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Q: What has surprised you most as Counsel of the North Carolina Bankers Association?
A: I've been surprised by the pace of the change that has swept through the industry in the seven years I have worked for the association. I've seen firsthand the effects of the subprime meltdown, the crisis on Wall Street, and Congress's attempt at fundamentally changing how financial institutions are supervised and examined. When I was first learning banking law, I naively assumed that the structure was well-established and changes would be sufficiently incremental that I would have time to absorb it. The core principles are sound, but operationally this is a business that is steadily reinventing itself.   

Q: What resources does the NCBA provide for its community bank members?
A: As a trade association, the NCBA serves its members in three main areas: government relations, regulatory compliance assistance, and continuing education. The NCBA is a voice for the industry to legislators and bank regulators at the state and federal level, helping to build consensus. In a bank's day-to-day operations, the NCBA also plays a role by providing expert compliance assistance and training and networking opportunities for bankers.

Q: What are the biggest problems to community banks? How are some community banks overcoming these hurdles?
A: Two of the biggest hurdles right now are overregulation and ever-changing capital requirements. The two are linked. Laws and regulations have become too complicated and prescriptive. Something is terribly wrong when banks are spending more time and money on compliance than on activities like lending that bring in revenue. The related issue is bank capital ratios. Bank capital from sources like shareholder equity helps to cushion the bank from losses on its loans. It is critically important that a bank have a strong amount of capital, but if you set the capital requirements too high you begin to stifle the ability of a bank to make new loans and stay in business. The industry is working with legislators and regulators to try to identify areas where regulations can be simplified. The second issue is tougher to overcome.

Q: Everyone keeps saying that community banks need to consolidate to be profitable. Do you agree? If so, what do you think the average "community bank" will look like in 5 years? 10 years?
A: The most successful banks are the ones that have carved out a niche and continue to innovate. A bank may differentiate itself by having the broadest range of services, the best customer service, the largest number of branches, the lowest costs, the most unique advertising. I have asked much the same questions and heard countless opinions from various experts. Some people hold up a smartphone and say that it is the future of the banking, others are convinced that there is still a place for personal service at the branch level. While large banks have economies of scale, community banks under $10 billion in assets are exempt from many of the requirements of the Dodd-Frank Act, so that helps to level out the playing field to a degree. I firmly believe that there are opportunities for community banks without regard to asset size. If there is a defining characteristic of those banks that will be the most successful in the next 5 to 10 years, I would predict that they will be the ones that continue to invest in and leverage new technology.

Q: The federal government seems to be pushing the banks to repay TARP. Do you think this will continue? If so, what will be the ultimate effect on community banks?
A: Much of the pressure seems to be coming from the Treasury Department. Out of the over 700 banks that received funding through the TARP program, approximately 400 are still in the program. Larger institutions have greater access to the capital markets and have generally been able to raise funds to pay off the TARP investments in them. Without the same access, many community banks will continue to remain within the TARP program for the foreseeable future. The TARP program has made billions for the federal government. One of the results that we will likely see is continued consolidation as some banks facing the prospect that their TARP dividend requirements will eventually reset higher consider potential mergers.

Q: Community banks do a lot of things right and do not get publicity. Can you share with us a few of those things?
A: I am very proud of the work that community banks do in the area of financial literacy. Each year, the NCBA's member banks sponsor deserving middle school age children to attend Camp Challenge, which is a traditional summer camp experience that includes courses to help kids learn the basics of how to save and manage money. Thousands of kids have attended the camp, and it would not be possible without the financial support and volunteer hours provided by bankers from across the state. I also believe that banks too often go unrecognized for their role in promoting affordable housing. Through the NCBA's subsidiary Community Investment Corporation of the Carolinas, banks have joined together in loan participations that total hundreds of millions of dollars for the construction of affordable and senior housing. And when it comes to community causes, community bankers are at the forefront in helping raise money and in volunteering. I know in my own community, for example, that local banks are supporters year after year in Warmth for Wake, which provides fuel to Wake County residents during the winter months.  

Q: What do you see as the course of regulation over the next several years?
A: More of it. I see the regulatory burden increasing before it gets any better. There are some encouraging signs at the state level. The North Carolina Commissioner of Banks and the General Assembly are working on a comprehensive update to the state's banking laws to modernize it and hopefully reduce unnecessary regulatory burden. A lot of uncertainty remains at the federal level though. I continue to watch the new Consumer Financial Protection Bureau to see if it will add to the regulatory burden or begin to simplify it. Guarded optimism is the most that many bankers can have at this point.

Nathan Batts is Senior Vice President and Counsel for the North Carolina Bankers Association, a trade association for banks that are headquartered or have branches in N.C. He joined the NCBA in January 2005 and works as a banking lawyer, providing regulatory and compliance assistance to member banks of the NCBA. Nathan also focuses on federal legislative issues and is a registered lobbyist in N.C. He received his undergraduate degree from the University of North Carolina at Chapel Hill and his law degree, with a concentration in business transactions, from the University of Tennessee, Knoxville. While at the University of Tennessee, Nathan participated in the Clinical Program and served as an Editor of the Tennessee Law Review. 

Bark Worse Than Bite?

In April's edition, we discussed the FDIC's $900 million lawsuit against Washington Mutual and its former executives. Well, it was settled last week against three of the former executives when they agreed to pay $64 million. Importantly, this sum is mostly made up of surrendered claims to golden parachutes, bonuses and retirement funds, rather than cash that the executives would have to pay out-of-pocket.


 

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Potential Pitfalls of Upstream Guaranties

by Amy King Condaras