An Eye to the Future of Banking

Bankers have plenty to look forward to over the next five years. The leaders of six community banks outlined key opportunities—as well as expressed several desires for the industry—at a CEO roundtable discussion during the ABA Community Bankers Council’s Spring Meeting in San Diego in April.

M&A

Most of the six bankers cited an increasingly attractive mergers-and-acquisitions environment as their biggest opportunity. The $260 million-asset Deerwood Bank in Baxter, Minn., will soon rise to $570 million in assets after the bank closes its deal for American Bank in St. Paul, says John Ohlin, president and CEO. More acquisitions for Deerwood are likely, as Minnesota ranks as one of the top states in the number of charters, making the banking industry there ripe for consolidation. Ohlin says that board directors of smaller banks are now thinking about selling for a variety of reasons, including increased compliance requirements and increased competition putting a squeeze on their net interest margins and earnings.

Likewise, Leslie Andersen, president and CEO of the $85 million-asset Bank of Bennington in Bennington, Neb., expects her bank to buy more banks over the next several years. “Bankers tell me they want to sell because they are just too tired to fight the fight.”

While New Mexico doesn’t have as many banks, the $195 million-asset Western Bank in Artesia wouldn’t rule out looking at other banks—even though it’s just a one-branch bank—“because we’re highly successful,” says President Kenneth Clayton. The bank serves the lucrative oil and gas industry there.

However, at least two bankers—John Sneed, president and CEO of the $160 million-asset FMS Bank in Fort Morgan, Colo., and Mary Lynn Lenz, president and CEO of the $300 million-asset Foothills Bank in Yuma, Ariz.—say that they see more opportunities to grow organically, even though they would not rule out acquisitions.

“We’re seeing wider lines being drawn between the big banks and community banks,” and more people are opting for that “person-to-person contact” that smaller banks can best offer, Sneed says.

Digital technology

Jane Haskin, president and CEO of the $208 million-asset First Bethany Bank and Trust, Bethany, Okla., says that implementing new technology, such as mobile apps with thumbprint authentication, remote deposit capture and e-statements, is her bank’s biggest opportunity to distinguish itself in the increasingly crowded market surrounding Oklahoma City.

“We believe we can deliver a lot of very innovative products that both young people and our high-end customers really appreciate,” Haskin says. In fact, because of the bank’s digital offerings, “we don’t find the need to expand our branch network.”

Lenz expressed similar sentiments, adding that her bank is currently consolidating its seven branches into four in part because more customers now choose to bank digitally. Indeed, Foothills Bank surveyed the customers of one branch it was considering closing, and it found that only 10 of them came into the branch more than twice a month. She says that feedback from customers over the pending closure hasn’t been hostile, particularly since the next closest branch is only a quarter of a mile away.

“In the letter we sent to them about the closing of the branch, I put my cell phone number because I wanted to hear from the customers,” Lenz says. “I only got 20 calls, and for such questions as, ‘Do I need to change the address on my check?’ ‘Will my debit card still work at the other branch?’ That was it.”

Apple Pay

Most of the six banks are either participating in Apple Pay’s mobile wallet or considering participation in the future when more merchants in their market accept the new payment method. Andersen and Haskin say the costs to sign up concern them, but eventually, they might not have the choice if all of their competitors sign up. Ohlin says banks need to address the desires of the younger generation—“I’ve got a 25-year-old son who has never written a check and never will.”

But not all of the bankers are rushing to be involved in the alternative payment method or even launch mobile apps. Clayton says customers in his rural New Mexico community really aren’t clamoring for the latest technologies, and he feels confident that Western Bank can attract the next generation of oil and gas owners by continuing to focus on building personal relationships.

Haskin is particularly keen on new payment methods that could come out of the Federal Reserve’s task force formed in March to identify and evaluate alternative approaches for implementing faster and safer payments capabilities in the U.S. She advocates for some type of directory “with a credit push,” to determine whether the funds are good, something similar to ABA’s routing system or Chase’s Quick Pay, where someone just has to know a person’s email to send money, Haskin says. “It’s crucial for smaller banks to be able to participate in this.”

Mortgages

How are the bankers approaching mortgages, if at all, considering the new Qualified Mortgage (QM) rules? A QM is one in which the lender has analyzed the borrower’s ability to repay based on income, assets and debts and that meets certain criteria. For example, the borrower cannot take on monthly debt payments in excess of 43 percent of pre-tax income and the lender cannot charge more than three percent in points and origination fees, unless the loan amount is for less than $100,000.

Moreover, a QM cannot be deemed risky or overpriced by having negative-amortization, balloon, 40-year or interest-only terms. Under QM rules, safe harbor provisions protect lenders against lawsuits by distressed borrowers who claim the lender gave them a mortgage that the lender knew they could not repay. Lenders can resell qualified mortgages in the secondary market to Fannie Mae and Freddie Mac and other entities.

Small lenders, lenders who hold mortgages in their portfolios instead of selling them into the secondary mortgage market and rural lenders face fewer lending restrictions than larger lenders. Of course, banks can make other types of mortgages that aren’t QMs, but sales of such mortgages in the secondary market are limited and provide fewer legal protections for lenders.

Western Bank and Foothills Bank are no longer making mortgages, with their leaders citing either compliance issues or increased competition from bigger players. But the others are actually expanding in the business line—FMS Bank hired two additional producers to total four and dedicated a compliance staffer just to handle mortgage disclosures, Sneed says.

Residential lending is “a big part of our business,” with a $100 million servicing portfolio that’s “bigger than our bank,” Andersen says. The bank makes both QM and non-QM loans and prefers to sell to the Federal Home Loan Bank because the agency makes it easier for banks that have some rural presence. “For instance, we can do a loan on acreage that is zoned ag,” she says.

First Bethany actually entered the business line after many of its competitors exited mortgages in the face of tougher regulations, Haskin says. Her bank partners with the Bankers Bank in Oklahoma City that processes the applications. “We can do just a few mortgages and just make a fee when they close, which works very well for us.”

Customers of the future

Like most within the industry, the six bankers are implementing tools and revamping marketing strategies to attract more millennials. Lenz says it’s really how banks tailor their strategies to catch them that will make the difference, including providing more digital offerings.

Haskin agrees, saying having the latest technology helps greatly. “We have a lot of college students that bank with us and we tell them that even if they move, they can still bank with us.”

Millennials across the country actually contact the Bank of Bennington, asking for follow-up advice after watching the bank’s series of educational YouTube videos about financing topics such as how to improve their credit scores so they can buy a home, or how to talk to contractors if they are building a home, Andersen says.

“We want to be looked at as a trusted advisor for millennials,” she says. “We’re not selling ourselves but they still call us for additional advice.”

Some Bankers Question Value of New EMV Rules

October is the deadline for financial institutions and merchants to have the technology in place to accept EMV-compliant debit cards or else face greater liability for counterfeit card fraud, but some bankers from smaller institutions question the value of the new rules.

In fact, some contrast the substantial costs of complying with the benefits, particularly since the debit card fraud their banks actually face—online fraud—isn’t protected under the new rules, according to bankers at a CEO roundtable discussion during the ABA Community Bankers Council’s Spring Meeting.

Under the new rules by EuroPay, MasterCard and Visa set to take effect in October, if counterfeit fraud occurs, the company that has not adopted EMV technology—either the bank or the retailer—takes on greater liability for losses connected to the fraud.

“All of our card fraud is card-not-present, so EMV is not going to do us any good,” says Leslie Andersen, president and chief executive of the $85 million-asset Bank of Bennington in Bennington, Neb.

Jane Haskin, president and CEO of First Bethany Bank and Trust, Bethany, Okla., says that EMV-compliant technology costs twice as much as current technology, and ultimately may not be worth the investment because other technologies such as contactless transactions may end up leapfrogging EMV. Still, her bank is implementing the technology as it replaces expired cards to lessen its liability.

“However, many of our merchants are not going to follow the rule, and so it will be interesting to see if that fraud really does transfer to the merchant,” Haskin says.

Western Bank in Artesia, N.M., is focused on different solutions, recently implementing a product from Guardian Analytics that alerts the bank about possible unauthorized charges, says President Kenneth Clayton.

“Just last month one of our tellers lost her card and then got a text, which instantly saved us liability,” Clayton says.