M&A, pot banking and more reg relief: What's on the minds of midsize bank CEOs
On the same day megabank chiefs were being grilled on Capitol Hill, a group of CEOs from midsize banks visited Washington to lobby for what their big-bank counterparts lacked the standing to demand themselves: a little more regulatory relief.
In a far less public setting — conference rooms at the St. Regis Hotel — the midsize bank CEOs met with top officials from the federal banking agencies on Wednesday to make their case for updating anti-money-laundering laws and modernizing the Community Reinvestment Act.
The threshold for filing currency transaction reports has held steady at $10,000 for decades and bankers want the limit raised to account for inflation. Meanwhile, they’d like to see the CRA updated to give banks credit for community reinvestment in areas where they don’t necessarily have branches while also requiring mortgage companies and other nonbank lenders to comply with the law.
“I really like when I hear a regulator say, ‘Let’s regulate activities, not just charters,' " Jim Reuter, the president and CEO at the $18.5 billion-asset FirstBank Holding Co. in Lakewood, Colo., said in a roundtable discussion with an American Banker reporter in advance of the meetings.
Reuter was one of four bankers at the breakfast roundtable hosted by the American Bankers Association. The others were: Michael Scudder, the chairman and CEO at the $15.4 billion-asset First Midwest Bancorp in Chicago; Bob Jones, the chairman and CEO at the $19.6 billion-asset Old National Bancorp in Evansville, Ind.; and John Ciulla, the president and CEO at the $27.6 billion-asset Webster Financial in Waterbury, Conn.
The CEOs said that updating the CRA and Bank Secrecy Act are high priorities, but they had other issues on their minds as well. They’d like to see Congress pass legislation that would make it easier for banks to serve marijuana businesses without fear of running afoul of federal laws. They dismissed the argument that midsize banks need to consolidate to remain competitive. And, in a show of industry solidarity, they praised big banks and their CEOs for supporting communities in which they operate.
Following is an edited transcript of the discussion.
Last year when I met with [midsize bank CEOs] it was right around the time Congress was debating the regulatory relief bill and the focus was on pushing the bill over the goal line. What’s on your agenda as you meet with policymakers this year?
BOB JONES: We have relatively new heads of all the regulator agencies and [we want to] just continue to impress upon them the need for some continued relief that will allow us to continue doing the things we’ve been doing. CRA modernization is clearly on the agenda with Comptroller [of the Currency Joseph] Otting.
In terms of CRA regulation, what is it that you would like to see?
JOHN CIULLA: This law hasn’t been revised in quite a long time … and so many of us now have expanded beyond our traditional banking center footprint in commercial banking and other areas. We’re investing in those areas where we don’t necessarily have branches. They use the word "modernization" purposefully because it’s modernization of a code that will give banks credit for all the things they do to support communities [including] things we do digitally.
What about CRA for nonbanks?
JIM REUTER: I really like when I hear a regulator say, "Let’s regulate activities, not just charters." There are plenty of nonbanks that I think should be held to the same standard. The No. 1 originator of mortgages in Colorado is [nonbank] Intuit. The spirit of the [CRA] regulation should apply to their business because it’s essentially the same business.
CIULLA: I read somewhere that 50% of mortgages are being made outside of the banking network, and 70-80% of leveraged loans are being originated by nonbanks.
What are you looking for in terms of Bank Secrecy Act and anti-money-laundering revisions?
MICHAEL SCUDDER: The thresholds for currency transaction reporting haven’t been adjusted for a long period of time.
CIULLA: There’s been some talk in the midsize space about a utility. Imagine if you could pull all your resources and have the best technology and have all your transactions monitored. [BSA compliance] is a costly endeavor. If you’re a small bank you don’t get a discount to put in the technology and having the people to chase down a lot of false positives. So if there’s a way to simplify, increase the [dollar] amount of transactions we are looking at and potentially merge technology across a group of banks that would be terrific.
SCUDDER: There’s a lot of ground that has to be plowed to make that happen. You need a lot of regulatory cooperation.
REUTER: The challenge with AML-BSA, is you go up on the Hill and you talk to the legislators, they hear from [the Financial Crimes Enforcement Network] and they want to keep things the way they are. The problem is that we are still operating as if it was 25-30 years ago. I feel like if we worked together, banking and Fincen, we could just be much more strategic.
I want to ask about banking pot businesses. Jim, you’re in Colorado [where marijuana for recreational use is legal]. Do you do business with those firms?
REUTER: We do not. Until something is resolved federally — we’re a federally insured and chartered organization —so we’re not going to take that risk. There are a couple of bills moving through the House and the Senate that we would very much like to see [get passed].
What about companies that are related to marijuana businesses. Do you do business with them?
REUTER: HVAC operators, electricians, they work with [pot businesses] and they come in with a bunch of cash because that’s how they’ve been paid. We have a quandary to try to figure out we do. Today, we have made a decision to bank some of those related businesses if it’s not the majority of what they do. You also have the issue of a commercial real estate loan. You can have some strip center where a small percentage is leased by another marijuana business [and] we have to go to your borrower and tell them if it’s more than x percent of the building, we’re not interested in doing the loan.
Let's talk about M&A. When BB&T and SunTrust announced their deal, they said it was all about scale and being able to compete with the larger banks and making tech investments they need to make. You are a lot smaller. If they are saying that they need to scale up to compete, what does that say about the need for scale at the midsize level?
CIULLA: [Banks] have to invest in technology for three reasons: to be able to put great tech in your customer’s hand; to be able to deploy technology in the middle and back office to reduce cost of delivery; and to keep your customers’ information safe. We all do a good job with [investing in technology]; it’s a little bit easier if you have scale. Also, spreading those risk costs, BSA-AML, you get a significant advantage if you’re $80 billion as opposed to $27 billion, [so] I understand the rationale of why people would be interested in merging. But I don’t think it’s necessary, or that we’re all scrambling to say, "Oh we’ve got to partner up and get bigger," because I think we are still effective. The profitability and return on equity in our group is still really strong.
JONES: There are other ways you can look at technology. It’s working together and partnering with the fintechs. You go out and do any survey with our clients and they’ll tell you that our apps are as good as those of the largest banks. Scale is important, but there are other ways to compete.
The narrative we keep hearing is that big banks are using their size advantage to invest in the best technology and pull in more customers. Is that not what you are seeing?
JONES: We don’t see it in our markets. I’ve yet to get a phone call from somebody saying I’m leaving your bank because your technology doesn’t compete.
REUTER: We’re opening a third of our accounts online. We were the fourth bank to be part of Zelle. We’re certainly not a large bank, but we looked at our customers’ usage of Venmo, where we sat in the Colorado market, our demographics and we [decided to] get in there pretty early. As midsize banks, we like to use the terms early followers, but we’re leaders when it matters.
Where do you see the industry in five years?
CIULLA: It’ll be an evolving story, customers’ preferences will change, but I’m not ready to talk about it being dramatically different. There will be smaller banking centers, there might be fewer over time, but the branch will continue to be a critical channel of delivery. The call center will become more and more important over time, both as a problem resolution center and as a contact and sales center.
REUTER: The transformation going on in payments, with real-time payments, that’s going to enable us to help customers better manager their money because when you are pushing money out, I can say, "This is going to take you over your budget." Right now that all sort of happens after the fact.
SCUDDER: We are trying to take the people in the front lines, use technology to make them more effective, and when you do that a lot of the back room [functions] start to change. The skill sets that you need in the back room change, and you have to develop the talent to be able to [handle those changes].
Is it fair to say that acquiring talent, the right talent, is more important now because of the shifts we are seeing? And is it challenging now to acquire the talent you need?
SCUDDER: I’d push back a bit on more important. Ours has always talent business. Everything we do starts with how you building the highest-quality team of colleagues that you can have.
JONES. I agree. I’m a grizzled veteran of almost 40 years [in banking] and talent has always been the most important thing for a bank. Our model still works, we are still able to attract talented individuals. When you look at the diversification you can offer someone as a career choice and the fact that we are deeply committed to our communities, it’s a great model to attract people.
CIULLA: You’re not just competing, with other banks, you’re competing with everybody, and it’s a tough labor market. In our state in Connecticut … there’s still like 10,000 [technology jobs] that need to be filled over the five years, and there’s no natural talent pool. Everybody is scrambling to figure out how to attract talent, how they are going to differentiate themselves, how they’re going to create a work environment that’s exciting and challenging and have all of the things that the workforce demands these days. It’s not only about pay, it’s about quality of life, a focus on diversity and inclusion, thinking about your purpose.
REUTER: If you were to come see our new corporate headquarters, we have a fitness center, a cafe, it looks more like a tech company than a bank, and that’s because we are competing with Google and other companies in our market for the best and brightest in [information technology]. It’s a challenge, but we can meet that challenge.
JONES: Most of the time bankers are leaders in the communities, and that’s a great attraction [to prospective employees]. Millennials want to make a difference.
Is that a shift from a generation ago? Is this generation more purposeful?
CIULLA: We talk about being more purposeful … and it is important to prospective employees. They think about environment and social issues. I chair our diversity and inclusion council. You have to work at that. Our industry historically hasn’t been the most diverse … so we all work at that because it’s important.
REUTER: We hire 50 management trainees a year and I interview every one of them, and they all talk about our involvement in the community.
JONES: If you look at the conversations going in [Washington], we’re [seen as] the villains, when in reality we are the heroes in most of our communities.
So do you worry about what’s going on Capitol Hill today affecting the image of the entire industry?
JONES: We’re in a 24/7 news cycle and everyone is looking for a sound bite, but the reality is I sleep very well at night knowing what I do in my communities.
CIULLA: When the federal shutdown happened … we and other banks in Connecticut led an interest-free loan package. I did an interview with [National Public Radio] not long after that and I said that the reality was every single bank across the country is doing this. Banks are always there to help during the crisis. We’re proud of our industry, the CEOs [appearing before the House Financial Services Committee] are doing a lot of great things: Look at what JPMorgan’s done for Detroit. [Lawmakers] won’t talk about that much today.
REUTER: There’s always this talk about medium versus small versus large banks, the truth is the market needs all three. We’re $18 billion. A bank that’s $500 million can do some things from an agility perspective that we can’t do. Just like I can’t be an international bank. So bifurcating our industry with … the conversations that go on, to me are quite concerning because it doesn’t give credit to the breadth of the industry and why we all need to coexist.