Banking and Finance Roundtable

• Rick Anderson, Bank of American Fork
• Chris Christiansen, Bank of America Merrill Lynch
• Doug DeFries, Bank of Utah
• Anthony J. Hall, Lewiston State Bank
• Ram Halteh, Key Bank
• Howard Headlee, Utah Bankers Association
• Scott Irwin, Holland & Hart
• Bruce Jensen, Town & Country Bank
• Steve Kieffer, Big-D Construction
• Edward Leary, Utah Department of Financial Institutions
• Frank Pignanelli, Utah Association of Financial Services
• Erich Sontag, Banner Bank
• John Sorensen, Home Savings Bank
• Mark C. Van Wagoner, Central Bank

A special thank you to Hal Heaton, professor of finance at Brigham Young University, for moderating the discussion.

Utah’s banking leaders say that although the economy seems to be improving, some adverse factors are holding back a true economic recovery. They also tackle topics like governmental regulation, inaction at the Fed on interest rates and other issues concerning the state’s banks.

What is your economic forecast for 2016? Are there clouds on the horizon? What positive signs do you see?

SORENSEN: The United States economy is going to do extremely well. Outside of the United States, I don’t see improvements. I do think that wage growth will stay low. There’s an issue in regards to the employment participation rate, which right now is 62.6 percent. That is the lowest rate it has been in 38 years.

I do think the interest rates will go up but very, very slowly. There’s a lot of pressure to increase the rates. The dollar is strengthening so much that there’s a lot of pressure to raise the rates, which will devalue the dollar so that exports can do better. I don’t see any reason to raise the rates, but I do think they will raise gradually.

SONTAG: Last quarter our national real gross domestic product was only 1.5. That’s not very strong at all; that’s not healthy at all. Most economists forecast the GDP going up by the end of 2017, gradually migrating toward 2, almost to 2.5. To really have a vibrant national economy, we need to be up more around 4.0 GDP. So that’s what I hope will happen.

HALTEH: As it relates to the general economy, this is uncharted territory for us. These are near low rates. There’s talk of negative returns on deposits. You’ve got talk of larger banks diversifying their deposits with clients and penalizing their high-deposit clients and giving them negative returns. So when you have such low interest rates and the economy still shaky— I don’t think there’s confidence in the general population that we have come out of this recession. Maybe as bankers we were all scarred by it in one way or another. Hopefully it left an indelible mark on who we are as individuals and made us better bankers.

But the Fed has to look at raising rates, otherwise its credibility is at stake. They keep saying we’re going to raise it by the end of the year. And there could be some good in raising short-term rates by a small percentage, a quarter percent, provide some stability in the marketplace. Long-term rates have already built that in anyway. And maybe interest income will increase as well, especially on deposits, and make up for it.

CHRISTIANSEN: Bank of America is very optimistic about the national economy. We’re worried more about the implications of long-term rates being low and what potentially that does to us as consumers, as businesses and ultimately a government. All that being said though, we’re very, very optimistic about the economy. The projected growth rate is positive. We’re not going backwards. You do hear people talk about the softening of the economy. I personally believe that if we go along kind of status quo, that’s good. It’s not the growth rates that we all hope, but it’s good. We’re not retracting.

DEFRIES: One thing I am still confused about is the whole roll off of quantitative easing funds. They’ve stopped doing it, but they’re still replacing everything that’s there. This is a tool. They’ve used up a lot of economic tools to get us where we’re at, and with these low rates, what other tools are there? I guess we could have the next QE and kind of keep doing it again. But we aren’t what we were eight years ago as far as what the Fed’s involvement is in monitoring markets and their own securities. Until that gets back to where it’s good, a lot of things we look at might be looked at as more advantageous than they really are. But right now we’re taking advantage of it.

I think rates will go up in the short term. They probably need to go up more than what they are. But it seems like Fed is concerned about dealing with outside factors that aren’t just the economic factors. They spend more time trying to make sure things are smooth and everything is sitting correctly. I thought there should have been a raise in rates a couple of months ago, and it didn’t happen.

You don’t see a contradiction between this bullish outlook and the low interest rate forecast for the year? Shouldn’t the interest rates go up when the economy does better?  

DEFRIES: It’s not doing better, though. It’s just kind of rolling along where we think we’re comfortable with. But it’s not that robust. We’re just kind of riding along.

ANDERSON: I do think we’ll see a little rate rise in December. They need to and they’re probably going to do that just to keep some semblance of order going forward.

HALL: I’ve been doing this for 43 years, and I’m not sure anybody around this table or anybody in the U.S. really knows where we’re going. When we talk about the economy doing well, we just haven’t performed. The GEP has never got going. Now, we’re just a little bank, and we feel very bullish about what’s going to happen in our local market. We do a lot of ag lending. Ag prices, as you know, have really taken a dip. But through the years we’ve weeded out a lot of inefficient operators. Now we have some real good people there. But that’s a concern. And really is the economy doing everything we think it’s doing? Are we on kind of a steroid and we’re not really doing as well as we think we’re doing? That’s a concern to us.

LEARY: I’m the regulator in the room. We’re the paid professional worriers. We always have a jaundiced view of everything. My big-picture thought is, particularly in Utah, we went through the downturn, the Great Recession. Yes, we were probably fortunate being one of the states that popped out of it quicker, better and in a more sustained manner than most states. So we’re comfortable with where we’re at. All of the indicators for Utah show signs of good strength, good growth. But then the regulator in me immediately takes over and starts worrying about what’s next. Whether we talk on an international scale, catastrophic events, terrorist events, local disasters, they just seem to keep coming at people. And so the warning is always be ready, be prepared and be careful.

HEATON: I sit on the board of a small bank. We were told by regulators we ought to increase our stress test to cover 400 basis points, 4 percent swings. Does that mean you’re worried about a 400-basis point swing in rates?

LEARY: I would take it from the limit scenario. It’s probably good for an exercise. Is that realistic? I don’t believe so. But that’s Ed Leary speaking. Some of the federal regulators are very concerned about those kinds of shocks, yes.

JENSEN: Before I decided to start a community bank in Southern Utah, I spent 30 years managing short-duration fixed-income portfolios for big banks like BFA and Wells and a couple of others in Chicago and London. So my perspective is a little different. We had to do a lot of soothsaying in our job. So it really came down to if the Fed raises rates, what’s that impact going to be on the economy. And I just don’t see it. I mean there’s a lot of pressure for rates to rise, mainly political. But I don’t think the economic activity warrants an increase—not to say we’re not going to see it. But it’s pretty basic. Wages are the story, wages and labor participation. You see a rise in rates, there’s going to be an impact. And I just don’t see that there’s a strong basis.

Now, Utah has been kind of a bright shiny jewel in the United States. And I am somewhat optimistic for our ability to produce for basic fundamental reasons. We’ve got a hard-working community. We have great job creation. So we have all the ingredients in Utah to continue to perform. Down in St. George, where I’m based, we’re looking at lower vacancies, we’re looking at much more profitability, a lot more construction projects, which is what drives our community. So we’re reasonably excited about what’s going on in Utah and in our market. But nationally, we’re just plodding along. And you don’t raise rates to cool a plodding-along economy. Now, again, it still could happen for political reasons, but I don’t think it’s warranted economically or financially.

Let’s talk specifically about Utah. What are the economic trends here?

SORENSEN: We’re a small bank, and we lend in the Western United States. We see a really strong market. We do see some slowing in regards to real estate sales. It’s very minor, but we are seeing that. And I do think personal income is not keeping pace with rising home values. So we’re seeing some slowing. It’s taking place in Arizona and Southern California. It has not happened here.

I don’t think you can have a strong GDP if the participation rate continues to fall. The best you can do is about 2.5 percent. We have a large amount of people that are not working compared to people that are working. If that participation rate continues to drop, which I think it will, that will put more pressure on and decrease the effectiveness of the economy.

HEATON: I’m in Utah County, and I see all of those new condo units, the apartment units. I see all of the commercial buildings going in at Thanksgiving Point, and I’m saying: How long is it going to take to absorb all of this? Are you worried about that?

SONTAG: My quick answer would be, yes, we’re absolutely worried. Any time a market is very hot, it leads to ruinous competition and things start eroding.

Backing up just a little bit with more of a general answer to the Utah economy … One of the aspects of my job that I love is getting out and visiting with businesses, customers, prospects, advisors like attorneys and CPAs. I just enjoy trying to get a pulse for what’s going on in our community. And the general sense is that their businesses are doing well.

On the more challenging side—with all these projects and the businesses growing—the labor force and the need for quality educated individuals in our community is becoming a huge challenge.

HALTEH: We deal primarily with commercial real estate, and we’re seeing somewhat inflated values in commercial real estate, particularly on the construction portion of it. We’re looking at project costs that are not appraising. We looked at a $5.5 million project cost. We did an evaluation as-is and as-completed. And as-completed came up $700,000 shy, which is pretty significant.

The big money in real estate hunkered down during the recession, held onto their real estate, and the average business owner at the time didn’t have access to capital. Banks weren’t lending, and they weren’t profitable because they had suffered. So they couldn’t go out and be prognostic about buying a piece of real estate. But the big investors are getting out now, and they’re selling those off to our business owners. If they’re trying to build it, there’s a shortage in that commercial real estate space, especially here in Salt Lake. So it’s driven up values. And when we’re trying to look at numbers, they just don’t pencil out.

That being said, three to four years ago, three out of five clients we looked at weren’t profitable. Now pretty much just about every business we’re looking at is profitable.

VAN WAGONER: We’re mainly in Utah County, and residential real estate is a big issue. People have been priced out of the market. It’s forced people into townhomes and other high-density housing. So if rates go up on the long-term, are those people able to qualify? That’s a big concern we have. If rates do go up, that person is not eligible to purchase that home.

CHRISTIANSEN: I cover both Utah and Nevada. So really a tale of two cities in terms of the economy. Utah has a fantastic economy. Utah has either the fourth or fifth most diverse economy in the country. And that is very, very important obviously from a banker’s standpoint.

In Southern Utah there’s a lot of construction. Las Vegas and Southern Nevada is very similar. You look at that compared to Utah, where we’ve got distribution, transportation, healthcare. You’ve got some energy, but not a tremendous amount. So we love the fact that Utah has a diverse economy. We’ve got a very young population. We’ve got an educated workforce. There are so many great things about Utah and the economy. And in our opinion there’s no doubt that is going to continue.

PIGNANELLI: The great thing about industrial banks is most of the customers are outside the state. They’re all across the 50 states. But what we see happening internally, number one is that Utah continues to be the bright spot. And those industrial banks that are expanding, the parent companies are not telling them to go anywhere else, but to expand in Utah. So they like what they’ve experienced here in Utah.

KIEFFER: Offices are getting built like they never have in the last three years. At first it seemed like you had a lot of class B office tenants moving into class A and filling that up. Now it seems everything that’s being built is for a single tenant or they’ve got the building 50 percent leased. We’re doing a couple projects down at the Point of the Mountain. There’s a lot of other buildings going up on the west side of I-15 at Thanksgiving Park. Those buildings are pretty much leased before they’re built, or at least 50 percent. So they’re getting filled. All that class B space that’s been vacated seems to be getting filled. I guess all these companies are doing well because the space is getting filled and developers are building the buildings. There’s a lot of spec office buildings being built right now. And before we ever get complete, it seems like they’ve got tenants and they’re filling the space. So they’re very optimistic, and the office market is very strong.

DEFRIES: Given our experience in the last downturn, we haven’t lessened the lending standards at all. In fact they’ve gotten even tighter from the standpoint of looking at the quality of borrowers or pre-lease rates. I just look at the people doing business now in this hot environment, and they are those that really do have a low basis in land or they’ve found some other advantage or they have very sufficient outside cash flow to cover whatever they’re doing without even earning from that project, which wasn’t the case prior. From that standpoint, there’s obviously a lot of smart money doing things now because it’s a good time to do it.

ANDERSON: We’re similar to a lot of other banks. We haven’t changed our underwriting standards. We’re still remembering the past and trying not to get caught up. We are seeing many exceptions being asked for with the way our policies are. We’re bullish, but we’re trying to still maintain some conservatism in the underwriting.

JENSEN: The election will have an impact, too, on the direction of the economy. So much of the consumer confidence is intangible. Decisions that are made in terms of investment and spending and that kind of thing, if there’s a change from the perceived patterns of regulation that the current administration is undertaking right now, I think that could make a difference as well.

In Southern Utah, we’ve got to see the master plan that calls for a big tech corridor down on the road towards the airport. And we’ve already seen a number of companies that have made commitments, so that will be interesting to watch. Additionally, population growth continues to burgeon in St. George. We had a little respite there during the downturn. Much of Utah is very homogenous, but St. George is starting to become a mini Park City. We’re getting in migration from Delaware, from Belgium. So we’re getting a very eclectic mix of people, and the population is expected to double from the 2010 census numbers in 15 years.

During my career, I’ve seen the number of banks fall from almost 14,000 to less than 6,000. That’s unprecedented in terms of consolidation. What do you see for banking specifically? Do you think that the trend will continue to be fewer and fewer banks and larger and larger banks?

HALTEH: Increased regulation puts a lot of stress on community banks and big banks. You’ll see a lot of consolidation.

HEADLEE: I think it’s important for people to connect these two dots—the regulatory environment that is so popular in Washington D.C. is directly tied to the consolidation of this industry. And if you don’t like fewer, bigger banks then you have to support changes to Dodd-Frank. It’s that simple. Dodd-Frank has so many misguided provisions that most everybody agrees need to be fixed.

Banks are like the popular whipping boy, but everybody sits around and is rightly concerned that we continue to see fewer institutions and larger institutions. And you can’t have both. You can’t continue to beat on the industry for political purposes and not be troubled by the fact that it’s going to just continue to consolidate. And exacerbating all of this, the FDIC is not approving any new charters. The fact that they’ve approved maybe a couple of charters in the last seven years is an unbelievable anomaly. It’s never, ever, ever occurred before. Somebody needs to be held accountable for what is happening to this industry.

HEATON: Have we seen any new ILCs? I haven’t even heard of any yet.  

PIGNANELLI: No. The FDIC is constipated. We’re an $18 trillion economy, and they’ve approved two banks in eight years. Plus they’re not approving any changes in charters.

I compare it to this: Dodd-Frank is a leprosy on our economy, slowing killing parts of our economy because it’s preventing the extension of credit. It’s killing the banks. But it’s also really making it hard to make loans. Minority groups are upset with Dodd-Frank because it’s tougher and tougher for people of color and people of low income to get loans approved with Dodd-Frank. You have the concerns with small businesses. But what should be of greater concern in this country is more and more financial services are no longer being regulated. So 60 percent are now unregulated because it’s getting tougher for the regulatory process.

I do blame the PR effort; it isn’t just the elected officials. But I also blame the banking industry because we’re allowing this revisionist history to go forward that somehow we were responsible for the Great Recession. We weren’t. It was a government policy being pushed out of the door by both parties and a lot of people who participated in that. But we’ve allowed the PR machine to dump all over the banking industry, and it’s not our fault that there was a housing policy that took off.

As Howard pointed out, we’ve become the whipping boys. And we’re not doing a good job of educating the public as to why we need credit in the marketplace. I look at all these Republican debates; I look at the Democratic debates. How often do you hear them mentioning Dodd-Frank? How often are they talking about allowing credit into the economy? Never. There’s no discussion about this. It’s all about tax cuts, or it’s all about government programs. We have to do a better job of educating our customers, the general public and elected officials that if we don’t succeed, you don’t succeed.

SORENSEN: I agree. Basically I’m a numbers guy because I’m an overpaid accountant. But basically, there’s 680 banks that are over a billion dollars. Right now there’s a total of 6,300 banks, and 680 banks that are a billion dollars or more control 92.7 percent of all of the assets. Now, when I was a CPA if we had a customer that had to have a balance sheet reclassified and it was less than 5 percent, it was immaterial and we would pass on that adjustment. So what I’m saying is that if you take the remaining balance of all of the banks and they go away, it would have very little impact in regards to the financial situation of the United States of America.

There’s still going to be small banks. But the regulations are extremely onerous to small banks. I’m a small bank, and I’m an owner operator. When we have an exam, 16 examiners come into our facility. I have 14 employees. Now, if that group goes to another bank that is 10 times larger than me, the number of examiners that show up are 16 examiners. Fortunately I only have to see them every 18 months. But it’s extremely difficult. They literally put you out of business for a couple of weeks.

PIGNANELLI: I’m going to argue that’s intentional. It’s a definite policy of this administration, of the Treasury Department, of the FDIC to go to Canadian-style banking. They want six to seven large banks, a handful of community banks. That’s what they want. That’s what they’re pushing for. It’s very plain and obvious. We have to push back.

SORENSEN: The real threat to the banking industry is not the credit unions or the ILCs. The real threat is the non-banks that are now coming online—the Lending Trees, those banks that basically are coming online that are not regulated like we are. And they will eat our lunch; they will put us out of business.

They don’t have an originator. They can provide an approval on a real estate loan in eight seconds. And basically they have these platforms set up. The people who are actually funding them are from money centers from back East, and they will buy the platform. But they can approve a real estate transaction subject to an appraisal and title in eight seconds, and they’re going to go into commercial real estate lending too. It’s going to be very, very difficult to compete with that type of organization.

SONTAG: I had the opportunity to go with the Salt Lake Chamber to Washington. We had the opportunity to meet with our senators, our congressmen and congresswoman. And what was a real eye opener to me was in Senator Lee’s office, he demonstrated to us what congress had passed in bills in the last year—it was about seven inches. And then in his credenza he had 12 feet high all the rules and agency enactments like the IRS, the EPA and all of those kinds of regulator issues—12 feet compared to seven inches. As a banking industry, that’s what we’re dealing with.

HEADLEE: It’s important for everybody to understand that all flows downhill. We have to hire more people to make sure we’re complying with those rules, and it affects our customers. It affects our pricing, it affects the amount of time it takes to process. And then to John’s point, those who are lending in the community that aren’t subject to those regulations, they can do it faster. We’ve got to deal with this in order to make sure that capital is flowing and the economy is growing. That is the illness of our time; it’s why we’re seeing a stagnant GDP, why job numbers have just never gotten where they needed to get. It’s because of the 12 feet. People have to stop jumping on this bandwagon of it’s fun and exciting to beat on the banks. Well, the banks are us. The banks cannot outperform the communities they serve. And when a community is hurting, their banks hurt. And when the bank is hurt, the community is hurt. We’re all in this together. So as people jump around thinking, yeah, let’s take it to the banks, they’re just sticking it to themselves. We’ve got to connect the dots. We have to help them understand how the 12 feet of those regulations are flowing downstream and affecting every transaction that they do with us.

Nationally, the number of branches is shrinking. Is that happening in Utah? What are we going to see in the future with changes in the banking?  

SONTAG: What we’re hearing from our customers is their appetite for mobile banking. We deal with a lot of commercial companies and we do remote captured deposit and a lot of other electronic capabilities, but they still like the branch. They like to know it’s there. They’re doing most of their transactions electronically, but they still periodically want to come into the branch and know those people are there supporting them. As we’re growing in some of the states and particularly in Utah, we see a lot of pressure to build more branches in better locations. So we will start increasing branches, not reducing them.

JENSEN: Yeah, there’s fewer transactions done at the bank. There’s some megalomania going on too, though, that we’re ignoring. We didn’t see this going on 20, 30 years ago. Now everybody wants to expand their footprint for the very reason that, well, we don’t need as many branches in our market. But if we’re going to thrive, we want to find other strategic markets.

With regard to the desire to have a physical branch, one thing that can’t be downplayed is there’s some provincialism out there. We take advantage of it in St. George. So we can talk about these triple electronic providers coming in and doing loans and so forth. But relationships are really, really important. And small banks are nimble, they’re well positioned to take advantage of the provincialism. I think there still is going to be a future, but there’s this conflict with the cost of regulation, of cyber security, the megalomania—there’s going to be a continual shrinkage, but there’s going to be the community’s desire to have that relationship with the local provider that they know and trust. They can go in and kick the tires, and that gives a community bank an opportunity to differentiate itself, which is the strategy we’ve taken.

HEADLEE: If there’s one thing we learned from the downturn, it’s relationships are critical. When the crisis hit, everybody was looking for somebody to talk to, and those relationships when banks had to de-lever, those loans that they made went to their best long-term customers with the relationships. These folks that show up on your iPhone and they can do something in eight seconds, they go away just as quickly. So there is a huge future for community banks if we can get this regulatory environment right-sized and normalized.

Ed, can you give us a two-minute summary of what you’re seeing from regulatory side?

LEARY: I have always felt once I became commissioner and had to take a statewide view, Utah is served very well from a banking perspective because we have the large national banks with branches here. We have the large regional banks headquartered here. We have the community banks, and we diversify even more with the industrial banks here. So from a competitive standpoint, what you’re looking at is the ability to offer consumers or commercial clients good ground and very efficient banking services.

Looking forward, as a regulator, I see concentrations coming back in portfolios. That’s what we would be concerned about. The lesson of the last downturn was banks being too concentrated in certain areas. If they can manage that concentration, we’re a little more comfortable. We’ll keep looking at it.

The other issue on my mind daily is cyber security. All of the threats are continuing to grow exponentially. As a state department head, I am concerned about it for my department, for the examiners, for the banks and for all businesses. We’ve got to do more and be better prepared in that cyber security arena.

The hard part is Dodd-Frank is still being implemented. So there will be attempts at tightening because Dodd-Frank rules are still coming online. They’re still having to write them. They’re still trying to punish the large banks for being large. And so the overall feeling of bankers is like it’s really tightening around them.