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2018-02-23 / News

Community and regional bankers are optimistic about 2018, but some challenges remain

Regional Business Analyst

STOPKO STOPKO While bankers in our region may not be singing “Happy Days Are Here Again” yet, many are starting to hum the tune. There are many positive signs: significant tax cuts and generous employee bonuses; increased profitability from an uptick in personal, commercial and mortgage loans; gradually rising interest rates; the full rollout of digital platforms; the deployment of new software and technology to enhance cybersecurity; and bi-partisan support in Congress for easing some onerous regulations on smaller banks.

To get a feel for how these changes are impacting smaller banks in our region, Pennsylvania Business Central spoke with three bankers.

Jeff Stopko is president and CEO of AmeriServ Financial, Inc., headquartered in Johnstown, Pa. Stopko was promoted to president and CEO of AmeriServ Financial, Inc. in March 2015. He joined the company in 1987 and was previously executive vice president and chief financial officer, a position he had held since 1997.

WAGNER WAGNER Bill Wagner is chairman, president, and CEO of Northwest Bancshares, Inc., a bank holding company headquartered in Warren, Pa. Wagner joined Northwest in 1984 as chief financial officer and became president of Northwest Savings Bank in 1998. In 2003, he was named chairman and CEO of both Northwest companies.

Bill Hayes is chairman and CEO of Kish Bank and its parent company, Kish Bancorp, Inc., headquartered in Belleville, Pa. He joined Kish Bank in 1977 and has been chairman and CEO since January 1984. His son, Gregory Hayes, also works at Kish and was promoted to senior executive vice president and chief operating officer in August 2016.


Driven in large part by tech-savvy millennials, all generations of bank customers have been increasingly using digital platforms for their banking transactions. Last year, Wells Fargo conducted monthly surveys with 100,000 -125,000 customers a month who came into the bank’s branches, and millennial experience scores (customer satisfaction) were slightly higher than the average. Mary Mack, head of community banking at Wells Fargo, said, “We have had very positive response and rebound from our millennial customers and the uses of the branch.”

HAYES HAYES Have your bank branches experienced a similar rebound in millennial customers? If so, why do you think this is happening?

Wagner: You see a lot in the media about how much different millennials are from their parents, GenXers and from my generation, the baby boomers, but based on having two millennial children myself, and from my interactions with our millennial employees at Northwest, I don’t think they’re that much different. Yes, they want to use digital platforms, but so do boomers. My wife uses mobile banking. I use mobile banking. We also bank from our home computers. For basic transactions, millennials prefer digital delivery platforms, because they grew up during the Digital Age and the rise of social media, so it’s second nature to them. But when it comes to more complex transactions such as a loan or some investment advice, they want to come into the branch and talk to somebody face-to-face. So, in that regard, their desires are no different than the generations that preceded them.

Hayes: We have seen an increase in millennial clients coming to Kish along with all segments. Following the greatest year of growth in our history, we know that we are focused on the right things, which is a personalized accessible platform that includes full- service branches and more specialized transactional branches. Our clients appreciate the way we do business. They see value in our consultative approach, and it’s important to them that we are here and part of their community. There has been a surge in branch traffic, but that has been due as much to increasing customer numbers, as anything else. Our customers of all generations share the same appreciation for why Kish is different, and their responses after coming to Kish are similar, “If I had known how much better the experience at Kish is, I would have switched a long time ago.”

Digital bank platforms are growing in leaps and bounds, so the question becomes, how do you integrate them with the branches to deliver a seamless cross-channel banking experience for customers?

Stopko: Every year, we continue to see the number of face-to-face transactions go down, because more digital transactions are being done through the computer or smartphone. To adjust to the reduced foot traffic and serve both groups of customers, we recently consolidated two branches in State College into one branch on North Atherton Street, which is very up-to-date with digital technology and is equipped with iPads for customers to use. If a customer wants to open an account and understand what our online banking features are, our customer service reps can take them over to an iPad and teach them how to use those features. While the iPads are there primarily for instruction, if a customer wanted to come into the branch and do their transaction online, they could do that on the iPad. At the same time, having a bricks and mortar branch ensures that we will be able to continue to provide personalized customer service for more traditional customers and for some services such as loans and home mortgages, which are best done face-to-face.

Wagner: We want the customer experience to be exactly the same regardless if they are using a digital platform or our call center, or one of our branches. We have done training with our employees over the years to keep all those channels consistent. Our bank won the JD Power award five out of the last seven years, and a lot of that has to do with our employee training. We don’t just fill positions with bodies, we have friendly and knowledgeable people throughout our network, and all of our services are presented in a customer-friendly manner. It’s that consistency that gives us such a high level of customer satisfaction.

Hayes: We identified a “Twin Rails” strategy to deliver service and information both traditionally and digitally several years ago. As a community bank where we know our customers and customers know us, we are using digital bank platforms to make the everyday transaction easier, while increasing the number of digital connections back to their banker so they can reach out any time they want, in any way they want, to help find a solution for their needs. This traditional approach to relationship banking using digital platforms is the foundation of our “Twin Rails” strategy for the future of community banking at Kish.


More bank transactions being done online means more vulnerability to bank customers in terms of identity theft and getting their account hacked. What is your bank doing to ensure safe transactions online?

Stopko: We use a layered approach to ensuring information security. There are multiple systems and practices put in place so that hackers who might penetrate one layer, are met with another, and another after that and so on, and if they do try to hack in, we become aware of it early on, before there’s a breach. As an example, for internet banking, we work with strong vendors who have developed world- class security systems with a proven track record. Some techniques we use to protect customers are multifactor ID authentication including strong password requirements.

Also, if someone is logging in, we do an IP log-in analysis. For instance, I typically log in to our internet banking platform from my computer at home. If I try to log in at the library or at work, I will receive a security prompt that will tell me that I’m trying to log on from another device than I normally use, and that I’m going to need to use a password via text to my phone, so the bank knows it’s me, and I can go into our internet banking platform from a different computer.

We also do something we call anomaly detection, which is an automated system that routinely reviews customer transactions, and if there’s a pattern that begins to develop outside the norm for that customer, there’s an alert that calls our people’s attention, so they can follow up. Let’s say, you typically do transactions around State College, but then we get a group of transactions coming from Florida or California. The internal alert goes off, and to make sure the customer’s identity hasn’t been stolen, we contact them to ask if they are in Florida. These are the controls that help us protect our customers’ personal information.

At the bank itself, we have very strong firewall protection, and we routinely have those firewalls checked by outside IT experts through a series of attacks and penetrations tests. We’re a nice-sized community bank with $1.2 billion in assets. We do have a gap in technology with larger banks such as PNC, but the gap between us is not as large as one might think.

Hayes: Cyber security is one of our organization’s highest priorities, and in addition to the very robust systems of transaction monitoring, data encryption, data security and customer verification, Kish continues to expand the resources to protect our clients and help them protect themselves. In the past year we have expanded and enhanced our systems to include client and community educational activities; cutting edge use of machine learning and dark web monitoring; customer tools for alerts and fraud monitoring; and updating client contact information to expedite fraud mitigation.


How have the rising interest rates from the Fed affected your bank’s profitability?

Wagner: Because of the growth of the bank and the acquisitions we’ve made over the past few years, our profitability has increased significantly; however, it hasn’t increased as much as it would have if interest rates had been rising during that time. So, we’re better off from a profitability standpoint in a rising interest rate environment, and most banks are structured that way. But one of the things we were fortunate with is when the rates went down, we still had a large residential mortgage portfolio. We’ve always been a strong home equity and mortgage lender. That rolled out slowly over time, as people financed or paid off their homes, and it kept the interest margin fairly strong and consistent throughout the economic downturn. We were starting to feel the effects of low interest rates the past couple years, but it didn’t show up in our numbers because it came at a time when we were doing acquisitions and growing.

I saw a number last week that home ownership, which had been at 63 percent, hit a 13-year high, and they attributed that high to millennials buying homes. The story about millennials for a long time now was that they had too much college debt, and they didn’t have any desire to own a home; they would rather live in an urban setting where they could walk or bike to work, or they were still living in their parents’ basements. Suddenly, the economy starts getting better, and they start paying down their student debt, and they are making more money, and guess what they want to do? The same thing their parents did – own a home.

Hayes: The Fed decided it was time to take the punch bowl away. Kish Bank has been largely unaffected as the rising cost of funds has been offset by the expansion in the yield on our earning assets. In part, this is attributable to the significant expansion in our loan portfolio as we have relied less on lower yielding securities, and in part on the repricing of existing assets as interest rates have risen. Kish’s interest rate position is fairly neutral with a slight benefit if rates increase. A more important driver of performance will be our continued growth driven by our focus on our customer needs. This growth is both balance sheet and business line driven.

Do you think the new Fed chair, Jerome Powell, will continue Janet Yellen’s policies of steadily raising interest rates or get spooked by the volatility of the stock market and put on the brakes? What would you recommend he do?

Stopko: Over the past week, a number of the Federal Reserve governors have said they think they are still on track to raise rates gradually, and I think the key word is “gradually.” We’re seeing somewhat of a correction in the stock market, and I don’t think it’s derailing what Yellen put in place, but if we saw a more protected decline that would erode consumer confidence, perhaps that would cause the Fed to slow rising rates, but I’m not seeing that yet.

I think what Janet Yellen did well is in being transparent and being careful to make sure the economy was continuing to show some growth and inflation was still under control. She wanted the Fed to “remove accommodation,” that’s the technical term, and to make the rate increases incremental over time. If I could have Powell’s ear, I would advise him to continue to increase rates gradually.

Hayes: The Fed will continue to focus on price stability, full employment and a growing economy. It will continue to be data driven and flexible to adjust policy to the ever-changing economic conditions. The Fed will continue to reduce the size of their $4.5 trillion balance sheet, plus increase short-term rates at a measured approach with clear communications for the purpose of not sending shockwaves through the market. It is interesting now; with the unwinding of the Fed’s balance sheet, they can exert control over the entire portion of the yield curve. With the passage of the Tax Cuts and Jobs act in conjunction with current budgetary expansion, it does give the Fed more flexibility to continue on the path to higher rates.

It’s also important to note the impact international rates have on the nature and slope of the yield curve. Currently, 10-year Treasuries are approaching 2.9 percent, with German bonds trading at 76bp, U.K. rates being at 1.64 percent, and Japanese bonds being at a mere 6.5bp. U.S. rates are the best deal in town, barring any major currency exchange adjustments.


For the first time since the rankings began in 1999, fewer graduates from business schools went to work in finance and banking. As the banking industry continues to experience increased competition from outside the industry, particularly the FinTech sector, graduates are wondering if the traditional banking career is worth pursuing. Has your bank experienced a talent shortage? And do you have internal programs to train workers in the banking business, and if so, how do they work?

Stopko: At the teller level and customer service, we’ve been able to fill those positions. We’ve also been able to attract students coming out of college for entry level positions such as accounting or credit administration or IT. Where we are sensing a talent shortage is in finding experienced commercial lenders. Part of that could be that as an industry, we went through a period where we moved away from internal training programs and the development of workers. So, now we have real shortage of commercial lenders. With the economy improving and businesses showing some growth, commercial lenders are in demand. I think we’re going to invest more in internal training, so we can develop and groom our workers from the communities where our banks are located.

Hayes: Winning the war for talent is a strategic mainstay for our bank, because we are a people business, more so than some of the larger institutions we compete with. Kish has been successful at recruiting seasoned client-focused bankers who feel their ability to serve clients and meet their needs had been diminished by their institution’s decisions to merge. We have also been successful at recognizing promising young professionals within our organization with career path development plans that allow them to leverage their strengths and grow from starting level positions to those of increasing responsibility and authority. We place a significant emphasis on recognizing and advancing our top performers at every level.


Community and regional bankers feel unfairly painted with the same broad brush as big banks in terms of regulations. While a comprehensive financial reform bill failed to pass last year, a new bipartisan Senate bill, named the Economic Growth, Regulatory Relief and Consumer Protection Act, promises welcome relief for regional and community bank holding companies by raising the statutory threshold for enhanced regulations from $50 billion to $250 billion in total consolidated assets.

Do you expect some change in regulations this year? If so, what do you think should remain from Dodd- Frank and what should go?

Stopko: We have more people working in compliance now than we had five years ago. However, over the past year, it seems there’s been somewhat of an easing in regulations for community banks. It hasn’t been a sea change yet, but a couple smaller things. Regulators wanted us to collect home mortgage exposure act data, starting this year for those applying for a home equity loan in addition to those applying for a traditional mortgage. They pushed back the requirements on that, which was going to be quite onerous. That’s an example that even without major legislation, we are already starting to see some relief. A lot of the trade organizations, such as the Independent Community Bankers Association, which we are a member of, have pointed out that the mega tier banks – Citibank, JP Morgan and PNC – are in a different world than we are. These trade organizations have been lobbying for easing regulations on community banks with under $10 billion in assets, and there are still a lot of those, and we fit that category.

There’s been more focus on not using the broad brush for every bank, but a recognition that community banks are different, and individually, we’re not a threat to the banking system like the megas are, and even the banks that are $50 million are different than is $1 billion to $3 billion, and there should be some relaxation of regulations on smaller banks. I would like to see that continue.

A decision that caused AmeriServ to get lumped in with the big banks is when it decided to take money from the TARP fund to prop itself up during the financial crisis. We were a healthy bank that chose to participate in the TARP program to get additional capital at a time when it appeared that the financial world was falling apart, but, being in the program, we were subject to the same scrutiny as the larger banks, which is why we got out of TARP.

Wagner: The last number I saw for the Dodd-Frank rollout was that they had only addressed 70 percent of the requirements of the legislation, so the remaining 30 percent has still to be written by regulators. Dodd-Frank hasn’t had a huge impact on our bank, but we are on the cusp of it making a huge impact, because we’re at $9.4 billion in assets, and once we cross the $10 billion mark, a whole new set of regulations come into play. Three issues could be particularly onerous. The Durban Amendment to Dodd-Frank says that when you reach the $10 billion threshold, the fees the bank is allowed to charge when its customers use their debit cards are cut in about half. The impact on our bank is that we will lose about $7 million to $8 million a year in interchange income. That income we lose goes back to the retailers.

When security breaches take place, which have typically been caused by the lack of adequate cybersecurity on the part the retailers, the banks are the ones who take the losses from that happening, and part of our interchange income was used to compensate us for those losses. That’s one part of Dodd- Frank I would like to see go away, but the chances of that happening aren’t very good, because the retailers have a stronger lobby than the banks.

Second issue is that when we cross the $10 billion threshold, we have to do a mandatory, detailed stress test in a worst-case scenario of an adverse economic event, and then assess how that would impact our bank, and, in particular, our capital position. The banks that are doing that say it requires a 1,200-page report, and the cost of the stress test would be about $2.5 million a year. That regulation has potential for being eliminated. A bill that’s now in the Senate that’s gaining some traction, which I think it will be voted on in the next couple weeks, would eliminate that stress test for any bank that has less than $100 billion in assets.

The third is that when we cross that asset threshold, we will be examined by the Consumer Financial Protection Bureau, which is the most powerful bureau that’s ever been created in the federal government because they are not accountable to anyone. It’s been an extremely controversial government agency since its inception because it has been very aggressive, particularly with the banking industry. We’re hoping there will be some reform of the CFPB where there, at least, will be some accountability, such as a board of directors or governing body. The CFPB’s funding doesn’t come from Congress; it gets its money from the Federal Reserve Bank. Typically, Congress oversees government agencies by determining what their budgets are, but with the CFPB, they don’t have that opportunity.

Hayes: Regulation of “too big to fail” has been largely achieved. Regulation of the unregulated or loosely regulated players in the industry should be sustained. Otherwise, the bill currently before Congress will make some important regulatory rollback moves that should help banks focus on more effectively serving their communities and support stronger economic expansion. Regulators have already demonstrated their willingness to work collaboratively with regulated institutions to ensure regulatory oversight is reasonable and allows an expanded focus on client service. .

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