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2017-11-17 / News

Banking Outlook 2018

Bank executives keep a close eye on the uncertain federal regulatory landscape
Regional Business Analyst

Hayes Hayes Rising interest rates, an eased regulatory environment for business and industry, the promise of significant corporate tax cuts, a low unemployment rate, and an optimism among business owners that may no longer need to be prefaced by the word “cautious” has industry experts forecasting a much-needed profit boost for banks in 2018.

To find out how these national banking trends are playing out in our region, Pennsylvania Business Central talked to two local bankers: Greg Hayes, Sr. EVP and chief operating officer of Kish Bank, headquartered in Belleville, Pa., and Todd Brice, president and CEO of S&T Bank, headquartered in Indiana, Pa.

PBC: For most of the Great Recession interest rates had been near zero. How are the rising rates impacting your bank?

Hayes: The Fed is focused on deleveraging its balance sheet by unwinding the $800 billion in investments it made in the second round of the Federal Reserve’s monetary policy used to stimulate the U.S. economy in the fourth quarter of 2010. Those investments will need to get absorbed into the global economy, and this should slowly cause longer term rates to rise. Short-term rates are dependent on the fed’s economic outlook for inflation and unemployment. They are at or below both of those targets right now so gradually rising rates are expected. What we don’t want to see is an inverted yield curve that may come from flat long-term rates and rapidly increasing short term rates.

Brice Brice PBC: While regulations on other industries have been eased or are in the process of being eased, the regulations on the banks from Dodd-Frank are still in place due to the failure of Congress to pass the Financial Choice Act. What does this mean for the year ahead?

Hayes: I just came back from meeting with regulators from all five major regulatory bodies in Washington. The pendulum has certainly started to swing back from the reaction to the events preceding the Great Recession. The legislators and regulators are listening to community banks, and we appreciate the open dialogue and the opportunity to share the impact of the regulatory burden on our communities. The bottom line is that the regulations imposed by Dodd-Frank including a significant batch of new requirements coming in 2018, including the Home Mortgage Disclosure Act and the Beneficial Ownership Rule, have significantly increased the regulatory burden on banks, which continues to grow and is translating to our communities.

The average fees and costs to a borrower for a new mortgage has increased three times in 10 years solely due to regulatory burden. In the rural parts of Pennsylvania, where the average mortgage is under $150,000, the fees and costs have become a more significant percentage of the purchase price of a home. Even though regulators are engaged with community banks, we do not see the congressional and legislative movement to reduce this burden and the associated costs.

Brice: I’m not too optimistic about Congress repealing and replacing Dodd- Frank. There are a lot of moving parts, and people want to protect their special interests. I think there are some things worth keeping from Dodd-Frank such as the guardrails it put around the big banks to prevent some of the abuses that led to the financial crisis, but for smaller banks, the enhanced monitoring has increased our compliance costs. Some Dodd-Frank provisions made arbitrarily have impacted banks of our size. If your bank’s revenues are over 10 billion dollars, you get regulated by the Consumer Financial Protection Board just like the big banks with 70, 80, 90 billion dollars in annual revenue, and your interchange revenue get cuts in half and your FDIC costs increase. S&T is not at that $10 billion level yet, but we could be in a few years, and then we’ll be lumped in with the big banks in terms of regulatory oversight.

PBC: As more baby boomers retire from the banking industry, the battle for banker talent is expected to become very competitive over the next few years. What are you seeing in this regard?

Hayes: We have always had a significant strategic focus on building strong talent. We continue to attract and retain talent while also building the talent within our organization for the future succession of our team. We have several significant partners who help us manage our team’s development, one of which being the Pennsylvania Bankers Association’s professional development program.

Brice: Finding new talent is a big issue for the industry. We’re looking at hiring and growing our own talent internally with some training and leadership programs designed to develop a deep bench, so that when we have a retirement, we can draw from our own talent pool rather than look for someone from the outside.

PBC: The six largest U.S. banks could see annual profit jump by an average of 14 percent if President Trump delivers on his promise to cut corporate taxes by more than half. Banks stand to benefit more than other industries because they usually have fewer deductions, so banks could save a combined $12 billion a year, according to an analysis by Bloomberg. What’s your take on the tax reform bill?

Hayes: If and when a reduction in corporate tax rates occurs, there will be some benefit to banks. Note that in Pennsylvania, our state taxes are based on our capital level and not on income. We will not see a relief at the state level. In fact, Pennsylvania banks pay a significantly higher state tax rate than any other state around us. A reduction in the federal tax rate means that banks can retain more of their earnings to help support increased loan demand in the growing economy and reinvesting in the future.

Brice: From what we’ve heard, the Senate tax bill differs significantly from the House version, and it proposes a one- year delay in cutting the corporate tax rate, so I think the jury is still out right now on tax reform, because it’s unclear which provisions will end up in the final bill that they put on the president’s desk to sign. Certainly, if Congress passes meaningful tax reform legislation late this year or early next year, it would benefit the banking industry as well as our client base. .

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