By Gino Fanelli, originally published in Rochester Business Journal on March 22, 2018.
Phillips Lytle Panel Tells the State of Region’s Banking
Modern banking, like most industries, is facing a revolution in terms of the way it approaches customers, business models and areas where its capital is injected.
That comes from a potpourri of different influences; a growing reliance on technology, a shift in business needs and demands, the influence of the Tax Cuts and Jobs Act and an all-around atmosphere of adaptation to a new world of lending. Two sectors face different challenges and benefits: the larger, commercial banks like M&T Bank and KeyBank, which focus on middle-market lending, and the smaller, community banks such as ESL Federal Credit Union and Genesee Regional Bank, which tend to deal in smaller loans and hyper-local investment.
On the morning of March 13, the Rochester Business Journal hosted a “State of the Region” breakfast sponsored by law firm Phillips Lytle LLP, bringing together eight leaders in the middle-market and community banking sector for a panel discussion on what’s new, promising and challenging about Rochester’s world of banking.
Right off the bat, most in the middle-market sector agreed 2017 was a good year, and 2018 looks promising as well, with a large credit to the Tax Cuts and Jobs Act, or TCJA.
“Our customers have a pretty positive 2017 and are optimistic about 2018,” said Rich Owens, KeyBank vice president and middle-market relationship manager. “I think that’s part of a bigger cycle over the past two or three years as the economy has picked up. A lot of our businesses are looking at growth opportunities, investment in new equipment, being inquisitive, looking around for other companies they can add to their portfolio.”
Tax law changes under President Trump stand to be a boon to most middle-market businesses, mostly due to a substantial tax cut for C-corporations, or any corporation taxed separately from its owners. One of the only permanent provisions of the TCJA, the C-corporation tax cut removes a graduated scale of taxation, capped at 35 percent for C-corporations making over $10 million in revenue, to a flat-tax rate of 21 percent. That’s a pretty substantial tax cut for most middle-market businesses. KeyBank defines middle market as annual revenue between $20 million and $2 billion, with most commercial banks following similar definitions.
The result of that change has companies moving to turn into C-corps and to use their savings to reinvest in their businesses.
“With the tax reform, with a little relief from a regulation standpoint, I think companies are really excited, and what we’re seeing is optimism really driving a lot of business activity,” said Achille Cavatassi, vice president of commercial banking at JP Morgan. “Mostly due to the tax reforms, we see companies looking at paying down debt, investing in capital expenditures and really rewarding employees by trying to raise salaries when they can. I also heard of customers here locally looking to make acquisitions with the windfall of the new tax reform.”
As far as investments into one’s own business goes, new technology stands head and shoulders above most any other types of expenditure for a combination of reasons. Cybersecurity has quickly become a focal point following the Equifax data breach in 2017, while the natural progression of tech has pushed companies away from owning their own servers into investment in cloud technology. According to KeyBank’s 2018 middle-market business sentiment report, half of surveyed companies plan to invest in cloud computing, while 94 percent plan on keeping or increasing their current investment into tech.
“It’s a supply and demand kind of issue,” said Michael Brunner, president of Bank of America Central New York Market. “If clients are growing and they need to produce more, obviously they need more equipment. But a lot of our clients, given the level of the economy and the growth of the economy and support of capital markets, see an opportunity to update equipment and become a lot more efficient. It’s a little bit opportunistic for companies to be able to make investments in themselves and become more efficient.”
It’s a sentiment that all on the panel agreed with; companies receiving a tax benefit are going to use that money, at least partially, to update the business. The economy is good, tax breaks abound and tech is making steady progress. But that doesn’t mean all is well. Representatives from the middle-market banks see a real labor shortage as companies look to use their capital to expand and acquire.
“It’s likely to get worse, if you think about what tax reform means for a lot of our C and I (commercial and industrial) clients. Hopefully they’ll be able to invest in the business and grow,” Brunner said. “They’ll hopefully be looking for more people to have that growth, and it’s been kind of a challenge to find people, qualified people.”
Those scarce people include skilled laborers, IT and tech support people and even financially savvy bank employees. It’s not a trend unknown to the smaller community banks. For them, the local industries continue to do well, yet often their growth is hindered but the lack of skilled laborers.
“The health care industry is definitely one of the largest growth industries for us. We’ve really seen health care kind of shift to the homefront,” said Timothy Levine, relationship manager for ESL. “A lot of these home health aides and agencies have been expanding quite rapidly—physical therapy and those related medical help professional services, and I know that a couple of my clients have had trouble finding the right help in that industry. That industry is growing, but there’s not enough supply in Rochester right now to meet that demand.”
For the community banks themselves, the market has shifted in a way that makes expansion unlikely, and a focus on automation and customer service comes to the forefront. Take Genesee Regional Bank, which has only two brick-and-mortar locations.
“For our C&I customers, we have to derive the technology for them, so they don’t have to go into the branch to make deposits,” said Raymond Pettine, commercial relationship manager for Genesee Regional Bank. “We also have a program called SmartPay Express, and what that will do is we can tailor it to their website, which lets them set up a payment portal directly on their website for their customers.”
In short, it’s a complicated scene. Business confidence is up, investment into small and mid-market businesses is up, the economy is doing well and technology is quickly being scooped up and utilized. But providing human capital to keep up with the flow of business growth is a challenge. It’s an issue not unique to finance, health care, photonics or construction. It’s a communal Rochester problem, something that virtually all financial leaders agree upon. How to fix that is unclear, and what is even more unclear is what sort of cap that lack of skilled labor could have on the future of economic development in the Flower City. But a key part in that is simply trying to do things differently.
“Businesses are looking to grow, but they also need to fill positions,” Brunner said. “It’s the No. 1 thing on everyone’s mind. We’re not sure how it’s going to play out, and what’s driving it now is a lot of companies are looking for creative ways to recruit talent, offering flexible arrangements, which is very interesting—trying to capture the millennial activity. Getting creative is what I’ve seen companies have to do in order to keep it up.”