Industry panel: Banking and finance, a changing landscape

By Jackie Hanson

Gener Deliquina 2

Gener F. Deliquina
Coast360 Federal Credit Union

Gerard Gerry Cruz - Sept 2014

Gerard A. Cruz
President and CEO
Community First Guam Federal Credit Union

The banking and finance industry in the Marianas has seen several changes to its landscape in the past year, both physically and operationally with new federal regulations.

Bank of Hawaii, which reported fourth quarter profits of $42.83 million and has $15.46 billion in total assets, closed in May and subsequently sold in November one of its three Guam branches, a location it had operated since September 1971. Following that, the bank consolidated its two Saipan branches into a single new branch, which opened Feb. 1 in Garapan. In addition to its consolidated Saipan branch, it still has branches remaining in Harmon, Hagåtña and Palau.

First Hawaiian Bank, which operates three branches in Guam and two on Saipan, announced on Dec. 23 that its sole owner, BNP Paribas Group, was considering a proposed initial public offering of the business and operations. The bank reported fourth quarter net income of $63.6 million and $19.3 billion in total assets. The IPO could occur in 2016 after corporate
restructuring, according to a release. First Hawaiian Bank declined to
participate in this year’s banking and finance feature.

P Flores

Philip J. Flores
President and CEO
Bank Pacific

Lou Leon Guerrero

Lou A. Leon Guerrero
President and CEO
Bank of Guam

Regionally, the Bank of Marshall Islands, which has been connected to the U.S. banking world through First Hawaiian Bank for everything from wire transfers to checks payable, recently received notice that First Hawaiian Bank would soon be terminating the relationship, as reported in the Marianas Business Journal, sister publication to Guam Business. BOMI established the connection with First Hawaiian after losing its correspondent banking relationship with Citizens Security Bank in the mid-2000s. The move would leave BOMI with no connection to the U.S. banking system despite the fact that the Marshall Islands economy uses U.S. currency.

Another change to the landscape was the addition of PenFed Credit Union’s second branch in Guam, which opened Jan. 28 in the GCIC building in Hagåtña with onsite ATM services and cash recycle kiosks. The credit union announced it expects to do approximately $50 million in mortgage transactions during its first year.

Hobbs Lowson

James “Hobbs” Lowson
West Pacific region manager
Bank of Hawaii

John Wade

John W. Wade
CEO, American territories
ANZ Guam, Inc.

As Guam’s financial institutions respond and adapt to incoming and outgoing players as well as various regulatory changes, they remain a stable foundation upon which the community can rely. Guam Business checked in with the region’s major banks and credit unions for some perspective on how the landscape of the industry has changed for better and for worse and what it will look like moving forward.


Q: How do you foresee the landscape of the region’s financial institutions changing in coming years?


Cruz: I think there are two primary drivers in the future for financial institutions in Guam. The first is the pace and the depth of future regulatory changes. Many new laws were enacted to prevent what national lawmakers saw as reasons for the financial meltdown. Implementation of new processes to comply with new regulations is an expensive requirement, and it forces institutions to relook at their branch footprint and make difficult decisions. The second driver will be economic, and right now the United States is doing better that most countries.

In Guam, we expect the current landscape to remain about the same. Ownership structure may change, but the number of institutions will be about the same. Despite having several banking options, the industry remains pretty small.


Deliquina: Nationally, we are continuing to see a steady decline in the number of financial institutions, primarily related to closures attributed to mergers, consolidations and failures. The landscape of financial institutions is continuously being shaped by compliance issues. The costs of compliance — personnel resources, software/system purchases/upgrades, etc. — are causing financial institutions to rethink their strategic initiatives and focus in order to control expenses, some resulting to closure and consolidations of their smaller branches into their larger branches.

Recent remarks from Debbie Matz, the chairman of the National Credit Union Association, the federal agency which regulates credit unions, announced NCUA’s commitment to the Regulatory Modernization Initiative’s efforts to provide regulatory relief, particularly for smaller credit unions, which are designed to aid all credit unions to better compete in a rapidly changing economy. One prime example is the update of the “small” credit union definition by raising the asset threshold from $10 million to $100 million in assets for defining “small” credit unions under the Regulatory Flexibility Act. This would increase the number of small credit unions for consideration of regulatory exemptions in future rulemakings, noting that $100 million asset credit unions make up 76% of all credit unions.


Flores: Where others put branches, we place roots. We’re not closing any branches. … All our departments are busy. … It was too bad to see Citibank go — they’ve been here since, I think, the early ‘70s. They had a lot of employees they let go — it was too bad. As far as Bank of Hawaii, they’ve been consolidating branches across their entire system. I think it was a shock to everybody that they closed Tamuning so quickly, especially those who lost their jobs, which is unfortunate. We’ve been able to pick up a couple of people, and we’re happy to be able to do that. We’re committed here. We’re halfway through our 62nd year, so we’ve been around for a while and we’re going to stay here.


Leon Guerrero: Although some national and regional banks have closed or consolidated their presence in Micronesia over the past few years, the landscape of the region’s financial institutions remains positive, with new opportunities ahead. Our island communities will always need access to financial services and funding as we continue to develop and expand. …

I see the people of the Micronesia region taking hold of their economic development and moving forward in improving their livelihood. … the CNMI is slowly recovering, and they also will need access to funding and financial services as they expand and develop their economy. …

In Guam, I see sustainable economic opportunities that demand the participation of strong financial institutions. We are seeing new small business start-ups; we are seeing existing small businesses survive and thrive. Opportunities from tourism and government spending, both on the federal and local level, are the foundations of our economy, and they have flourished. […] So the landscape of our region’s financial institutions is positive, adaptable and resilient. We have to be, as we cannot rely on anyone else but ourselves.


Lowson: The most exciting development is the transformation in mobile banking and payments. In the years ahead we expect to see a strong customer preference for immediate transactions across the mobile platform with 24/7 availability, particularly through peer-to-peer payment systems. As a result, the customer branch experience will distinguish itself by becoming less transactional in nature and geared more toward ensuring that longer term financial needs are being met.


Wade: We have gone on record as saying our goal is to consolidate one centrally located office. Our timeline has been pushed out due to investment required in American Samoa. However, this is still our goal in Guam. We expect that banking products will continue to be increasingly accessed electronically.


Q: The passage of the federal Dodd-Frank Act in 2010 created the Consumer Financial Protection Bureau. How have the real estate transaction requirements of the Consumer Financial Protection Bureau that went into effect in October — the Truth in Lending Act–Real Estate Settlement Procedures Act Integrated Disclosure — affected your processing of home loans?


Cruz: We appreciate the government’s intent to promote greater transparency when dealing with such an important loan decision, but we also believe in the Law of Diminishing Returns, where ultimately, there exists a point when the cost to implement a new regulation outweighs the intended benefit. We believe we are approaching that point.


Deliquina: The new requirements certainly placed pressure on our processes. We now have to provide fee estimates to our members at the higher range to minimize having to absorb shortfalls. The disclosure requirements can sometimes delay closing since they have to be redone to effectuate any changes and must be provided within three days prior to closing.

From our members’ perspective, the application forms are more user-friendly in that they are clear, transparent and condensed — the number of pages they have to fill out has significantly reduced.

From our mortgage processing standpoint, the new requirements have also been beneficial because the information they receive is more complete and thorough. Overall, we’ve had to reevaluate our processes to minimize any delays in our turnaround time without compromise to quality of output.


Flores: The concept behind TRID was that it would provide more accurate estimates of costs to the borrower and reduce paperwork, both of which are good ideas. Unfortunately, it goes a bit overboard and often causes delays in the closing of an applicant’s loan while not providing better disclosures and increasing paperwork. [TRID] has definitely delayed closings of residential real estate transactions by probably an average of 10 days. … The bureau has hurt the banking industry and consumers and businesses tremendously. … It hurts the consumer, the man on the street whom it’s supposed to protect. It’s just adding more rules and regulations, and it doesn’t serve to protect anybody.

We’ve got it pretty smooth right now because it’s built into our software … but there was a learning curve for the first month or two.


Leon Guerrero: The “new” real estate requirements of the Consumer Financial Protection Bureau are not really new to us, as they are basically the same as we have always followed in our mortgage underwriting. We had to adopt new forms and adjust our systems to adapt to the changes for documentation and reporting, but the basic underwriting criteria are what we have always and will continue to adhere to.


Lowson: Among other things, the new process makes it easier for borrowers to compare closing cost quotes. Previously, an estimate was provided early in the process followed by a firm quote at the time of closing. Under the new process, borrowers are able to do a side-by-side comparison of the two costs and are also given a few additional days to evaluate and think about the loan terms before committing.

However, the result has been an increase in the time needed to close a loan, and due to the implementation in 2014 of the Ability to Repay rules on top of this, borrowers are required to show more documentation to demonstrate their ability to repay their loans, including meeting a 43% debt-to-income ratio.

Lenders hurried to meet compliance deadlines and adapt to the regulations, and are doing their best to help ensure borrowers are being well taken care of in a timely and efficient manner.


Wade: The newest rule relating to the use of the TILA-RESPA Integrated Disclosure form has had very little impact on home loan processing. We worked with our vendor and implemented the change on time.


Q: What other regulatory issues is the industry facing?


Cruz: One new requirement for the industry has to do with how regulators determine a financial institution’s capital adequacy. This is an important ratio for us as it determines the amount of capital we can use to lend out.


Deliquina: There are quite a few to mention; however, one common theme is enterprise risk management — this means an organization-wide monitoring, measurement and documentation of risk-mitigating programs. While it isn’t a new concept, the costs to develop, implement and maintain ERM programs are increasing. For example, we continue to reevaluate our technology architecture in order to make the data reporting process more efficient to meet new requirements.


Flores: When things went upside down in the states eight years ago, we said Washington is just going to overreact to this, which they have completely, which has made it harder to do business. There are products that we used to carry, such as remittance services, that we don’t carry anymore because the regulatory burden has gotten too expensive to offer them. They came out with something [in January 2014] that changed our mortgages — it was called qualifying mortgages, QMs — and it stopped banks around the nation from making residential loans, really slowed it down. Fortunately for Guam because we’re designated as a rural area, it didn’t affect us as much, so we’ve been able to continue to make residential loans without a problem.


Leon Guerrero: Major regulatory issues that I see coming that could affect our industry — in addition to consumer protection, which we have already dealt with — are in the areas of cyber security, fraud and anti-money laundering. We have made major investments in these areas, as we must protect people’s identities and assets, but I see more intensity in these areas coming down the road.


Wade: Prevention of cyber-crime and identity theft.


Q: How has the banking/finance industry in the Marianas been improving over the past year?


Cruz: The industry has seen marked improvement over the years, mostly a result of technological advances. Today, most deposit and withdrawal transactions occur electronically. Branch visits still occur, but today we have less teller windows and more desks. Member visits are more consultative, where members come in for advice. This is a significant change from the days where most visits were for paying and receiving. This evolution required us to retool and train our team to adapt to these new demands. Today, our service representatives are expected to have a more broad understanding across all products.


Deliquina: When it comes to the banking industry in the Marianas, we are faced with a captured market. This means we are competing generally for the same market in a relatively small region.  Outside of products, rates and services, I feel that financial institutions have directed more focus on branding/rebranding initiatives, which have drastically improved and strengthened their intrinsic value and market presence. More and more financial institutions are allocating resources toward community support as an extension of their brand awareness programs.


Flores: As Guam’s economy has been good, real estate has picked up, and it’s also on the commercial side. You see more restaurants coming in, you see people buying larger tracts of land. There’s talk of the new hotel going up behind the Acanta Mall in Tumon. … There’s going to be a lot more activity going on. … There’s a lot more enthusiasm in the private sector today than there was a year or two or three years ago, which is good for banking.

[As far as security], now cards come out with this little chip on it. They’re a Europay Mastercard Visa, EMV. They’re just a safer way for you to transact business. If somebody’s put in a skimmer at a gas station — a skimmer being such that you don’t know it’s there, you put in your credit card, you pull it back out and it captures your information. You won’t be able to do that with an EMV card as long as they have an EMV reader there. Because the chip transmits information, comes back with a token that allows it to only be a one-time only code for that transaction. About 18 months ago we had the Kmart breach. Just a few months ago, the Hyatt breach. A little while ago they had a Home Depot breach — and not just in Guam, in their systems worldwide. If everybody was using EMV cards, and if everybody had EMV card readers, that would not have happened.


Leon Guerrero: I believe the banking industry in the Marianas is at a level that is strong, that is extremely viable and will always be vibrant. Bank of Guam is now a $1.5 billion company [in total assets] with an expert and seasoned management team that can take on foreseen and unforeseen challenges. Our employees are very well-trained and ready to service the community with whatever their financial needs may be. We are up-to-date with the knowledge, the tools and the technology that are necessary to meet the demands of our consumers, whether that may be quality and convenience or just simply the personal touch. Our people are resourceful and will continue to make banking work for you.


Lowson: Most notably there is an increase in general optimism for the economic future. Both Guam and the CNMI have experienced ongoing improvement in their visitor arrivals and an overall increase in direct investment — Guam as it relates to the visitor industry and the military buildup and Saipan in the visitor industry and foreign investment.


Wade: In Guam we are seeing new opportunities across all business sectors. It seems a spirit of optimism has finally arrived.


Q: What should the community know about interest rates right now?


Cruz: Rates have been extraordinarily low for more than seven years, so the community should be prepared for rates to begin increasing. No one can predict with certainty the timing of the increase or speed at which rates will increase when it starts, but I think that a safe bet is that the general direction of interest rates in the future will be north of where they are today.


Deliquina: In December, the Federal Reserve finally raised the overnight lending rate or target range for the federal funds rate at 0.25% to 0.50%. The community should know that this is the one interest rate the Federal Reserve has the ability control. In order to maintain higher interest rates apart from the overnight Fed Funds target rate, there needs to be a presence of inflation. The Feds longer run objective in inflation is 2% before any further rate hikes can take place. In their January meeting, the Federal Open Market Committee decided to maintain the overnight rates and will continue to assess economic conditions relative to employment and inflation before considering another rate adjustment. Several factors are guiding down economists’ outlook on inflation: housing sector, unemployment rate, energy sector, auto sector and Chinese stock market crash. At this point, we don’t have an idea on when the second rate increase will materialize — perhaps not at all this year.


Flores: … Although the Fed rate has not gone down, interest rates in general continue to down, and that’s a global economy issue. … I believe Sweden actually has negative interest rates. So if you put your money in that bank, they charge you for it. There’s some debate about whether it will go to negative interest rates in America. … That just shows you how low interest rates are, or the cost of money is getting, because when rates are low, the banks don’t have a use for money, can’t make money on it. It’s not necessarily a good thing. … If you ask me, I’d bet on low rates for a while.


Leon Guerrero: It seems that the community is already as informed about interest rates as the Federal Reserve Bank is, which is to say that nobody seems to know what is coming next. I can safely say that interest rates may stay the same for the next three quarters but will make their way up again by the first quarter of next year. If I am wrong — well, I will be wrong like the Federal Reserve governors. It is as predictable as life.


Wade: Our view is that interest rates are going up. I would not wish to speculate on when. I have been wrong in the past.


Q: Anything else you’d like to share with Guam Business readers about the state of the industry or developments within your organization?


Deliquina: I feel in general, the financial services industry is continuing to thrive despite the economic pressures since the 2008 financial crisis. On Guam, the issuance of the Record of Decision for the military buildup has regained steam and confidence for an economic boost.

Our members and the community can look forward to a new Coast360 Member Center in Upper Tumon/Tamuning and enhanced electronic services that will allow our members more convenience.


Flores: We’ve just deployed a bunch of new ATMs in Guam, Saipan and Palau. Our investments in ATMs over the last year have been several hundred thousand. [Also, Bank Pacific is] launching a new product — we already make loans to businesses for equipment, but we’re going to be making leases. We hope to launch that product within the next six to seven weeks.


Leon Guerrero: The state of the banking industry in Guam is safe, strong and will continue to advance. It has to as long as we have people who have financial needs in whatever their endeavors, wherever their adventures and daily lives lead them. …


Lowson: Here at Bank of Hawaii we are excited about the changes that are taking place. In August we introduced our mobile banking platform to the market, which allows customers the ease of verifying balances and making check deposits 24/7 from their mobile phones. We are also excited to be enhancing our branch services with teller cash recyclers and easy-deposit ATMs in the months ahead. These enhancements are geared to increase the efficiency.




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