As the state bounces back from the recession, Nevada bankers agree that the outlook for their industry has improved in recent years. However, healthier industries have their own challenges such as new regulations and ambitious competition. Recently, decision-makers in the banking industry met at the Las Vegas offices of City National Bank to discuss these challenges to their industry.
Connie Brennan, publisher of Nevada Business Magazine, serves 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.
How has the industry been Improving?
Kirk Clasusen: Your question almost implies the financial institutions themselves are under duress, and that’s not necessarily true. There are a few out there, but these are healthy institutions here. It was the economy, whether it was a business customer or consumer that was struggling to figure out what was going on. Uncertainty played a big piece of that; a lot of that certainty is starting to come back. That confidence is coming back. We’re starting to see deals that are more measured now. It’s not land grabs and curb-side auctions, and hopefully that never happens again.
John Wilcox: I saw a report from one of the chief economists at the state saying that our employment should be at pre-recession levels by the end of 2016. Think about that. That’s a big deal. Job growth is up. If you drive around the city, you can see all the construction going on and projects have been started. Last year, we had the first huge speculative industrial building that was built in eight years. So the market’s improving. We’re not printing money yet, but I don’t think any of us want to. I think we need to have slow, stable, sustainable growth.
Reed Radosevich: I think problem loans have certainly decreased and have worked their way, for the most part, through the system.
T. Ryan Sullivan: Even though Nevada has been through a lot, the banks that are here have higher capital ratios than any other bank in any other state in the nation.
What regulatory issues is your industry facing?
George Burns: The main focus we’ve had is to try and measure the response to the financial crisis and to moderate the reaction so it isn’t an overreaction of trying to make “one size fits all” [regulations]. With regard to bank regulation, there’s a really big difference between the too-big-to-fails and community banks. We’ve been fighting to try and make sure that distinctions are made in that regard.
Phyllis Gurgevich: What we see with the members of our association is that they’re all vastly different. Finding that balance in regulation and legislation so that it’s not a one-size-fits-all means we’re meeting the needs of the diverse industry.
John Kley: I’m a little bit worried about the consumer protection group that’s out there and what they might bring to the table. They seem to be throwing a wide net. I’m wondering how that’s going to make us change our operations and deal with everything.
How has competition affected banks?
Radosevich: On larger deals, a $5 or $10 million commercial real estate deal especially, the life insurance companies are becoming very competitive again in the non-recourse arena. They were out of the market during tough times, and now there are probably fewer qualified borrowers than there were in the past. Now everybody’s focusing on the same top clients.
Wilcox: In many communities, [credit unions] are larger than community banks. Originally, they were just little small town options, but today they are competing with financial institutions and should be under the same scrutiny as the rest of the financial institutions in those markets.
Sullivan: Locally, they’re already competing against us on commercial real estate. In reality, there’s only a few credit unions that are up against the business lending cap, but they’re aggressive and they’re mega credit unions that are billions in size.
Burns: In this state, we have credit unions that have a field of membership that’s the entire state, and are as big or bigger than most of my state community banks.
Clausen: Eventually, folks at the federal and state level are not going to be able to ignore that piggy bank. It starts to look more like a bank, maybe even sounds like a bank at times, so it should be more subject to a bank’s [regulations].
Robert Martin: I think the key is developing a relationship with your clients. With everything being equal, the clients that you build relationships with realize I’m not transaction-oriented, I’m relationship-oriented. That’s the big difference at the end of the day. Their deal might be better than mine, but [the client] might be okay with that.
How did the Industry fare at the legislative session?
Gurgevich: We had what would be deemed a successful session. Specific to taxes, the bankers went into session clear that they supported the governor’s education plan and recognizing the need to fund it. We all understand that we don’t really get to pick our taxes, that is a decision the governor and the legislature are tasked with. Our message remained consistent. We stood ready to pay our fair share, and felt that all business should be taxed fairly. Banks shouldn’t be singled out, no industry or business should be singled out. We would have liked relief from the punitive branch tax and the higher MBT rate and that hasn’t happened yet.
Clausen: It’s about educating folks that make policy for us but have never been in our industry. I really believe education is going to be increasingly important because there is a lot that goes on politically, a lot of misinformation that gets sent out there, about what banks are and what bankers are about.
James York: They mix up the main stream banks with the wall street banks and place us with the same blame. That still is a prominent thought, even in our politicians who are just regular people who run for office and are trying to support their communities. We do have to educate them and we never had to do that 20 years ago. The credit unions do a phenomenal job of saying this is what your credit union does for you. We need to do more of that in banking. Look at the jobs that are created. Then how many charitable donations and time do we give to our community? These are the things that we need to start talking about.
Clausen: On the branch tax, we are making progress because more and more folks are becoming aware of that. At the end, what is really interesting is that conversations with customers, once they understand the branch tax concept, get concerned about what that could mean for their business and their industry if they have multiple locations.
Gurgevich: Bank customers are also concerned. They want branches in their communities so as they learn what this branch tax really is, everybody gets educated, not just our legislators, but our communities.
Martin: It will be interesting to see the impact that Carson City has on the growth of our communities in general, from a tax standpoint. Will it impact jobs? What’s the consequence of it? I think we would all agree that education is extremely important. We need to fund education in some way, shape or form.
Has the definition of “Qualified Borrower” Changed?
Wilcox: I don’t think it’s changed. People, like several institutions, have moved through the tough times and cleaned up their balance sheets and they’re financially at a point where they are credit-worthy. The demand is up, but there’s still going to be some residual effect when you go through what we’ve gone through in the last seven years. There’s a lot of people who did not get through unscathed. There’s a time they have to go through to clean themselves up to become credit-worthy.
York: It means a lot to us when somebody has come through this and they have the liquidity and the staying power to get through the hard times. You can see they made it this far and if they’re good solid performers now, they’re going to be really good going forward. That definitely comes into play. For 20 or 30 years, it was always not enough deposits to fund the loans. Now it’s just the opposite. We have plenty of deposits and not enough loans. A lot of the businesses, a lot of individuals that come through this, they’re thinking twice before they go deep into debt again.
Clausen: It’s a balance against a lot of other things you’re taking a look at. How much excess deposits are out there to loan? Without having looked at everybody’s balance sheet, I would guess loan-to-deposit ratios are historically low right now, meaning there’s a lot of money to lend out. I think character does still matter a lot as we look for their balance sheets to improve, as real estate values continue to improve.
Wilcox: There’s a period of time that a business owner has to go through where they resist the urge to borrow after a tough time, because of the short-term memory they’ve got of what happened. Then they get to a point where they cannot resist the forces of growth any longer, and then they jump in. I believe that’s where we are. I think there’s a lot of positive emotion about what’s going on in this market. A lot of people excited about where we’re going, but they’re waiting for that last push to prove that the growth requirements are real. I think that’s where we find ourselves.
How has security been an issue?
Wilcox: So many people still do not realize the implications of not protecting your passwords. There’s a big push to raise the level of awareness of how people can protect themselves from cyber fraud. We continue to staff up with people who are securing us and watching the trends and paying attention to what’s going on. As soon as we get better at it, the bad guys get better too. It’s something we have to be diligent about. We have to be even more diligent about educating our clients about the basic things they can do for their protection.
Clausen: Well I can tell you [the threat] for us is international, by far. The work that’s being done in the background to stay ahead of these bad guys includes a lot more collaboration within the industry. I think the collaboration and the education is a big piece of what’s going to help us protect as many customers as possible.
York: Regardless of education that we do at my little bank, our losses and hacks come through the debit card. It’s usually other industries - the Target and Home Depot breach - and any of my customers that used their cards at those stores or retailers got their account information hacked.
Martin: What’s interesting is there’s been some changes in regulation in some of the merchant roles that are relatively recent. Historically, it’s been the banks that have had the burden when fraud happens. Now it’s going to head back to the merchant.
What is the outlook for the banking industry?
Martin: I don’t know if we, as an industry, are doing a great job of training the next generation of bankers.
Wilcox: You’re exactly right. There’s some of us that have some training programs, but as an industry, we’re not preparing the next generation. We were all prepared. We all took training programs. We all apprenticed with somebody. Because the tightening of the margins, we don’t have the ability to do that like we used to. The scariest thing for me is the next generation of bankers. How do we prepare the next generation to make the kind of decisions to keep us out of the frying pan we just got out of.
Sullivan: I think you are, on a national landscape, still going to see a reduction in the number of institutions that are out there. It’s not going to be through failures, it’s going to be through competition. Now with small community banking space, we’ve had to reevaluate our whole business model. Whereas for decades, we had to rely on margins exclusively, it’s forced us to take a look at those niches, because we don’t have the resources to do everything and do it well.
Burns: Concentration of the industry is something that’s going to be forced by that increasing burden. That’s why right-sizing is so important. The smaller banks are finding that they can’t afford to comply with all of the things big banks do because it takes such a large infrastructure to do that. So they tend to then look at mergers. That’s a big concern because then you’re going to have even more concentration of the industry into larger and larger banks, which of course increases the overall risk.