It may be hard to imagine, as you notice the rising fees on your bank statements, that banks also face big challenges. But what you may not be aware of is that the rising cost of doing business presents many challenges to banks. An increasingly competitive playing field, new tax requirements, stricter regulations and a rapidly changing economy all contribute to that cost. Here, we take a look at the state of banking in Nevada, how the industry is changing and how local bankers are weathering the changes.
An Uneven Playing Field
Mention the words “credit union” to any banker, and you may get an earful. Credit unions now offer many of the same products and services as banks – but banks have always faced competition. As Bill Martin, chairman, president and CEO of Nevada State Bank explained, the problem is not competition itself, but rather the unfair advantages credit unions enjoy, namely tax exemption and expansion beyond their original purpose and scope.
“We have an economic system based upon free enterprise, open competition and equal footing,” Martin said. “This system should abhor subsidies and market protection. Trust me, as a bank in a 35 percent tax bracket, it is extremely difficult to compete with an entity that advertises widely and pays zero income tax, not to mention virtually any other type of tax.”
In the early 1900s, credit unions were legally established for people, by people, who shared a “single common bond.” Typically, this bond was employment in an industry, such as teachers or factory laborers, for example. Those sharing this bond would pool their money into a cooperative, or credit union. Profits are distributed among its members, so if credit unions perform well, so do their members, just as with other cooperatives like mutual funds.
The problem now, as Martin and many of his colleagues in the banking industry see it, is that the “single common bond” rule no longer seems to apply. For example, the Nevada Federal Credit Union’s membership field is anyone who lives, works, worships or attends school in Clark County.
Carol Tidd, Commissioner of Financial Institutions for the state of Nevada, handles all new charters for credit unions, and must clear up any membership overlaps. She said there is no preferential treatment given to any institution, credit union or otherwise. “Sometimes there’s even in-fighting between credit unions,” said Tidd, “if the membership overlaps. Any changes in membership have to be approved through this office, and some of these credit unions want to cater to the same group of people. So there are a lot of people in this sandbox, and they’re not all playing very nicely. And actually, I can see where they’re allcoming from.”
In addition, where many cooperatives are now expected to pay taxes, credit unions are still exempt. “Credit unions definitely have a place,” said Kirk Clausen, regional president and CEO of Wells Fargo Bank of Nevada. “But what’s happened is that credit unions have chosen to change their charters and compete with traditional banks. That’s well and good, and Wells Fargo is absolutely not afraid of competition – it serves customers best. What’s not fair is that as a for-profit business, Wells Fargo is paying 40 cents on every dollar of revenue in taxes to build schools and pave roads. Credit unions don’t have those duties.”
Jackie DeLaney, president and CEO of Sun West Bank, Nevada’s only sub-S bank, sees this situation from a unique position. As a sub-S bank, Sun West, with only five Nevada locations, has a much smaller ownership structure. Rather than paying taxes at the bank level, Sun West’s 24 shareholders file a tax form upon receiving profit distributions. “Credit unions squawk about sub-S banks, saying that we’re not paying taxes either,” said DeLaney, “but we pay taxes. We just pay them differently. It shows as a distribution of profits, not as taxes, but we absolutely pay them. We operate under very complex tax rules. [Credit unions are] not only not paying the federal government, but they’re not paying the community for roads, schools, etc. Everyone else is subsidizing that, and it’s not fair.”
The Tax Situation
The tax structure for banks in Nevada, since last year’s lengthy, controversial legislative session, involves a 2 percent payroll tax (while other businesses only pay 0.7 percent) and a 7 percent quarterly branch tax. “The governor stated early on that there would be no industry-specific taxes, but in the end, that’s what this is. This is NOT a good tax,” said Clausen.
“Some of us were involved in that abysmal legislative process,” said Mark Daigle, president and CEO of Colonial Bank’s Nevada region. Colonial Bank Group has 13 locations throughout Nevada. “It was nothing more than a last-minute effort to put someone’s head on a pike. It’s not that anyone wasn’t willing to pay, but let’s keep it fair to all of Nevada. The vehemence some people had toward banks was really past all reason.”
“Our reaction to the branch tax? ‘Yuck,’” said John Guedry, president and CEO of Business Bank. With five Nevada branches, approximately 80 percent of Business Bank’s consumer base is in businesses. “I don’t believe it will impact our growth plans. It would be foolish not to proceed, but it’s at least a factor. Even if a bank is in a market and plans to stay, it discourages competition, which is always a negative for consumers. It’s a concern because we were singled out, and other businesses’ concern ought to be, ‘Are we next?’” said Guedry.
None of the bank representatives indicated that branch efforts would slow due to the branch tax. However, as DeLaney put it, “For smaller banks like us, it makes a significant difference. We have to make up that loss of profits, and we can’t price as competitively. At this stage we’ve done well, because we’re a market-niche community bank. It’s not preventing branching, but the bigger you get, the more you have to look at branch profitability.”
Tidd has seen no slowdown in the number of new bank charters issued, but it is still too soon to tell how the branch tax will affect banks in the long run. “The chartering process can take months, and there are a lot of steps in the process. But Nevada is a very good market to start a business, and I’m not sensing a slowdown” said Tidd.
Another inequity bankers see has to do with the CRA, the Community Reinvestment Act. This act is the federal government’s way of ensuring that banks reinvest in their neighboring communities, by offering loans to residents and businesses in low-income areas that previously may have been denied the opportunity. This is another regulation from which credit unions are exempt. “It costs me several hundred thousand dollars a year to comply with that act,” said Martin. “Very little gets passed on to the consumer. It’s all cost that we absorb.” Martin said Nevada State Bank’s 65 branches will also cost them approximately $500,000 a year due to branch taxes.
So why, then, do credit unions continue to enjoy such benefits, and why should the average consumer care? “The more credit unions compete with us,” said Daigle, “the more it weakens the banking system. We price our products to accommodate that. And we price to cover the additional tax burden we carry, which is one of the most significant elements of our costs.”
Bankers say they also compete with credit unions for employees. Without being responsible for paying the new payroll-based business tax, credit unions can pay higher wages, while enjoying greater, untaxed profits. It is estimated that over the next five years, credit unions’ tax exemption will cost taxpayers almost $6.7 billion nationwide, or over $1 billion a year, according to the federal Office of Management and Budget.
“This is nobody’s fault. There are no good guys or bad guys,” said Clausen. “This just evolved. Credit unions were gradually given additional powers. And honestly, what business person wants to pay taxes? But I believe that eventually it will get fixed.”
The Patriot Act
Banks face an ever-increasing amount of regulatory responsibility. This has always been the case. But added to that is adherence to the Patriot Act. When customers want to open an account, banks must rigorously check IDs, and then check those names against long lists of suspected terrorists. Not only can this be costly for banks, but failure to catch someone results in stiff penalties for banks and the individuals involved. While no banker would discount the importance of safety precautions, many argue that banks are unfairly being asked to enforce the Patriot Act.
“If training fails someone, the penalties to the institution and the individual go beyond what I think is appropriate,” said Daigle. “We want to protect people in a way that’s fair and prudent. Penalties for a simple mistake or error come back to haunt you. The reality is, we’ll do whatever we’re required to do. But there are law enforcement organizations where enforcement should rest. Let’s not make banks do that.”
Costs for enforcing the Patriot Act take many different forms. Training is a big portion, as well as making sure there is enough staff to handle the workload. And the cost to a bank’s relationship with long-time customers may be high, too. “I think the biggest change is with opening a new account,” said Rich Robinson, president and CEO of Bank of Commerce, a Southern Nevada bank that currently has three branches. Robinson points out that in a small bank, relationships are especially important. “Examining a database for information that might be suspicious can be expensive and time-consuming. Customers must have at least two sources of ID that absolutely identify them, and this may be offensive to customers who have already been dealing with us for years. We’re very tenacious about adhering to policy, and this makes customers suspicious,” said Robinson.
Guedry agreed. “Requiring us to ask for more ID from customers we know by name and face can be frustrating for them, and I don’t blame them. It’s a better-safe-than-sorry policy, but I do sympathize with customers.”
Most banks, however, said that adhering to the additional regulations is only a slight change from what they have already done in the past. “As the Patriot Act evolved, we learned that what we were already doing was the same thing,” said Clausen. “This is really something where the difference is in how well you train your staff. And we continue to train as well as we possibly can, because in no way do we want to contribute to anything unethical or illegal.”
An Industry Full of Challenges
Every bank faces its own unique set of challenges, depending on its age, size, competition or consumer base. Most banks in Nevada cite the ever-moving interest rate climate as a constant challenge. But they also agree that Nevada has handled a rocky economy better than most states. “This is one of the challenges that’s become an opportunity for the Nevada market,” said Guedry. “We’ve recovered faster than the rest of the country. Now the Fed is reluctant to raise (interest) rates until things have stabilized. A rapidly recovering economy and low interest rates make for a positive environment for customers. It’s a terrific position for them to be in.”
Additionally, all financial institutions face the challenge of identity theft. DeLaney pointed out that for small banks, the cost of technology to safeguard against such fraud can be burdensome. “[Identity theft] is constantly getting worse,” she said. “And it can be devastating. It takes a lot of time and energy to clear it up. As losses become larger, the amount of effort expended to catch it increases.”
Daigle explained that every component of the economy affects the work of banks. “Issues that affect consumers affect us,” he said. “We look at affordability of housing, availability of land for development, availability of water, cost of land for branch expansion, funding for the educational system, because without an educated workforce we can’t contribute to a healthy economy. We want to see growth in Nevada. People coming to live here are interested in quality of life. And we bankers have an opinion on any issue out there.”
