An industry that saw major changes and new regulations after the recession hit, banking has endured a host of ups and downs. Currently in an upswing, the industry is cautious and working toward smart growth. Recently, banking executives met at the Las Vegas offices of City National Bank to discuss banking and talk about some of the changes they’re seeing.
Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. The magazine’s monthly roundtables bring together leaders to discuss issues relevant to their industries.
Is the banking industry over regulated in today’s economic environment?
BJ North: It’s getting better with some of the changes that have been made. The industry is moving so quickly and that is going to create continued regulations and compliance. We’ve had some bills passed that have improved the regulatory issues. But, it’s going to look different as we continue to move forward. Banking is really going to change and that’s going to impact how we’re viewed and what the people on Capitol Hill think we should or should not be doing for consumers and small business. If they’re looking at changing the way small businesses are looked at when you are giving them a loan, that changes the ability to lend to small business, which could be problematic.
Phyllis Gurgevich: On the federal level, S2155 passed. Now comes the hard work of the regulations being developed. Our members, and banks across the country, will be involved in providing feedback and making sure new regulations match the intention and don’t stifle the ability for banks to serve their customers. More than anything, [S2155] is really for community banks. Its not repealing or pulling back Dodd Frank, it’s right sizing and fixing some of the unintended consequences. There was an overabundance of regulation. Sometimes, the bigger problem is that [regulations] are not meaningful or appropriate to the business model that the bank operates in. With some of the relief under this Bill, we’re hoping that banks can get out of this endless cycle of compliance.
James York: [Regulators have] a more cooperative attitude with respect to, when they come in and audit us, they want to help. They cleaned house, they’ve done their job and saved the day and they’re interested in coming in and having reasonable conversations. Their job is to audit us and point out the soft areas, and that’s what we need them for. The relationship is good, both with the state and at the federal level. We know the examiners well and they know us well. They look at our reports on a regular basis but, when they come, they feel like they know our portfolio. It gives them more confidence and they show more confidence.
George Burns: As far as regulators go, the major conversation that we have been having with the FDIC is applicability. With all of the regulations that have been out there from Dodd Frank, we keep asking a question when we go into a particular institution. That question is: Is this really applicable? The fight we had previously was, they were trying to apply everything to everybody. They have been very receptive in looking at applicability. We don’t want to repeat the past, or make the same mistakes of the past but, at the same time, we really have to look at how everything is applying.
Are you seeing staffing issues?
Bruce Ford: That’s probably the biggest challenge in the industry, finding quality and well trained talent. In the old days, we used to have training programs and we’d teach people. The industry stopped that a few years ago so there is a dearth of talent. It’s really tough to find high quality people.
Brian Formisano: The outlook on career path today, versus maybe 10 or 15 years ago, is completely different. Before, the conversations might have been around slowing down to gain the right experience to be properly prepared. [Now] a lot of folks are looking at other lines of business, outside of community banking, or even other industries, to be able to determine where they see themselves 15 or 20 years from now. Keeping people engaged in current positions, seeing the outlook for the future and then looking for talent is a little bit more difficult.
John Zaby: Finding quality talent, the folks that are able to manage relationships and bring in business and manage it from start to finish, is very tough. The training programs aren’t there from the credit standpoint. You get to a point where you’ve got business development folks that can do a good job but maybe don’t have the credit skills.
Terry Shirey: I fully agree on the talent issues. I’m really excited for what the Nevada Banker’s Association is doing to help in that regard. The industry has not done a good job marketing itself to talented college students. We have fallen out of favor as a desired profession. I don’t think we’ve done a good job explaining the great career paths that exist in banking, the great career you can make. And, we’re competing, not only for customers with technology and fintech (financial technology companies), but we’re competing for talent.
What education programs are available for this industry?
Gurgevich: The Nevada Banker’s Association and its members came together to fix [the talent] problem. We are working with UNLV and the program that will be created will be a banking program, similar to what Texas A & M has. It will be a two-year program in the finance department. Our first graduates will be in 2020. It’s moving along because our members are coming to the table, working with UNLV and making it happen. We will also be looking at programs for “accidental” bankers. For someone who finds themselves without the formal education background but now are a banker and would like to pursue it as a career path, we want to have programs available for those bankers.
York: In two years we’ll have 22 graduates, at least.
What is happening with interest rates?
Burns: From a regulator’s point of view, the biggest challenge our banks are facing is interest rate risk. The rising interest rate environment that we’re in is because of the very low interest rates [we’ve had]. A lot of banks went long on their security portfolios. Now that interest rates are rising, are they going to be able to get out of them quickly enough to manage that risk? That’s something we are watching very carefully.
Zaby: One of the things we are all faced with is the interest rate spread. The competitive nature of it is such that you know the deal is not just from banks but from other outside lenders. [They are] really putting the pressure on the spreads. Rates are climbing up and we’re not seeing the spreads on some of those good quality deals climbing up with them. It makes it tough to try to make that dollar.
York: Rates have been low for so long. They are rising on the deposit side but they’re not rising at the same level on the lending side because of the competition. The competition for a good loan is very fierce. We all know it. We are going to have to hold our interest rates down on the commercial loans to be competitive and put the loans on the books. That also leads into credit risk. To be competitive we are going to be tempted to be looser on the credit side of things to get deals on the books. We just can’t afford to do that. We have to maintain our credit risk, at the same time we’re going to be losing margin on our loans because we are going to still have to do loans at prime [interest rates].
T. Ryan Sullivan: We’re dealing with [interest rate risk] as an industry and we haven’t had to deal with this for about 15 years. The direction of interest rates has started to become less uncertain; you could take a look at the yield curve to figure that out. When interest rates are zero, you know where rates are headed. Now, the market is telling us they could go up for a while, but then, they could also come down.
Is this a good time to get a loan?
Ford: We certainly think now is a great time. They can lock in some rates before they go up further. There has been tax changes so there’s some tax benefits now and there are real benefits to doing it. The economy is robust and there is high demand. This is a fantastic time for a business person to borrow.
Sullivan: Borrowing risks are historically very low. Credit spreads have shrunk so, even though short term rates have come up, the borrowers still, historically speaking, have very attractive borrowing opportunities.
How do you stay in front of financial Fraud?
Shirey: You have to spend a lot of money. As the industry moves towards technology, and delivering products and services to clients through technology, it’s an equal increasing amount you have to spend to protect against it. There have been enhancements. The chip card technology has reduced our debit and credit card fraud a lot. But, there’s more creativity now by fraudsters around social engineering. [There are] different frauds going on at the branch level. People are walking in to branches and figuring out ways to steal money from the bank. It’s an ongoing, evolving issue that is really at the heart of what banks do. We have to be a trustworthy place for our clients to have their money. We have to really prevent, even the appearance, that we’ve let something slip through.
Formisano: From a technology standpoint that’s where we see the biggest risk going forward. Going back 15 years, the biggest issue a branch had to worry about is a quick change artist coming in or someone stealing an identity. Now, with the innovation of funds transferring, that’s where we’re seeing the biggest issues right now, from a fraud perspective. As we continue to advance technology, this is a space that we have to be able to get our arms around. In many ways, it’s not only about developing better programs, it’s also about bringing in the right talent that’s able to help us to be positioned properly for the future.
Robert Sandhu: Its a balancing act. We definitely want to serve our customers in a more convenient and timely way, but we also want to try to reduce risk associated with cyber security. That’s the balancing act we are faced with.
Are banks building fewer branches?
North: We’re not going to put a branch on every corner. We’ll have, what I call, a mothership and then [we’ll have] a little boutique shop or technology. Our clients can bank anywhere, on their phone, at home or [they can] put the bank on their desk. We want them to come in when they really want to have advice and counsel and talk about things that are impactful to their business or their financial security. We’re not looking at heavy brick and mortar, as a community bank. We’re looking at expansion but, I don’t think you’re going to see the same kind of expansion. We’re going to have to figure it out. The brick and mortar, it’s not the answer. Will it go away? No. People still want to see something that houses their money.
York: You’ll have a minimum amount of brick and mortar in the communities that you serve. They still want to see you across the street. And, if they want to go talk to somebody, they can do that. That could change with the next generation but, for what we do, small businesses, I think the businesses will still want that [bank] in their neighborhood. You’ve got to be approachable other than just a conference call or a webinar, they need to be able to sit down and have a face to face.
Ford: There is some comfort [in having a physical branch], especially with our older clients who have more wealth. They can actually see and touch someone. It’s a combination. You don’t need as much brick and mortar but, you can expand. We’re expanding.
Shirey: We actually did a survey a couple of years ago and the number one determinate of where somebody banked was proximity to a branch. It’s a really interesting dynamic. We see branch transactions down 20 percent year-over-year, every year. We’re looking at it and we’re not adding branches but we are repositioning branches. It’s more about having them in the right location.
What is the outlook for banking in Nevada?
Burns: Nevada continues to be one of the nation’s leaders in a lot of measures. Nevada banks have the highest average return on asset ratio in the nation for the entire year of 2017. With all of those economic fundamentals, average loan growth is, right now, relatively weak. The thing in Nevada that’s most impressive to us, as regulators, is the average risk based capital ratio in Nevada is 20.4 percent, which is the highest in the nation. We have the best capitalized banks in the nation here in Nevada. The offside to that is the fact that it means they’re not deploying capital into loans.
Sullivan: I would say, in the next year, there’s still some good opportunity. We deal almost exclusively with small- and medium-sized business owners. The forward looking capital investment for this next year has gone down a little bit. But, it’s still expected to grow.
Sandhu: I think [a year from now], the discussion points are going to be the same. There is still going to be concerns with technology, there is going to be expansion. When I say expansion, [I mean] specified locations that provide the right products and services to customers to meet their needs for convenience and also timeliness.
Formisano: A year from now the topics will still be the same but I’m interested in where we are a year from now. More of the focus is going to be around, maybe not so much being able to hire the right talent, but it’s more going to be around how to keep up with the growth of our economy and making sure we’re supporting sustainable growth for the future.
North: I think our real focus is helping the client achieve what they need to achieve. If I can’t do it, I’m certainly going to find somebody that can help them because everybody grows. It’s good for the community, it’s good for the client and it’s good for the bankers. Having a really good relationship with all of your fellow colleagues at different banks makes a stronger banker community, but also makes a stronger community for the people that we serve.