Rock Solid: Utah's banks and credit unions have pushed the state to national prominence in the financial services industry

“We’re No. 1!”

That could be the chant of Utah’s bankers if current trends continue, according to the industry’s leaders.

Utah is currently the fourth-largest banking state in the country, according to Howard Headlee, president of the Utah Bankers Association.

Utah should climb, Headlee said. “We could get to No. 2 in the next three years or so, and perhaps No. 1 in the next 10 years.”

“It’s conceivable,” agreed Scott Simpson, CEO of the Utah Credit Union Association.

“That’s a possibility,” said George Sutton, a lawyer with Jones Waldo and a former Utah commissioner of financial institutions.

Headlee said Utah’s economic success is broad-based, resulting from a foundation of sound tax policy, a pro-growth regulatory scheme, the skilled and reliable workforce and “a wonderful standard of living. These factors have and will endure,” making for upward economic cycles that are stronger than the rest of the U.S. as well as milder downward cycles.

In terms of total banking assets, Headlee said, only New York, California and Massachusetts surpass Utah. Utah sports a current near-$681 billion asset figure. New York topped $1 trillion in 2017, then sagged a bit before jumping the $1 trillion mark again in the first two quarters of 2018, according to FDIC figures.

Utah’s healthy assets completely overshadow the neighbors. Nevada totaled $238 billion by the end of June this year, according to the FDIC numbers. Colorado had $63 billion, Arizona $25 billion, Wyoming $8 billion and Idaho $6 billion.

Bolstering Utah’s assets base growth are industrial banks. As the officials explained, only eight states charter industrial banks, despite the obvious advantages, as federal lawmakers have always feared the mix of non-banking commerce with banking. The law allowing chartering of industrial banks about 30 years ago only came with a window of a year or less for states to line up.

These days only Utah and Nevada are involved heavily with industrial banks, Sutton said. California, Colorado, Minnesota, Indiana and Hawaii have also allowed some industrial banks but Utah has chartered the most industrial banks, he said — somewhere between 12 and 15.

The result is that BMW has a bank in Utah and General Motors did at one time. Pitney Bowes, noted for making postage meters, has a bank here. Sutton said industrial banks may account for as much as $50 billion of Utah’s total bank asset picture.

The Community Reinvestment Act (CRA), enacted by Congress in 1977, ensures the benefits of all those assets is passed around the community. While complicated, the act basically requires that banks determine the needs of their community and develop plans to respond with appropriate levels of investment — even five-year plans — which are reviewed federally for CRA compliance, the banking leaders noted.

“It’s a gigantic advantage to a community,” Simpson said. “It adds up to real money for under-served areas” such as low-income housing developments — even the arts and charities. The act fits with the social mission that is part of any credit union’s activities, he said.

CRA was promulgated in response to banks “red-lining” low-income neighborhoods as too high-risk for loans, the officials said. It was a major problem in areas like the northeastern UnitedStates, Sutton said, where banks where actually drawing red lines on maps around such areas “which condemns those neighborhoods to die.”

The CRA process is involved and ongoing, Sutton said, but basically requires a minimum of 1 percent of a bank’s assets include areas covered by the act. “Utah has always had a satisfactory or outstanding rating as far as CRA compliance,” he said.

This summer’s loosening of regulations on banking levies following the 2008 recession should only speed Utah’s fiscal growth. “When many of the regulations directed at Wall Street inadvertently hit Main Street, they had especially harsh and unintended consequences in Utah,” Headlee said.

“However, the one issue that Democrats and Republicans agreed upon in the last two years was the right-sizing of these regulations,” said Headlee.

“I think Trump’s appointments to the regulatory agencies have generally been very good,” said Sutton. “They are experienced people who understand more than just political issues in Washington.”

The main effect, he said, is more development than has been allowed in the past 10 years. “From 2008 to 2016, almost no new banks were formed in the entire country. Today I am working on several applications for new banks in Utah.”

“Virtually no new banks were formed between 2008 and 2018, which is unprecedented in the history of the country,” Headlee expanded. In detailing a recent fix, Headlee said the regulatory classification of Zions Bank as a Systemically Important Financial Institution (SIFI) was implemented at the $50 billion asset level. “Zions was the smallest SIFI and it cost them millions of dollars a year in compliance — entirely unnecessarily. [The asset level] has since been increased to $250 billion. I could go on and on.” (Zions Bank has since successfully appealed its SIFI status.)

Simpson also lauded the recent regulatory relief, since resources that could be “deployed and leveraged to grow opportunity for Utahns is instead devoured by the cost of dealing with increasing regulation.”

His favorite “nip” in the recent deregulations is the expansion of financing to allow up to four doors on eligible residential properties. That means small rentals can still remain in the residential category, Simpson said, instead of classification as a business — a category that comes with a financing cap. “That’s tangible relief we got as credit unions.”

Something Utah’s banking leaders said may challenge regulators in the future are the growing technological advances in finance and banking, sometimes referred to as “fintech.”

“Fintech is all about speed and convenience,” Headlee said. “Assuming people are going to want a mixture of touch points with their banks, the traditional banks are well-positioned.”  Face-to-face interaction is still critical for certain customers, he said. “But for those that just want speed and convenience, their options are growing every day.”

The impacts are broad but affect younger people more, said Sutton, with some youngsters banking solely with their smartphones. “Ask them if they’ve ever been in a bank branch.”

A core of customers still prefer dealing with a person, and financing businesses and developers remains central for local banks, Sutton said. “What bankers are paying more attention to now is avoiding cybercrime and anticipating new technologies that could significantly change how consumers bank. Electronic banking is much more efficient and cost-effective — and, therefore, more profitable.”

But Simpson worries. “Tech is a little tricky for credit unions,” he said. “First, it is really changing the retail footprint, and to the benefit of consumers. Branches are still going up but you’ll notice they’re not your mother’s bank branch. The footprint tends to be much smaller because mobile options have reduced branch traffic. As such, teller lines are starting to look different.”

Fintech is also expensive — prohibitively so for smaller institutions in some cases,” he said. He also sees “a constant threat from the financial technology space to all brick-and-mortar financial institutions. Credit unions are running pretty hard to keep pace with consumer expectations.”

Simpson said fintech could change retail finance dramatically. “Look what Amazon did to Sears. With Apple, could we get iTunes credits instead of U.S. dollars?”