improvements. [Businesses are] hiring a little bit and they also need to buy equipment to support transactions. Outside of construction, we’re really not seeing a lot of opportunity.
Reed Radosevich: Luckily, real estate and land values have come up considerably since last year, which has helped, not only in refinancing on existing loans, but other banks being able to finance new projects.
John Wilcox: Over the past several years, businesses have been hunkering down, reducing debt and bringing down their balance sheets. Just the optimism of what’s going on in the economy is causing some of them to realize it’s time to invest in growth. That creates lending opportunities for banks. It’s slower and with smaller steps, but we’re seeing companies want to expand and invest in growth and that’s a positive.
J. Sullivan: Bad loan charge offs are very low. Past due loans and non-accrual loans and past due principals are falling precipitously. Borrowers are performing. Borrowers are healthier today, they don’t leverage as much and that gives them cash flow.
Can we expect any new banks in Nevada?
George Burns: The FDIC has only approved two new charters since the downturn in 2008. Here in the state of Nevada, over 50 percent of our state-chartered institutions went down during the crisis. There was a total of nine banks included in that.
Ryan Sullivan: The good thing right now is the banks that are around are stronger than they have been in a while. Earnings are up, capital is very high and banks have a lot of liquidity. We’re ready to play our part in the continued economic development. Competition has changed, from the perspective of a small bank; a lot of the larger banks have moved down the scale and are more actively focused on small businesses.
Radosevich: With the improving economy and rising real estate values, banks have gotten more aggressive in their lending abilities.
Cupri: The regulatory environment is very tough to take on, so you’re not seeing new banks come in for that reason.
What regulatory issues Face the industry?
Gene Galloway: It’s not necessarily the written rule, it’s the implied rule that’s the problem. There should be strong oversight. We work hard with regulatory communications and good will.
Burns: The biggest problem most state regulators face in trying to maintain a balance on their community banks versus the megabanks. [Regulations] coming out of Washington, DC these days are one-size-fits-all. We are constantly attempting to make sure it becomes a tailored fit instead of trying to apply all the megabank rules. It’s really putting a huge burden on medium and small sized banks. We have to constantly battle to make sure that doesn’t take place. Our biggest concern at the state level is that there is going to be this entropy of forcing consolidation into larger and larger institutions because of the infrastructure costs of complying. We’re going to see fewer local banks because they just can’t make the spread operating in a small environment. It’s very difficult because overhead costs can be large.
R. Sullivan: If you go back to 1985, there were 13,000 banks with $100 million or less. Today, there’s about 2,000. That difference is even more pronounced in Southern Nevada. If you go back to the end of 2007, there were 18 banks in Clark County that had some degree of local ownership. About a quarter of them are operating today.
Burns: We also regulate credit unions in the state and they have a very particular market niche they operate in. Their portfolios are primarily composed of residential real estate lending. They took the biggest hit when the downturn occurred. They have been getting into the retail area quite a bit in making, particularly, auto loans. There aren’t too many banks that actively do that. They haven’t escaped the regulatory scrutiny because everybody is subject to the federal financial institutions examination council. We have applied the same types of standards, although slightly different, to them. When it comes to commercial lending and business loans, they have caps on that as to what they can do. Commercial banks do not. It is not a level playing field on the tax issue, but credit unions also have a lot of restrictions on them.
What effect would the Margins Tax have on Nevada?
Galloway: It would have an impact on every one of our clients. Therefore, it has an impact on our Nevada operation, every one in this room and everyone living here.
Wilcox: We’re at a time in this state where we have just come out of the most horrific economic cycle we’ve ever been through. We talked about how people are getting better and their balance sheets are cleaning up and ready to invest in growth. However, if business owners are suddenly faced with a tax situation that’s more onerous than California, they’ll rethink what they’re doing. Just the uncertainty and possibility of that tax being passed is already changing the behaviors of some business owners in terms of growth strategies and investments in the community. I just want people to read the bill. If you read the bill it pretty much spells it out and it’s pretty easy to figure out from a business perspective whether it’s a good or bad thing for the economy. It could be a game changer.
Cupri: We have to do our job to get [information] out to business owners and have them get it out, too. It’s not that we’re not supporting what the proceeds will be going towards, but we need to do it a different way.
Is it a good time to borrow?
Wilcox: You have an interest rate environment and values lower than you’ll probably see again in your lifetime. It’s the perfect convergence of opportunity.
Radosevich: Banks are healthier now with healthier balance sheets so they’re looking to grow their loan portfolios as well.
Shirey: Margins are thin. It was a good time last year to be borrowing and it’s an even better time now. If you can do it, you’re going to get really good terms and rates.
How does the advent of bitcoin affect banking?
Shirey: The New York Attorney General was looking at how it’s going to be used for money laundering and there are all these rules that the banks are supposed to be responsible for. It’s (bitcoins) totally unregulated so it’ll be interesting to see how the world governments respond to it. It’s going to open up a lot of problems.
Burns: One of the pieces of legislation that’s going to be presented in the upcoming session contains a provision to bring all forms of alternate payment methods including virtual currencies under regulation. I want that in our state laws so, as it emerges we can respond to it quickly and not have to wait two years until the legislature meets again. We don’t want to kill innovation, but we don’t want something that is going to harm public interest.
Are banks more cautious today?
Cupri: Banks used to do speculative financing where we would lend in anticipation that the borrower would lease out the rest of the building. Now, banks and developers are more nervous about that. They don’t want to go into a project that maybe won’t lease, so you see a lot more preleasing that happens even before the developer brings the package to the bank. Because there is so much vacancy everywhere else, they want to make sure that project is a viable project before they ask for financing.
What are the obstacles to lending in today’s environment?
Wilcox: You have people who have a two-year credit history that’s spotty. They’re getting better but they haven’t gotten there yet. They have to wait a little bit longer and demonstrate a positive cashflow for a bit longer for a bank to be able to loan to them within the guidelines. For the past seven years, there are people who have systematically reduced debt and they don’t want to dive in until they know it’s the right time. There is uncertainty with the Margins Tax Initiative. There are some good borrowers who are healthy and ready to jump in, but the uncertainty is making them stay on the sidelines.
Cupri: Banks are doing loans but we’re not replacing them fast enough. When you look at the balance sheets, sometimes our loan balances go down because we’re not able to replace the runoffs, the principal payments and the payoffs faster. The demand is not there.
R. Sullivan: Some business owners question the relationship they have with their bank if they’ve struggled for the past few years. They do not want a revolving line of credit because they built their business around it several years ago and when they needed it the bank took it away.
What makes a good client-banker relationship?
Radosevich: You need to educate your borrowers. It’s part of our role to help them understand what it takes to be a qualified borrower and not to over-extend them. [We need to] give them some advice and guidance, versus just being there as a commodity.
Wilcox: What we’ve learned in the last seven years is that the bankers who lost their way are those who weren’t investing in the people that they were banking with. Our job is to become a silent partner in the business of those people who we bank. That means we’re meeting with them on a regular basis, giving them advice and counsel and, if we’ve done our job right, they’ll become more profitable and so will we. That’s how the partnership works. We stopped telling that story six or seven years ago because we got on the defense. Today, it’s getting back to what made this industry great and letting the clients know they have an advocate.
Galloway: Sometimes the right thing is to send them to the competition. I refer business to other banks that didn’t fit our model and would be better served somewhere else. Bankers need to do that instead of just saying “no.”
Is finding new talent an issue?
Wilcox: We have to be intentional about it and look for young people who want to get in this business. For the last several years if they read or listen to the news, this is the last business that they’d want to go to work for. We restarted our training program three years ago. We have formalized mentoring programs where we put an executive with a young up-and-comer, and we started our relationship academy. They have to test out of it and get certified every year to show they’ve mastered the concepts of the program. We’re a mid-size bank and we’re starting to see more mid-size banks go that way.
Galloway: The problem is the people who want to go into banking now want to be on the lending and sales side. I have guys who make two to three times what I do now and would make great community bankers. But, I’m not sure they want to take a 70 percent paycut to pay their dues to be a CEO in 15 years.