Community banks are starting to accept that sweeping regulatory reform seems unlikely anytime soon.
There was a surge of optimism when last year's presidential election spurred beliefs that the Trump administration would significantly roll back bank regulations. But partisan gridlock in Congress has challenged legislators to pass any meaningful bills, though bankers recently scored a victory when the Senate voted to repeal the Consumer Financial Protection Bureau’s arbitration rule.
Still, banks are concerned about other proposals, such as the CFPB’s plan to collect data on small-business lending and changes to the Home Mortgage Disclosure Act. Those worries only seem to compound an increase in nonbank competition and cybersecurity threats.
Those uncertainties were shared by a group of bankers — Cheryl Sorensen, chief operations officer at Ireland Bank; Howard Jaffe, president and chief operating officer of Inland Bank & Trust; John Klebba, chairman and president of Legends Bank; Ken Clayton, president of Western Bank; Jay Isaacs, president of FirstCapital Bank of Texas; Jeff Krejci, president of Cornerstone Bank; and Kelly Mason, chairman and CEO of First National Bank — at a meeting in Washington hosted by the American Bankers Association.
“We face the same challenges as the mom-and-pop shops do in the communities we’re in,” Sorensen said.
“They’re fighting the Walmarts of the world and the Amazons on the internet,” Sorensen added. “We have the same concerns. It remains a constant battle to provide services and establish relationships, especially with the emphasis on [using] technology to offer more and more services that pushes people to self-serve.”
The following is an edited transcript of the conversation.
Do you believe regulatory relief is coming? If so, what form will it take?
Jaffe: I think the political environment is such that that passing any bipartisan bill is probably going to be extremely difficult. You might get bits and pieces of regulatory relief. It may not even be the highest priority but it could be attached to another bill. The best chance of any sweeping change will come from the regulators and the things that they can do within their agencies.
Klebba: I don’t think a whole lot will come through the legislative process. They will maybe chip at the edges but I don’t think those bills will get through the dysfunctional legislature. I would say the CFPB is 90% of the problem with the overreach they’ve had. If you wanted to draft a bill that would guarantee the elimination of community banks, you couldn’t have done better than Dodd-Frank and some of the regulations that have come out, especially the CFPB. It’s not the only reason a lot of community banks are disappearing, but it is a huge part of that.
Jaffe: They’re taking a look at [the Community Reinvestment Act]. The legislation for CRA is three pages long, so all of the issues you hear about it really are what the regulators have done in interpreting rules. The law is 40 years old. The way we conduct business today is not the way those rules are mandated. People are mobile and I can bank people no matter where they are. I can lend money no matter where they are, if that’s our business strategy, which is not consistent with CRA. Hopefully they’ll do that without having to get a mandate from Congress.
Where are you investing the most in your bank?
Klebba: I think the last five to seven years it has gone from [focusing on] customer service to trying to keep up with the regs. Luckily we’re starting to see a little bit of a slowdown in the propagation of regs coming in but [at one point] it seemed like almost every quarter there was another new major fiat coming on the regulatory side. It was difficult. Now that it has slowed down a little bit it is easier to focus on upgrading technology, online delivery of products and services. But it has been a while since we’ve been able to refocus.
Isaacs: We’ve spent a lot of time and effort on technology but most of it is geared toward playing defense: cybersecurity, the fraud issues, the phishing issues that are going on in our bank. I just saw a list yesterday that our data security person sent out. I didn’t even see it in my inbox. Our filters threw them out. But I probably had 50 to 60 emails come in from phishing sites. And some of them are pretty bad stuff. The viruses that can come through.
What’s the next regulatory hot button issue?
Krejci: I don’t see new regulations [being a focus] but I see existing ones getting beefed up. Early next year they’ll beef up the [Bank Secrecy Act] rules and they’ll beef up the HMDA rules. That will be more for HMDA you have to comply with.
Mason: I expect that they’ll be worried about credit concerns. They’ll want to come in and ask pretty heavily on that.
Jaffe: I think rising rates will raise credit concerns.
Clayton: We’ve got some concerns on small-business lending with data collecting.
How do you distinguish yourself from other institutions?
Sorensen: I think we benefit a bit from the negative attention around the big banks. Any time [something negative]t comes out people look at relationships with people they can trust and kind of come back around. We’re always wanted in a time of need. As far as creating new relationships, that still remains a challenge.
Mason: We struggle with growth. We’re in a small town that has three banks and we have two farm credit [institutions]. There’s a credit union a block away. We used to update technology [more slowly]. We would let it get established. We’ve learned that you have to try and get ahead of the technology. We ‘re one of the early ones to do mobile banking. It’s a rat race.
Klebba: By and large, the mood of small-business people is pretty good, with the exception of ag, where there’s been a stagnation, if not a decline, because of commodity prices. The biggest issue I have with some of my customers is they can’t find good employees. We’re in an area with basically full employment. They need skilled folks, but they can’t find them. Or they find folks [who] can’t pass a drug test, which is a huge problem. Otherwise, I think the overall expectation of people is that things are getting better.
Does the banking industry need more banks? Do you think we’ll see more de novos?
Clayton: It comes back to lightening up on regulation and letting us go. If you do that, you’ll get all of the de novo activity you want. I don’t think you’ll find a whole lot of people in this meeting saying we need another bank in our town.
Isaacs: We may not need it in our town but we had over 1,000 banks at the peak back in the ‘80s that were serving customers across the entire state. Now we’re down to about 450. It is a similar percentage drop nationwide. The consumer is not being served. We may not want another competitor in our market, but the consumer isn’t being served the way they should be.
QuoteI don’t think you’ll find a whole lot of people in this meeting saying we need another bank in our town.
Klebba: I think a lack of de novo shows there’s dysfunction in our industry. If it was a properly functioning industry, you would have people coming in and filling voids. As interest rates rise it will make it a little bit easier to get a proper spread. If we get some of these regulations for smaller banks backed off or eliminated I think you’ll see some de novos coming in. Right now people just don’t want to take that risk. It isn’t a healthy industry to be in right now because of all of the backlash.
Any predictions for the next 12-18 months?
Jaffe: The industry will continue to progress. Profitability will expand probably because of rising rates. Not sure what we’ll see in terms of regulatory or legislative benefits. Again, I don’t see really new oppressive things except small business and payday lending rules and HMDA.
I’m hopeful the new leaders of the regulatory agencies will be a little bit more reasonable and consistent in their approaches. I think the industry will continue to benefit from that. I don’t see any crises on the horizon. The economy has been running fairly well. The markets are doing well. Bank valuations have been steadily increasing. Not to the level they were pre-crisis, but from that perspective, that’s a good thing.
Isaacs: We have to remain optimistic, not only for our bank’s performance but for the communities we serve. There will be some form of regulatory relief whether we think it is sweeping or not.