November 1, 2012

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Article

Bank Balance

After a Heavy Blow, the Financial Industry is Coming Out on Top

Spencer Sutherland

November 1, 2012

When the real estate bubble burst, financial institutions across the country struggled to hang on—and Utah was no exception. Over the past five years, the state has seen the failure of eight different financial institutions. But now Utah’s banking industry is not only showing signs of life, but has become the most profitable in the nation.

According to a recent study by the Milken Institute, Utah banks earn the highest return on assets (ROA) in the country. The state’s ROA of 2.49—meaning for every $100 in assets, banks earn $2.49 in profits—is more than double the national average. This top ranking is largely a result of the strength of a type of bank that most consumers have never heard of.

Industrial Banks Leading the Way
Utah is home to 19 industrial banks that represent more than $118 billion in assets. Though most have the word “bank” in their name—examples include American Express Centurion Bank, GE Capital Bank and BMW Bank of North America—the average consumer may only notice these names on the back of a credit card or in the fine print of a loan application. Rather than operating retail locations where consumers go to cash checks or set up a savings account, most industrial banks focus on corporate clients.

Industrial banks have remained strong throughout the recession because of the loans they didn’t make. “Most industrial banks avoided the most recent banking crisis because they did not lend in the mortgage or construction loan market,” explains Darryle Rude, supervisor of industrial banks at the Utah Department of Financial Institutions (DFI). “The few that did have had some troubles, but strong parent companies helped them survive until the values on real estate came back.”

Industrial banks were also able to avoid the delinquencies that have plagued commercial banks in recent years. While homeowners across the country defaulted on their mortgages, Rude notes that consumers continued to pay their credit card bills and their car loans, keeping industrial banks in the black. 

While industrial banks have profited from consumer spending, Utah’s economy has benefited from industrial banks. Institutions like Morgan Stanley and Goldman Sachs came to Utah to open banks, but continued to bring more jobs to the state even after the banks had relocated. “When [these organizations] came to Utah, they were impressed by the workforce here,” Rude says. “They’re bringing higher-than-average salaries to the state, which creates a larger tax base and really helps the economy.”

These banks are also required to give back to Utah communities. The Community Reinvestment Act mandates that depository institutions reinvest in the community where they do business through service, loans or investments. Many industrial banks in Utah fulfill this requirement by participating in the Utah Micro Enterprise Loan Fund and Utah housing bonds. “They’re putting a lot of money into the local community to help low- to moderate-income individuals,” Rude says.

Well-capitalized Credit Unions
While industrial banks avoided the real estate meltdown, credit unions found themselves right in the middle of it. For years, a small number of Utah credit unions had successfully made real estate construction loans, says Orla Beth Peck, supervisor of credit unions at DFI. “They had never lost money on them, so they were probably a little over-concentrated in that particular area. Institutions that had a significant amount of real estate construction loans were the ones that really suffered the most.”

Troubles for local credit unions were compounded by the failure of five national corporate credit unions (basically the credit unions for credit unions) that heavily invested in collateralized and sub-prime mortgages. The National Credit Union Administration (NCUA) worried these failures would lead to more failures and decided to step in and borrow from the treasury to stabilize the corporate system.

Because credit unions collectively own the corporate system, they were all required to help pay back the treasury loan. “That has increased their operating expenses at the worst possible time,” Peck says. “But it was probably the best thing to do. If the NCUA had just let these big corporate credit unions fail then they would have taken down a big chunk of the whole system.”

During the height of the financial crisis, two Utah credit unions failed and nearly a third of the others were operating at a loss. Now, however, almost all of them are profitable again. “Luckily for [Utah] credit unions, when this recession hit, they were very well-capitalized and in a position to withstand the big shock that hit in late 2008 and 2009,” Peck says. “Now our credit unions are lending, they’re making money and they’ve got strong reserves.”

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