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For more than a century, state financial regulation has been a cornerstone of economic stability.
So how do we balance innovation with stability? How can we navigate uncertainty with confidence?
On this show, we’re talking to regulators, policymakers, and financial leaders who understand that stability and progress go hand in hand. Each episode, we’ll break down what’s happening behind the headlines, why it matters, and how we can make informed decisions that drive economic growth and resilience in our community.
Let’s navigate it together.
Randall Guynn (00:00):
We've been accused of looking at what works well for a big giant bank and then saying This is coming soon to a theater near you to a community bank. Does some of the things that apply to JP Morgan really need to be applied to community banks? I think the answer is no.
Kyle Thomas (00:20):
You are listening to State of the System, the podcast that brings clarity and perspective to financial regulation, community bankers, academics, and bank regulators meet every fall at the Federal Reserve Bank of St. Louis for the Community Banking Research Conference, co-sponsored by CSBS, the Federal Reserve System, and the FDIC. This year, I moderated a panel exploring the issues and considerations community banks face as they pursue different strategic approaches to best delivering the services needed by their communities. In this episode of State of the System, I invite you to listen to Leslie Anderson, president and CEO of Nebraska-based i3 Bank, David Coxson, director of Community and Small Business Banking for Georgia Primary Bank in Atlanta. Ilaria Rawlins, CEO of Fortuna Bank in Ohio. And Randy Gwen, a senior advisor with the Federal Reserve Board of Governors on what goes into the decision to buy, sell, create, or redefine a community bank.
Jim Fuchs (01:27):
So one of the things about this conference is there are some things that have been foundational to the conference every year. And then each year we've always added a number of different features, a number of different ideas. It's constantly evolving and I would say that is really the beauty of having the partnership between with the FDIC, CSBS, the states and the Reserve Bank structure along with the Federal Reserve Board, and then just the constant engagement with the research community and the practitioner community. So it really helps us to adjust things each year. Some of the programs that you've heard, emerging scholars, for example, in some of the later years survey started in the second year. But one of the aspects of this conference that really has been with us from that very first year in 2013 is this idea that after a day and a half of discussing research and in fusing it with perspectives from practitioners, it's probably good for us to just take stock of what we have heard through a capstone panel.
(02:25):
So we've always had a capstone panel at this conference. It's very difficult because on one hand you want to look ahead a little bit into the future, and it's really hard when you're starting to plan a conference to know what the future is going to look like in October in this case. But we have been very fortunate over the years to be able to assemble some very interesting panelists, and this year is certainly, certainly no difference. So pretty interesting maybe provocative title, but we're talking about some of the strategic choices that banks have made or may need to make in the panel. And I give full credit to Kelly Laers in Nebraska for the title of buy, sell, create, and Redefine. And we have representatives that can speak to all of those different perspectives and of many more as part of this panel. But moderating the panel is Kyle Thomas at the conference of State Bank Supervisors who serves as a senior advisor and policy and innovation at CSBS where he provides thought leadership for the organization, meaning CSBS, and of course all of CSBS'S members on financial regulatory policy and the growing role of innovative technologies in financial services.
(03:29):
We refer to Kyle a bit as a double threat because he began his career working in both supervising community banks and in working in community banks. So with that, I will turn this year's capstone panel over to Kyle Thomas.
Kyle Thomas (03:43):
Well, thank you very much, Jim, and it's a real pleasure to be here. What Jim didn't mention in my biography is that I'm a son of a farmer and a community banker here from the Midwest, so there's no place I'd really rather be during harvest season than in the Midwest talking about community banking issues. And so we do have the distinct pleasure of being the capstone panel, and I want to thank my panelists in advance for the perspectives you bring today. These perspectives are going to be reflective of a track that banks take in delivering the services that their communities need. And so each of these panelists is kind of going to speak to a different track that they took in best providing those services. And so my panelists today, and I'll let them give a more fulsome introduction of themselves and the path that they represent.
(04:30):
But going down the line here, we have Randall Guynn, an advisor for the Federal Reserve Board of Governors representing the buy track or the purchase side of a transaction. Then we have David Coxon, executive vice president, director of community and small business banking for the Georgia Banking Company out of Atlanta, Georgia, followed by Ilaria Rollins, president and CEO for Fortuna Bank, Grandview Heights, Ohio. I failed to mention David is representing the cell path and Ilaria is representing the create path. And last but not least, Leslie Anderson, CEO of i three bank in Bennington, Nebraska representing the Define track are the redefined track. And so the panel discussion that I kind of outlined for us today is going to take a few, maybe three phases. The first phase we're going to talk about is really the conditions of the community and the market and those in your immediate environment that kind of created the considerations that put you on that track, how you got to where you are now.
(05:31):
And then we're going to talk about the current environment and what the threats, the opportunities, the factors in the current environment and how those feel to you based on the track that you're on. And then, because this is a regulatory research conference, we're going to take all the things that we learned yesterday and today and talk about how those elements of the research and the policy discussions resonate for your particular track and where you think regulatory policy could be improved or better support the particular track that you're on. So I thought maybe we'd start with you, Leslie, give us an introduction to the institution you work for and the track that you're on.
Leslie Anderson (06:08):
So, i3 Bank is a small community bank. We're based right on the northwest edge of Omaha. We're almost a hundred years old, so Redefine has happened a lot in our tenure. The track that we're really on now, just as the bank has grown naturally. So a hundred years ago, small town ag community, 35 miles from Omaha, so trains and Model Ts, people weren't going back and forth very often, so very much its own community. Over time, Omaha grew and came out to meet Bennington, and Bennington is now very much, although they would shoot me for saying this, if the mayor's in town very much a suburb, Omaha kind of drives what we do. And so over time we've had to morph from an ag bank to what I'd call a more suburban community bank, construction, lending, development, lending, a lot of small business lending. Over time, we've morphed that way. What really got us on our redefined journey, this latest go round has been the need to grow to be more efficient or find a product that produces income without affecting our balance sheet. So that's where we are.
Kyle Thomas (07:30):
Ilaria, you provide a really nice contrast to that as they create banks. So tell us a little bit about your story and what the conditions were that got you to that path.
Ilaria Rawlins (07:39):
Yeah, great. Thank you. I'm Ilaria Rawlins with CEO of Fortuna Bank or de novo in Grandview Heights, Ohio, which is really a suburb of Columbus, Ohio. Columbus, as many of you may know, is a highly competitive banking market. We're tied with LA for de Novo formation since 2019. Fortuna was number five. And so we knew that we really had to be very intentional in differentiating ourselves from even our fellow competitors in the de novo space. We started to do some research. Women owned businesses are growing at two times the national average women stand to inherit the majority of the great wealth transfer taking place between baby boomers and the next generation female entrepreneurs are denied three times more often than their male counterparts for commercial loans. And out of 4,300 plus banks, less than 15 are women owned. Two were created ahead of us intentionally to be women owned. And so we really felt like that was a space where we could be a differentiator in the market. We could be supportive through our philanthropic arm and providing female entrepreneurs and women consumers with access to capital, mentorship, networking, and financial education. And thus Fortuna was born.
Kyle Thomas (08:52):
Great, thank you. David, how about you from the sell side of things and your aim to provide services to the community you operate in, that was your path. How'd you get there?
David Coxon (09:02):
Sure, and I might back up just a little bit and explained that this bank was the de Novo bank in 2007 and shortly after that we got into the great Recession. You would've thought this SPAC would've been had the foresight to see what was going on in the market, but it fell victim to the one thing we've all learned that concentration kills and that sometimes you think you're doing things a certain way, you're not. All that being said, took 'em about three years to get in trouble and I was asked to come on board in 2012 along with the new staff and it took us eight years to get out of trouble, as you can imagine. But after that, the bank prospered very well and grew to about 350, a little bit, 350 million in size. But during that time you also have a responsibility to your shareholders and governance.
(09:57):
And we were a particularly attractive target for a number of institutions in and around Atlanta, principally because we had built a strong core community bank that probably serve most small businesses and certainly a certain element of the consumer activity. And we are situated in an area called Buckhead in Atlanta, which is a fairly affluent and well positioned area. And with that, we were continually being sought after in terms of what opportunities might've existed if we partnered. But I only bring that to light and say at the same time we were enjoying the fruits of the turnaround and the growth and the activity only to find that in too often our customers were outgrowing us. So in order to continue to serve them along with the consideration of where so many of our shareholders who thought they were going to be in for a three or four year stay, now at 17 years we're beginning to say, what is the liquidity event?
(11:01):
What's the opportunity? And we found ourselves and while we sold and was bought, I'd like to call it a merge with the organization that did buy us, which we were Georgia Primary Bank, and we became Georgia Banking Company. So it was such a subtle change that I'm not even sure that our customers to this date really recognize the fact the transfer happened because we didn't have to change a single account number with our customers. We probably did not have a handful of customers that overlapped with each other. So it's been an extremely successful merger in that regard. But we accomplished a couple things if I can. We found ourselves in market with a much larger institution that allowed us to continue to serve the customers I talked about that outgrew us. We did an 80 20 split between shares exchanged and cash that was offered. So we created enough liquidity that people were happy and we also gave them the choice that over time, as our currency becomes now more available for them to make good decisions on how they will exercise, either staying invested or deciding to exchange out.
Kyle Thomas (12:14):
Yeah. Thank you very much. We've heard that comment a couple times that as borrowers outgrow the bank's capacity to serve those needs, sometimes the best move is what you described there, which is partner up or merge with another institution to grow and provide those services. Turning to you, Randy, you represent the purchase side of the transaction. You've advised institutions on these types of transactions. What would you add to this conversation at this point?
Randall Guynn (12:36):
So let me first confess to the whole audience that I'm the imposter on the panel. We have three community bankers, C community bankers. My experience was a lawyer on Wall Street for a firm called Davis Polk and Wardwell during the 38 years I worked there, I represented a lot of buyers and sellers on transactions. I worked on a lot of de Novo bank applications. Well, a lot's an exaggeration because there haven't been a lot in the last 15 years or so. There should be more. And hopefully in my new job there will be more and also have talked about how community banks or have advised over the years how community banks can meet the new challenges with non-bank of the large bank competitors, with regional bank competitors, with non-bank competitors and the non-bank lenders and non-bank payment service providers have really become a big deal.
(13:27):
And obviously there's a lot of partnering potential with community based and I think the new stablecoin issuers will create another challenge or opportunity depending on how you respond to it. My new job since early May is to be senior advisor for supervision to the new vice chair for supervision. Mickey Bowman, who of course is also the community bank representative on the Federal Reserve board. Governor Barr has left so I can freely say whatever I want regime. So he entered his presentation talking about deregulation. I like to call that recalibrating, excessive capital, overregulation and irrational supervision. But those are two different perspectives about how things go. I think there's a lot that can be done to facilitate robust banking for community by community banks and to help them be competitive in the new and ever-changing environment.
Kyle Thomas (14:20):
It's a good stopping point because it's a perfect segue into the next section here. So you've all described market forces in your communities that got you headed down this particular path, but there's a lot of factors that go into how that path feels as you're moving down it, whether it's create, redefine, sell, buy, what have you. So I'd like to explore how did it feel from a regulatory and supervisory standpoint along that journey? What worked well, what didn't work well? And we're going to save some time at the end for wishlist recommendations, but I think it's helpful for the audience to understand what the regulatory and supervisory structure around you felt like as you were navigating your particular journey. And I also want to invite my panelists to just jump in freely if you've got something to add to somebody else's comment, maybe we'll start at the beginning, Ilaria with you as a create path.
Ilaria Rawlins (15:10):
Let me set the stage though. We really came up with the idea to start the bank in September of 2021. We worked early to raise some at-risk capital. We submitted a draft application in late 2022, understanding that that would probably help us fast track an application. We had relationships with the Ohio Department of Financial Institutions from a previous de novo. So that really helped kind of just get us off to a good start. We submitted our formal application with the ODFI and the FDIC in February of 2023. Three weeks later, SVB Bank fails, signature and First Republic fail. And I think as organizers we looked at each other and thought, what does this even mean? Because we know after the financial crisis, no de Novos came online. So our application was not fast tracked, but we still moved along. It gave us time to raise our capital.
(16:04):
It gave us time to get our doors open. We received conditional approval in August of 2023 from the ODFI. We received our conditional approval from the FDIC in February of 2024. And I think the only kind of additional twist that we could throw into it because why not you're starting a brand new business, was we had all seen unprecedented rate hikes during that time as well. So we submitted 18 different scenarios and stress test and performas that layered on top of our application to ensure that we would still be able to become profitable in the timeframe. So I think it felt hard, probably harder than maybe some of our earlier denovos that had come online since 2019, but as one of the other bankers in the organizing group really kept reminding the team, it really should be hard to start a bank. It shouldn't be something that's taken lightly and easy. And so we were appreciative of the partnership. I think there are opportunities to help maybe make it a little bit more efficient or easier going forward. So I have a lot of ideas in that space.
Kyle Thomas (17:11):
Thank you. Maybe we'll talk to Randy and David here from the merge buy sell side of things, how the regulatory environment, supervisory environment influence support work against what you were trying to do?
David Coxon (17:24):
I would say it was extremely cooperative and supportive. Has nothing to do with the fact that Bo and Melissa sitting over there, but I can tell you that prior to that time, we'd actually formed a holding company through the Fed, obviously as a small bank holding company and dealing with the FDIC as well. When we submitted the applications, I think two things entered into it. One is that the acquiring bank had been led by somebody who had already kind of demonstrated their ability to navigate the strengths of risk management and grow in a profitable institution along with the staff that they had. I think the fact that what we had done in taking a bank from almost obscurity to a very strong balance sheet, very good asset quality and a group of people who were committed to the community banking model, when you combine those two together, I think it made for a very easy decision as opposed to what might other risk would be out there in terms of somebody from outside of market coming in and wanting to acquire it.
(18:31):
And quite frankly, I say this a little tongue in cheek in the final decision as I was explaining to the board who I think really leaned a lot on my decision of it was the timing, right? The thing that I thought was so important, going back to the earlier question, was an in-market merger so I could continue to serve those customers along with the fact of what we did with the shareholder. And the last thing, and like I said, a little tongue in cheek, we had a lot of credit union sales in the state and more than one's too many. I wanted to be a part of what Georgia banking meant in the community, and I felt like that from all aspects of the supervisory and regulatory standpoint. It was smooth selling. We announced our definitive agreement on October the ninth, so two days from now it'll be one year and we close on February the 28th. So I think that timing speaks to the cooperation and I think the partnership that we had with the regulatory side of it and feel very complimentary to what we experienced.
Kyle Thomas (19:42):
Randy, would you say as someone who's advised banks to these types of transactions, you agree with that or have you had a different perspective?
Randall Guynn (19:49):
Particularly since I work at the Fed now in Washington and I'm sort of responsible for taking a look at the m and a processing and how it can be improved, I can be more critical of the current process than maybe David can. And I would just say it takes too long, it's too burdensome. And I'm going to talk about a situation which is publicly disclosed so I can mention it, but I was on the sell side there. But on the buy side, basically if you're the buyer's lawyer, you're doing the application for the buyer. And when I would fill out these applications first I've been application size for the Fed for the holding company, then another one for the FDIC or the O ccc, depending on whether the flagship bank is a national bank or state bank, there may be the FDIC for some other reason because acquiring some deposits from a non-bank company and why do we have to file three applications instead of one, number one, number two, it's like, but you guys supervise these banks.
(20:41):
Why are you asking us to spend two months to gather all this information to give to you, which is actually in your systems already? Why can't you just look at your computer? And then why does the review of the application feel like a mini examination instead of things that only relate to the statutory factors for approval or denial? All kinds of nice to know questions that have absolutely nothing to do with whether it be application gets approved or not. So that's one thing. And then we need to speak, it can go faster, and particularly for community banks, it should be able to go a lot faster. Let me give you an example. This was not a community bank, although it wasn't a huge bank, but I was representing TIA and selling sort of a 30, I dunno, not a huge bank. The buy side were a bunch of private equity funds, which makes it really complicated.
(21:32):
Those take forever. I remember the day before, I'll say this, I can remember the day before the NCAA volleyball finals. The reason I know is because my then future son-in-law was on the Penn State team that was actually playing in May of 2023. The day before I was asked by one of my m and a partners, are we going to get approval by September? Need to know this for a drop dead? And I said, look, I really don't think we get approval until the end of the year. And in my mind, I was thinking to myself, and I didn't say this, I hope it's before the end of the year. It's not sometime early 2024. I really have no idea these scenes can take forever. And the next day as I was traveling to the NCAA volleyball finals, I get a call from Mar Vander White, the general counsel, the board, and he said, we're ready to approve the transaction tomorrow.
(22:22):
And I about fell off my chair. What happened here? Well, what had happened is that a couple of the private equity funds said, oh, you know those troubled banks you have out in the West Pac West and some others we're prepared to invest, but only if you actually get this thing done. And so magically what was going to take six or eight more months could get done tomorrow. Now it didn't get done until for about two more weeks some things that the buyers and sellers had to do to work it. But it said the big lesson there was this can happen faster if there's a need to go faster. And I think particularly for community banks where it's like, okay, suppose we make a big mistake allowing, I'll just hypothe the JP Morgan and Bank of America to merge. Never going to happen. But really what's going to happen if a merger of two community banks go through?
(23:14):
Yeah, I guess one of them could get in trouble, but really what are the chances of that pretty low and what systemic impact does it have? Almost nothing. Sorry. I mean you should have, and it's not to say you're not important. You're very important to small businesses, but you're not important to whether there's going to be contagion, things like that. So we ought be willing to take more risks to process those more quickly and just say, look, you know your business, the two banks know their businesses, go do business and we won't interfere with you in any way. And if you fail, I guess that's the problem. If your depositors will be protected by deposit insurance, your shareholders will lose money. But that's kind of capitalism and we ought to not get in the way of that just because you happen to be a regulated bank. So that's sort of my view now, I guess both a little bit from a regulator standpoint, but also as a buyer where you just said, why does this have to take so long and be so complicated and so expensive?
Kyle Thomas (24:09):
No, thank you. It also reminded me yesterday a couple points that came up that when a bank isn't able to make the business decision that is right for it in the community and it's maybe stuck in a limbo phase or a holding pattern, whether it's regulatorily or otherwise, not much is going on in that bank. I think you had mentioned that your bank had been up for sale for four years, and in that period it was essentially in a holding pattern and not really providing the services and needs. So to the extent that the regulatory process creates an additional holding pattern period, I think we could do better. One last thing in along of these lines, sorry,
Randall Guynn (24:43):
Is we've been accused of looking at what works well for a big giant bank and then saying, this is coming soon to a theater near you to a community bank. Does some of the things that apply to JP Morgan really need to be applied to community banks? I think the answer is no, know.
Kyle Thomas (24:59):
Yeah, yeah. Well, last but not least, Leslie, you did the redefine track and that strikes me as a particular challenge, not only in the community telling your consumers and your customers what is happening at the bank, but also internally with your employees, but then also with your regulators, what you're up to. How did that feel as you went through the redefine process?
Leslie Anderson (25:21):
We changed our name first. So about 10 years ago, we were Bank of Bennington and had been Bank of Bennington since inception. We had branched into Lincoln into a community right between Lincoln and Omaha or Bennington, really in Omaha called Ashland. We'd branched in and the name Bank of Bennington just wasn't working for those communities. So that was the first to this. We changed our name to I three Bank, explained to everybody the I three. It has nothing to do with an iPhone. It just happens to be our core values, which our integrity, innovation, and impact. And it took a while for us to convince the community that we were primarily in and really have a strong belief in community banking and that mission that they weren't really going to see any change. It was just the name change. We didn't sell all those things.
(26:13):
That took a while to get through. And then about four years ago, we decided to reinvent by offering a new product, and we looked hard at whether or not it makes sense for us to go looking for a partner to buy or whether we should just develop something new. The partner to buy piece when you're a $200 million bank gets a little tough, especially to find one in the communities that we're, those banks are generally available sort of in much more rural locations, which really wouldn't be a fit for our core bank. So we went down the road, figured out what banking as a service might look like for us as a way to make income without affecting our balance sheet. Hired some consultants, spent a lot of time and effort there developing what the program might look like, got everything developed, policies and procedures and so on in place.
(27:12):
And an overall sort of strategic plan for the program is because while I didn't need, and I knew we didn't need approval from our regulators, I've been a banker long enough to know that this isn't something you just spring on 'em when they come for a visit. So we then put together a paper really around what we thought this program was going to look like, had meetings with our regulators, talked at length about it. I wouldn't say they weren't supportive to begin with. They really wanted to know the why do you need to do this? Well, growing it, even if we can grow it 10% a year, it's going to take us a long time to get to a point where we can really manage, have our balance sheet cover the overhead that we need. We've talked about it a lot during this conference around how much technology costs and fraud costs and all those things that you need to deal with.
(28:05):
Little did we know in those meetings, I'm sure the regulators did that. The whole banking as a service piece for banks was about to blow up. Lots of consent orders filed, all sorts of crazy things happening, which then caused us to rethink exactly how we were going to do this. But I'm sure that was a big part of the hesitance when we had these first meetings was they knew this was going to happen, we just didn't yet. So I would say in general, it's been a good experience. My experience with the regulators has always been let's keep 'em in the loop, tell 'em what we're doing and how we're going to do it and it should make life easier down the road.
Kyle Thomas (28:47):
Thank you. Yeah, that's good advice. And something we hear from regulators out there is tell us what you're doing early and often or consult with us. We're going to shift a little bit now into the current environment. So several of the research papers talked about various elements of the current environment, particularly the technology, and I am curious, each of your tracks is probably feeling different pressures, threats, seeing different opportunities in the current environment. So I thought it'd be really interesting, particularly from the three bankers here, no offense Randy, but what this environment kind of feels like and where you're putting some bets right now. David, maybe we'll start with you.
David Coxon (29:22):
Sure. We actually have a fairly young population within the bank. I am probably the second oldest person in the bank, and that's getting pretty old, but the reason I say that is with that young group, they are very much at the forefront of where technology is. What should we be looking at? I think we take full advantage of what our third party support both our core system and other ancillary services provide us so that we can be kind of at the state-of-the-art for our commercial customers as well as our consumers. We are not making loans online at this point in time, but that certainly is in the pattern of where strategically we feel like we've got to be focused, but there's a lot of monies being poured into everything from our desktop to our cell phones. In fact, when they converted us, they did away with our landline, our hand, we got voiceover, so I just use your cell phone if you think about it.
(30:25):
I'd say the average age is probably 40 42. I mean, they've lived on that cell phone since they were very young, and I tried it for a couple of weeks and finally I used my position. I said, I need a handset. That's all there is to it. It's just something about picking up that handset and talking to people. But whether it's teleconferencing or internally or whether we're now being able to allow our commercial customers to execute wires on their desktop, I think we're availing ourselves to what we feel like is not bleeding edge, but certainly cutting edge and not to be left behind. I know that the comments in the research talked about oftentimes, and I think Leslie you alluded to a minute ago in terms of the fact that smaller institutions, it is a burden. I mean, it's capital intensive. It takes money to do it, but we also recognize we cannot fail not to do it.
(31:21):
We've got to change with time. We are in a paradigm shift. I mean, let's face it the traditional sense. I started in banking in 1974, so you think about it, I was in a period prior to interstate banking that I saw traditional banking the way it had been for so long, and I've watched it evolve to where we are today to almost a virtual environment. I mean, it really is, and none of that's wrong. It's just the change of time in what we do. So we are very much a pro technology. We're looking at all the things that we can do to enhance our ability to deliver the service to the customer and the customer to not be faced with, if it wasn't for only the fact that you don't have this, I would bank with you. So that's a big challenge that we have.
Kyle Thomas (32:20):
Interesting, and I bet that challenge Ilaria is particularly acute for a bank that's just getting started because I bet you have to be just ruthlessly prioritizing where you're making investments. You don't have the benefit of a large amount of capital that's been with you for years. So how do you view this current environment? How are you making investment decisions and strategic decisions on where to invest?
Ilaria Rawlins (32:45):
I think if we had tried to start the bank about 10 years ago, it probably would've been much harder in that technology, especially by the third party providers that a lot of us community banks rely on. We're not up to speed and we're not on par with some of the larger banks today. They are. And so we've really been able to utilize those third party relationships to be able to provide us with technology that aligns us with our larger competitors and really not make that a barrier to entry. Where we've seen a barrier to entry really in this first year has been more, I was probably naive in this space where when I was part of a de novo 20 years ago, we moved money via checks today, we moved money electronically. We couldn't get debit cards launched until September of this year, so nine months after we opened, because Visa won't allow you to submit an application until your doors are opened and you're approved, then your core provider puts you on a project plan that takes six months to get through. So that was one. Fintechs don't update their routing number tables pretty regularly. So Venmo didn't know who we were, we were PayPal didn't know who we were. I put a post out on LinkedIn saying, does anyone in my group know Venmo and can you help connect me so that I can ask them to update the routing number tables
Kyle Thomas (34:03):
Couldn't just call Venmo.
Ilaria Rawlins (34:05):
Well, we tried, but I messaged the president or the CEO of Venmo. He didn't respond. And then similarly, even banks aren't updating the routing number tables regularly. So KeyBank we just went live with three months ago. If there's a way to increase the ability to ask all of these electronic money movers to update the routing number tables, it allows us to go live much faster because core to deposit growth has been a challenge for us in these early days. If you can't move money, you're not going to put your transactional money in the new bank.
Kyle Thomas (34:39):
Right. Yeah, that's really interesting, huh. Leslie, what about you? How's this environment feeling from a redefined perspective?
Leslie Anderson (34:47):
From a redefined perspective, probably the biggest thing we had to do was put financial crimes, policies, practices, software in place. Much like a billion dollar bank, not a 200 million bank or even larger, not inexpensive to do, but I think really well worth it as much as it hurt when we were doing it and I was grumbling about it, now that it's up and running and working really well, it's also really benefiting what we call the community bank side of the business too, and catching fraud and doing a lot of things that may have slipped through before that aren't slipping through now. Although I would say this whole new thing that we're worried about with voices and faces and everything is a challenge we were just talking about. So how are we going to do that? We're so small. How are we going to fight that?
(35:42):
I think we're going to have to physically have people call people back. So if they get a phone call, they're going to have to physically call 'em back to be sure they've got the right person and they're not from the record at the bank, that phone number, not the phone number that they called you on, because that could be wrong too. I think those are the kinds of things that we're going to run into. I think challenges for small banks from a technology perspective are almost all the same, and it's just really hard to afford it. And even though our core providers have a lot of those products now, they aren't as pretty and squeaky and colorful as what fintechs have, and they also aren't even very often as great as what the large banks have. And our core providers, bless their hearts, charge us a bajillion dollars to integrate something that's better that we can get on the market.
Kyle Thomas (36:42):
Yeah, I think creating space for the development of those accessible, affordable technology solutions for community banks is one of the most important challenges. I live in the DC area and there's a large bank in that area, and I have a lot of friends who work for this large bank. None of them are bankers. They're all in technology. They all work in the tech shop or the tech stack at that institution. And so I joke that it's kind of a technology company that dabbles in banking, but your banks and you've got to have access to that technology, otherwise your customers are not going to be able to sign up.
David Coxon (37:12):
We're held hostage these days to our core providers because we have just given overall our ability to process and hold information. And with that, we don't know how cheap it really is. We know it's expensive to develop, but today the pricing is what they want it to be. I can guarantee you, if we all had the same core provider had the exact same services, we'd all be paying something different because they negotiate based on the strength of which they can appeal to you. So that's something that has to be looked at in the future.
Kyle Thomas (37:50):
Yeah, absolutely. And I wonder if artificial intelligence is going to provide some competitive disruption in this space. A lot of the services you were likely getting from your core providers, and check me on this if I'm wrong, might be able to be done in the future faster, easier, and more accurately with an artificial intelligence model that hopefully you might be able to get externally
David Coxon (38:11):
As long as it's not attached in any way to the core. Because they'll charge you an arm and a leg to do that.
Leslie Anderson (38:16):
Exactly. I mean, I think there'll be a lot of us that are looking at actually having a side core that can run all those systems for us and will interact once a day with one or two transactions with the core, because that can be done just back to the balance sheet without having to pay charges per account and per everything else. So I think a of people are going to be looking at that and AI can really help that out a lot.
Kyle Thomas (38:39):
That's interesting. That's the first time I've kind of heard that concept of a side core, but I think it makes a lot of sense just to be mindful of time. I want to save plenty of it for q and a, regulatory policy changes. Wishlists kind of ending on the note, everything we've learned through the research papers, the perspectives we've gotten from different bankers and different panelists, and then your own perspectives based on the tracks that you're on, what would you say are some areas ripe for opportunity of beneficial change in the regulatory and supervisory environment? Who wants to start? I've been too directive. I'll give free reign.
Ilaria Rawlins (39:15):
I'll go first. And I'm speaking really probably more on behalf of the de Novos that are behind me as our experience wasn't necessarily as stark, but when we submitted our application with the FDIC and the ODFI, they kind of walked hand in hand. And it wasn't until after we were approved by both that we'd now started to really talk to the Federal Reserve. We opened our door, we submitted an application with the Federal Reserve for the master account in July of 2024. They activated our account in December, 10 days after we actually opened our doors. So there was a 10 day period where we were open, but we couldn't do anything because our master account wasn't open, so we weren't able to move money. From what I'm hearing from, I've gotten three calls from de Novo banks and organization at this point, and they're saying that they're hearing it's taking six to nine months after the approvals before their federal account will go live. So I just wonder if there's an opportunity for all three parties, whether it's your state, the FDIC and the Fed to all come together at the time of application and work kind of in lockstep together as opposed to kind of being completely siloed.
Kyle Thomas (40:24):
Yeah, kind of a dual tracking. I mean, if it's headed in the direction of approval, get moving now on the internal process is to just flip that switch when the day is ready. Can I jump? Okay,
Randall Guynn (40:34):
So I just add that to my list. Master accounts has been at the top of our list of looking at things like this, but I hadn't appreciated exactly that one. It shouldn't take that long for master accounts. And also when you're doing denovo, you shouldn't have to send your applications in sirta first to the FT C, then we had to be able to send them all in at one time and have them prove including the master account so that they're being reviewed simultaneously with the deposit insurance application, whatever. So let me add that. I'll talk to Governor Wall since he's in charge of master accounts and we'll see what we can do there. Governor Barr mentioned the problem for the community banks of the capital requirements being reduced for the giant banks, but in some ways I view that as a distraction. When I look at the key findings from this year's survey, I didn't notice anything here that talked about the threat of capital reduction for the big banks.
(41:31):
It may be an issue, but it's not here. But what is here are things you really ought to focus on. And I think Charles Y is up there in the ICBA, he ought to be focusing on this too. So the lobby being should be reduce the community bank leverage ratio from 9% to something lower that can be done. That would be a reasonable proposal. I noticed that safety and soundness supervision accounted for the largest share of total compliance costs at 27%. Make safety and sound of supervision more reasonable by doing things like having more specific, predictable and reasonable standards for issuing MRIs. In the Graham Leach Bliley Act in 1999, and this is mainly directed with the Fed, but it applied, the principal applied more generally. The Fed was actually directed to rely to the extent possible on examinations done by other state and federal supervisors.
(42:23):
We generally never find it possible to rely on them because they're not as good as we think we would do them. And so that standard ought to change where maybe there's a lot more reliance on examinations by state supervisors talking about in this here. Another thing here was another big cost 25% was complying with standards for money laundering. CTRs are filed every time, either there's a transfer of $10,000. That $10,000 figure was established in 1970. If you adjusted for inflation, that's $80,000, not $10,000. We've looked at some things. If you actually just raised it to 30 or $40,000, it would reduce the number of CTRs that have to be filed for most banks by about 75 or 80% similar impact for sars. And one of the questions is why are we filing all these things? Does it really help law enforcement detect crime or not?
(43:12):
And when examinations are being done, why are enforcement actions so prevalent for sort of B-S-A-M-L violations? Does it really help the process or is it just something that we can do because we can, maybe the regulators can do something to help reduce the cost of addressing cyber risk or credit card check fraud. The Fed has a proposal now for check fraud instead of always regulating, maybe facilitating some of the technology challenges that community banks have so they don't have the scale. I noticed that one of the things in here was increasing deposit insurance caps to 500,000, maybe a million. There's a proposal now to raise it to 20 million. I worry that that might actually not be so good for community banks because there'll be a big fight over who pays for that. And you might have a pretty big premium increase to have that higher amount for transaction accounts.
(44:03):
And then lastly, we talked about, or I've talked this about is just really dramatically streamlining the de novo and m and a acquisition and de novo chartering processes. We can tailor this to community banks. We should be able to process those a lot faster than an acquisition involving a big bank. We should take our forms so that we're not asking for information that we already have in our system and we shouldn't have, I'll just call them frivolous, additional information that have nothing to do or are clearly related to the statutory factors for approval or denial. We should discipline the process more. Now, that's obviously on us, not on you. One of the things from a bank regulatory standpoint is a lot of times if you have a holding company, you have to do an application at both for to us and to say the OCC or under the Bank Merger Act or the FDIC.
(44:52):
There's actually a provision of the statute that says we can waive those holding covenant. We should be waiving those, particularly if the community bank accounts for 99% of the assets of the group. And then we've got to figure out some way to address public comments. It's important to get public comments, but every time there's a public comment, the application gets moved from the reserve Bank where it's going to get processed quickly after the board where it gets stuck for months and months and months. And a lot of these comments, as you probably know, are not really serious. Comments are all designed for what I'll call extortion of various writing a check. And I can't tell you the number of buyers that I've told. Look, yes, X filed a comment letter. Just get out your checkbook and offer to pay $2 million to this cause or that cause and it'll all go away. And since they do go away, the comment itself is actually not serious substantively, it's really just to get the $2 million check or $5 million check. We've got to figure out ways to separate reasonable and genuine public comments from those that are just designed to slow down the process
Kyle Thomas (45:54):
Anyway. Now that's a long list. I'll maybe underscore or jump off of the notion about sharing and relying on one another's regulatory reports in the process. I think that's an area ripe for exploration. Probably no better time than now given the changes happening in many of the federal regulatory agencies from a staffing perspective. Also, the changes that we're trying to make to the supervisory and regulatory process, all that means that how we examine the tools we use to examine banks are going to change. And so how we use each other's exams should also probably change. And hopefully we're in a position where we can build up a level of trust needed to use one another's resources the most effectively. Leslie.
Leslie Anderson (46:35):
So I'm going to hit on something that Kenneth talked about earlier, which was the ability to use sandboxes. As we're moving into doing new and innovative things, we ought to have a sandbox that we can play in that our regulator can be there with us because let's face it, on all this stuff, we're all learning together. If we can have a regulator in there playing with us, they're going to see things possibly that we're not seeing. We can learn together, get a product up and running, just let's call it something really simple AI that's going to help us with financial crimes. Now, if you're a big bank, you're developing your own, you're building your own, that's going to happen. The smaller banks are going to have to find somebody off the shelf that off the shelf product probably is new. It needs to be vetted and the regulators are going to want to vet it too.
(47:27):
And they're going to ask a whole lot of questions. So why not be together, vetting it together given a grace period to try it and make sure it works. And if it doesn't work, fix it or get rid of it and start another one. I mean, I think lots of those things are going to help community banks because we don't have time to wait. AI is running like a freight train. We don't have time to wait. There's going to be a lot of those products that don't have time to get, as I call it, the good housekeeping seal of approval. Those are those kinds of things that we may use on the side core because our cores all do have the good housekeeping seal of approval, which makes them more expensive. So if we could work together, if we could get that grace to work together, I think that would be huge. Now, I know from a staffing and all those things, that becomes a problem too, right? Because regulator staff is off examining banks. So we're going to ask for more time to come in and work in the sandbox with us. So I know those are all issues that are going to be out there.
Kyle Thomas (48:29):
And I think the trick will be within AI is figuring out what are the use cases that are probably low risk, but high impact. Just go do it men. And there's probably a segment of 'em that are medium risk and still high impact, maybe work together and figure out the rules of the road collaboratively. And then there's the high risk use cases that we probably need to really work together closely on and tread lightly.
David Coxon (48:52):
Randy, you brought up a lot of good things, and I had thought about the really, I was in the CTR SARS part because again, the amount of time that's being committed, that was it. But I was really trying to move it over and probably be in some of the questions that what's facing to me, community banks. And it was one of our things to think about is the net interest margin and core deposits. I think the things that's facing our industry more than anything else is liquidity, stress, and the ability to fund the balance sheet. We're all compelled and driven by growth. We want to have a year over year improvement. And the only way we can do that is to have a very solid footing of financial funding. And today, when we look at how much, and we heard it throughout the conference, how much of our industry has moved outside of our industry and has created a lot of challenges for us.
(49:53):
I want us to be cognizant of that because I think we're going to continue to find them very hard to go back and return to what we've traditionally looked for, which then gets back to the things you talked about in cover and overhead. But I think the whole funding of community banks has got to be revisited, and we're not going to have these non-interest deposits like we've had before, and what we expect and the cost and non and broker deposits, all of these things are going to be things that we've got to address in order for us to have the stability and really the survivability going forward. Just as a closed comment for questions, so much of what we've talked about here is both progressive and innovative, but if we don't act on it, it's not done us any good.
Kyle Thomas (50:43):
Okay. Well with that, we'll open it up for questions from the audience.
Audience (50:49):
One question I guess directed to Randall is within the application process, particularly in rural counties, the HHI definitions get very restrictive and very concentrated markets that prohibit in market mergers. Is there any interest in changing that analytical approach and particularly some of the market definitions?
Randall Guynn (51:14):
We are looking at that, but I'll say it's probably early days in terms of looking at it. But one of the things that we're going to do is we're going to probably reorganize how the different people in the Fed actually do applications m and a applications. So right now we actually rely on the supervision regulation division actually relies on another division to do the HHI now we're actually going to get those economists in SNR and we're going to start looking at alternative lenders as well as part of the competition. Look at credit unions, non-bank letters and so forth to try to have a more meaningful and accurate application of the real competitive environment. Question in the back.
Jim Fuchs (51:54):
So I have a question for Ilaria. A lot of times we hear part of the decision between starting de novo, it's either that or actually acquire a charter. Can you talk a little bit about how you thought about that decision?
Ilaria Rawlins (52:08):
I think in our case, and it was probably relatively isolated, is we had a team familiar with a de novo process and felt really comfortable with moving forward as a de Novo wanting to start out on her own. There also weren't necessarily attractive charters in the area where we felt comfortable acquiring at that point.
Randall Guynn (52:29):
Can I mention one thing before we rest? So if you're going to read two things, if you're a community banker, I would suggest two things. One would just not even be on your radar screen. One is get on the weekly newsletter of a guy named Tom Brown of Second Curve Capital. You may or may not know him. He's currently holding a CEO conference in Chicago. He gives some examples for why focus strategy and strong execution will beat scale every time, which I think is important. And it was a very good, and then the second one, which came to mind only because of Tom's newsletter is a book called Competing Against Luck. That was written by the late Clayton Christiansen, who was a professor at Harvard Business School for a number of years. He found that his theory of disruptive technology helped explain why really good companies failed because they didn't see disruptive technology coming up from over on the side like AI or things like that.
(53:20):
All it did was it showed correlation, didn't really show causation. So he then developed something called the theory of jobs to be done, which is what causes someone to buy your good or service. And one of his things is that aggregated data doesn't tell you that. You've actually got to really dig down deeper things that community banks can actually do that big banks don't pay attention to. And so I urge you to buy his book on competing against, most of the examples are non-financial, but you'll see the relevance to, I think, your own business models and how you can actually compete very effectively against even banks of much bigger scale.
Kyle Thomas (53:55):
I will second to Tom Brown reference. He's excellent, excellent stuff. So well, Leslie, Ilaria, David and Randy, thank you all very much for being here. Really insightful comments and appreciate the time you gave us today. Thank you.
(54:11):
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