Articles
8 February 2012

Banking

by Sarah Ryther Francom

08 February 2012—

The banking industry had its share of tough times during 2009, but Utah’s financial experts are predicting 2010 is going to be better—but not by much. In our annual banking roundtable, industry leaders discussed common misperceptions about banks, changes in lending practices and financial opportunities. They also discussed what today’s consumers and small- to mid-sized business owners should know when seeking a loan. 

 

Participants:

Richard Beard, Bank of American Fork

George Sutton, Jones Waldo 

Frank Pignanelli, Utah Assoc. of Financial Services 

John A. Beckstead, Holland & Hart 

Matt Packard, Central Bank 

Greg Winegardner, Wells Fargo 

Ed Leary, Dept. of Financial Institutions

Howard Holt, Brighton Bank 

Sheila Camarella, Key Bank 

Matt Krull, JP Morgan Chase 

Curtis Taylor, Heber Valley Bank 

Hal Heaton, BYU 

Nicole Sherman, Far West Bank 

Don Norton, Far West Bank 

Howard Headlee, Utah Bankers Assoc. 

Tyler Dabo, Utah Business

 

Not Pictured: Cory Moore, Big-D Construction

 

We’re coming off of one of the most horrendous years for banking in the history of the United States. What can we anticipate for 2010?  

 

TAYLOR: We’re definitely getting down to some firmer ground from my view of the world. How much of that is caused by the government stepping in with artificial stimulus and spending in unhealthy fashions to replace the consumers who were spending in unhealthy fashions, and to what extent that it’s going to be an enduring recovery because of the artificiality of it is a big question in my mind. Nevertheless, I’m happy for the stimulus that has been given. We definitely have needed something to try to help turn the corner. The confidence is much, much greater in the markets and in the potential for recovery and in the idea that this is a cyclical thing, not the apocalypse. And every month we’re one month closer to better times. 

 

LEARY: What I’ve told most people when they ask is that the banking system, while it remains fundamentally sound, is definitely under stress and continues under stress and a lot of it depends on the individual portfolio mixes that the individual bank is engaged in. But I know that there are some people who are not sleeping well at night right now, but some of them are doing fine—it varies across the spectrum. I’d just say that the banking system remains under extreme stress in some components and just mild stress in other components. And, I think it will remain stressed throughout 2010. Unfortunately, I think we will see continuing trends, industry consolidation either caused by individual institutions making that choice or regulators making that choice for them. 

 

SUTTON: Well, most of my clients, and that runs the gamut from community banks to some of the large national banks, are pulling back right now, trying to clean up their balance sheets, get their capital in a proper percentage and trying to raise capital. That’s been a real challenge. Some are really struggling to absorb the real estate losses, but others have seen a real opportunity—the ones that still have lending capacity. This economic downturn was caused by a collapse of the supply of credit. For those who have capital available and lending capacity, it’s a golden opportunity, a once in a century opportunity if you get into those markets. 

 

PACKARD: I think the outlook for 2010 is very fragmented. I think from the community bank standpoint, there are lots of problems that still need to be chewed through. Three or four years ago many people thought that you couldn’t make a bad loan, and now you have to do what we’ve tried to do for 30 years, and that is qualify people and make sure that it works out. I think there’s great opportunity for the banking industry, there’s also tremendous stress out there. Most banks are still under stress in one form or another. And it’s going to be most of 2010 before we start to see the light of day in lots of institutions. 

 

WINEGARDNER: Definitely the adjustment needed to happen. We look back, and things were out of control. Even in retrospect, which is usually the case, there was so much happening that we didn’t even realize what was happening with some of the real estate lending; in particular, mortgage lending, buyer loans and pick a payments. We weren’t doing those practices in our institutions, but we heard about it. I don’t think we realized how deep the problem was. I would agree that things are stable—much more stable than they were a year ago. I think we all feel a lot more confident that there will be recovery. But I think that over the past 20 years we haven’t had true recessions—we’ve had blips in prosperity. Today we are definitely in a recession. We’ve seen major ups and downs over the years and what we’re in now is a down, and there’s not going to be an immediate climb out of it. I think 2010 is the year where we really set the stage and the direction for where we’re going in the future. 

 

CAMARELLO: As I look at 2010, I agree—we are not done. Unfortunately, I think small- to mid-sized companies will continue feeling the hit in 2010. What we found over the last four to five months and continues today is that lending to small- to mid-sized companies is a challenge. We want to lend and we have the capacity to lend, but we have to make smart loans. Banks want to lend. At the same time, we have to follow prudent commercial-lending criteria within our portfolio. That’s the double-edged sword that I think we’re going to keep working through this year. 

 

KRULL: We’re at the peak of the output of the government’s stimulus package that they’ve been implementing here over the last months. Of course we’re going to start to see some stabilization in the economy and of course we’re going to start to see positive-looking, forward-looking economic indicators. Most recently, we’ve started to see a little bit of positive consumer spending. The question that we need to look into 2010 is: Is this sustainable without the stimulus that we have in the economy today? Is this a product of pent-up demand over the last 18 months that we’ve been seeing more recently? That’s a very difficult question to ask when we’ve never seen this amount of stimulus plugged into the economy. We have a very cautious outlook into 2010, but we still have a hint of optimism. 

 

LEARY: From the big picture, maybe not directly felt by consumers, but for people watching the economy, I think 2010 is going to be the year where the fed and a lot of government stimulus has to start backing out of the market. The market was propped up until now through government stimulus packages, many well-intended and many probably well-designed, it will be debated for years whether or not they were overall effective. But I think in so many areas, the vulnerability of the whole economy and our recovery will be played out and we’ll see how well the fed and other government entities are at removing those stimulus packages without having those markets then turn around and collapse. The challenge is going to be how do you back out of that and let the market start taking over? I think that even applies at the state level, like the Home Run Program—it was so successful that it was extended into Home Run 2. Now people are wondering whether there will be a Home Run 3. At some point, private enterprise needs to step back in and get away from relying on government packages. 

 

KRULL: I think we also need to be very cautious at the rate at which the stimulus is removed from the economy. We don’t want to repeat the mistakes that FDR made in the 1930s or the Japanese made in the 1990s in delaying this economic recovery.  

 

What are the things that concern you the most going into 2010?

 

PACKARD: There are lots of things to worry about, but one thing in particular that worries me has to do with mortgage rates. Where are mortgage rates going to end up as the government stops buying the mortgage backed securities? I know they’ve gone back into Fannie Mae and Freddie Mac and basically made those a government agency of some kind. But I worry, because if you have rates that move from the level  that they’re at to 7 or 8 or 9 percent, those little tender shoots are going to be stomped out because people just aren’t going to be able to afford to be able to do it. It’s a little like being on drugs and trying to get off of them. You have to do it very slowly, and that’s a very dangerous and careful process. In order to do it, you can’t just go cold turkey. So the process of watching those rates is going to be very critical. If those people stop buying homes, that’s going to continue to saddle the banks with more and more problems. Long-term interest rates are a very critical. 

 

WINEGARDNER: I agree that we need to be sensitive about the interest rate. If rates go up, there will be further pressure on valuations of real estate and that’s going to be counterproductive. 

 

BEARD: Until we see improvement in the unemployment, we’re going to continue to have a weak recovery. If people don’t have money, they’re not going to buy. We’re lucky in the sense that Utah is doing relatively well compared to the country. But we still have significant challenges, and until we get unemployment right, we’re not going to see a real improvement. 

 

NORTON: I think it really goes back to what started this whole thing where there’s no private secondary market. Freddie and Fannie and the government’s support are so critical. The stimulus that has been made available through the government and through the Home Run Grant has allowed the inventories of those lower first-homeowner homes to be used. But if it’s pulled back, there will be some challenges. Now that the re-pricing of the property and the real estate and those improved lots has come down for the ones who bought it. A lot of that money on the sidelines, but it’s getting it into the right places. 

HEADLEE: I think that what we have gone through and are going through in the banking industry is something that small businesses can learn from in terms of capital. We often say capital is king, and with the destruction of the secondary markets everyone has to re-evaluate their sources of capital. 

 

CAMARELLO: We talk about the new world, and I know we’re transitioning. I agree that we need to be sensitive to interest rates, but when we mention that a 7 percent mortgage rate would cause havoc, I’m surprised. Would 7 percent really cause havoc? The prime rate for years and years was 8-and-a-half percent. What worries me is how do we get back to a more normal economy to where consumers aren’t dependent on assistance programs? 

 

SHERMAN: I get asked all the time, “Why aren’t banks lending?” And my answer is this: “We are lending. We have absolutely plenty of money to lend. We’re a relationship bank, and we’re going to lend to our customers.” But the problem is that we have gotten so used as a society to having no money down, and “good enough” credit scores. There’s such a huge misconception about how to qualify for a loan that we’ve created over the last few years. Now, when we actually ask for 20 percent down on collateral and for the credit score to be 700 or higher, it’s shocking to people. So bottom line is the perception this year scares me a little bit. 

 

How are Utah’s industrial banks faring the economic storm?

 

PIGNANELLI: What we find fascinating is the disconnect that exists with the perception of ILCs (Industrial Loan Company). The FDIC came out with results from the third quarter of last year. Those results are absolutely fascinating. ILCs have the highest capital to asset ratio of any financial institution across the country; ILCs have the lowest troubled asset rates; ILCs have the highest rate of return. The story that Utah has to tell about our relationship between industrial banks, traditional banks and how we work with small businesses is amazing—we are the salvation for the country. And I say that in all truthfulness, because if we’re going to get the economy back going, this is how we deal with credit and how we deal with regulations. 

Unfortunately, so much is governed by emotion. It’s hard to really push the facts through because there’s this emotional element there that somehow this lack of regulation caused all the problems. But, there was not a lack of regulation—there were a lot of other factors. 

 

What’s your reaction when you hear that banks are the cause of the economic meltdown?

 

HEATON: That’s my biggest fear—that the banks have been declared the cause of the meltdown, because that creates an environment where the regulatory rules will be put into place that could have enormous impact in the long run, a very negative kind of impact. 

 

HEADLEE: The word “bank” has been absolutely misused over the last two years. About 99 percent of the time when these talking heads on TV say the word “bank,” they’re not even talking about a bank. And now the politicians are responding to the emotion, the reaction of the constituency, and we’re focused in absolutely the wrong direction. It’s maddening for every banker in the world.

 

BEARD: I agree with that, and just want to put another point to it. When you start looking at banks, investment banks are not what most community banks are. Even the too-big-to-fail banks are not close to what a community bank is in terms of the products that are offered and the way they’re structured. These derivative and securitization transactions that you see in the too-big-to-fail banks are not something that’s part of a normal community bank. And so you’ve got to distinguish between them, and the regulation doesn’t seem to. 

 

How has regulation impacted your institutions?

PACKARD: Regulation is one of the silent dragons that’s going to be coming back to bite us in years and years to come. I’m not here to say that I don’t think that there shouldn’t be some correction to the problems that we’ve had, but too much regulation for us to try to implement is one of the greatest silent threats that’s coming down the road aside from interest rates and consumer confidence.

 

HEATON: There’s some data to support that point; for example, the recent consumer protection on credit cards. The intent was to protect people from these over-limit fees and very high jumps in their fees. As I understand it, there are now millions of people who can’t get a credit card. So the very people that were trying to be helped with that legislation now can’t get credit. 

 

SHERMAN: Regulation also has a big cost to it. The dollar sign behind what it would take for us to implement numerous regulations could have a huge impact on us. Ultimately, the people who are going to pay the price for that are the customers. And it doesn’t matter if you’re a big bank or small bank. It’s kind of like a wolf in sheep’s clothing. The regulation is probably going to do very little and actually increase costs significantly. 

 

HEADLEE: And what that does is it leads to fewer banks, which is ironically what everybody says we don’t want. One of the things that has made America great is diversity of our banking system, but when you layer on so many regulations in the name of consumer protection or whatever, the small bank just can’t endure those costs. You have to have a certain economy of scale to hire a compliance expert or a number of compliance experts to make it all work. And so as we layer on all these new layers of regulation, we’re moving in exactly the opposite direction from a policy standpoint than what I believe most Americans think we should. 

 

What are you telling your customers?

 

SHERMAN: One of the biggest pieces of advice I have is stay in touch with your banker. We are doing everything we can to be out on the street and in front of our customers, but now is not the time for any business owner to hide from their banker. We’re here to help business owners. The sooner we know that there might be a problem, the more solutions we can provide to the business owner. We’re committed to being strong, serving and providing strength to the business owners, but it’s got to be a partnership. 

 

CAMARELLO: I think part of it is education. We need to communicate and do what can to assist our clients. A lot of consumers and small business owners don’t know what resources are out there and we need to help them understand. But at the same time, it’s also trying to get the message out to business owners and consumers that they have a responsibility also. 

 

TAYLOR: One thing that I think is different about this recession from prior recessions or even the Great Depression is the amount of wealth that is out there on the sidelines. The baby boomer generation that is waiting on the sidelines thinking, “Why should I buy this month when it may be cheaper next month?” And it creates a downward spiral. We’ve got to get to the point where we can convince folks that the economy has turned the corner. When we get to that point, I think there will be a lot of private capital for banks that will fuel a recovery. And I almost worry about that happening too vigorously and leading us back into something that’s unhealthy in terms of growth. But right now, that’s not the biggest worry. The biggest worry is getting that huge repository of the wealthy convinced that they all can be players in the economy. So much of what we’re experiencing is because of that psychology of fear of deflation. 

 

How have today’s economic troubles impacted your institution going forward?

 

HOLT: Someone mentioned that we’re getting “back to the basics.” I think we may be going back to how we used to run banks 10 or 20 years ago. And growth may not be the most important item on the agenda of many banks going forward, but rather safety, soundness and profitability. If we focus on those three elements, then growth that happens is natural. And although our bank has been conservative for 31 years and we still maintain that attitude, I think we’re even more careful and concerned today, fearing that if we make a bad loan, we’ve helped nobody, not the individual, not the community, not the bank, not the shareholders. But for the time being, there is a change in bankers’ attitudes that, in the long run I think we’ll be good. 

 

PACKARD: We have to let our staff and customers understand that this is just a cycle. It’s a brutal cycle, but it’s a cycle that you’re going live through and it’s OK to go through it. 

There are many things we learn from this moving forward. There’s great hope and there’s great success in moving the free enterprise system along in spite of all the challenge—this is a great industry, a great country and a great place to live. If we all get weighed down by all the problem loans and regulations, we might as well start putting paddles on the side of all of our bank walls so that when people have heart attacks we can work on them. But you have to instill in your people that this is a great industry and that there is great hope in it. 

 

HEATON: I was teaching a class with my MBA students, and I talked about potential rate increases. And they said “Huh?” For their entire lives, interest rates in general have fallen. That’s all they’ve ever known. And so you need some gray hair to realize that sometimes interest rates go up and you sort of plan for that contingency. 

 

SHERMAN: I think they are getting it. We’ve taken the opportunity over the past year to really cultivate and train our staff. I think that we’ll come out of this with a great banking industry that has educated bankers. 

BEARD: We had a younger lender that came to me and said, “You know, I heard the old guys in the bank talk about the ‘80s and the downturn and I used to get so irritated hearing those stories. Then the other day I was talking to somebody and I realized I was telling the same story, it was just happening 20 years later.” 

 

CAMARELLO: I think part of the problem that the younger generation of bankers have is that they’re so used to a lack of conversation—they text, e-mail—they haven’t had good conversations. This year, talk about throwing them into the fire. They’ve had to have tough conversations with their clients. But I think it’s creating skill and confidence into the next generation of bankers and that’s fabulous. 

 

LEARY: The discussion we’ve had to have with our examiners is the same. They have never seen a downturn. They’ve never had to sit down in front of a board of directors and management and tell them how poorly they’re doing and defend it and be willing to get up the next morning and go back up and start it all over again. So there is an education factor, an experience factor, a maturity factor and an inevitability of cycles that you have to deal with. But my primary point is that our industry has bankers that have never seen a downturn and I have examiners who have never seen a downturn, and it’s tough for everyone. 

 

What do you think small business owners should understand about today’s lending climate?

 

LEARY: I think in the caption of small business, conventional wisdom has always been consumers or small businesses bring us out of recession. The small business component is the area that really worries me right now. A number of large national suppliers of trade credit, let alone credit, have had difficulties or have gone out of the marketplace. And credit cards for small businesses are almost non-existent, except for a couple issuers right now. There used to be innumerable companies issuing credits to small businesses. So my concern is if you don’t have a way of focusing in on supporting those small business customers, they’re going to have a tough time to help us come out of this. 

 

HEATON: And a message to small business owners is: Build the relationships, a trusting relationship. Let us know the bad stuff. 

 

HEADLEE: There are a couple common perceptions that many people have that I would like to clarify. The number one misperception that I’d like to clear is about the bailouts—there was no bank bailout. If you define the word “bank” as an FDIC insured institution and you define the word “bailout” as an injection of capital to keep a company from failing, there was no bank bailout. Not a single bank in this country received a bailout to keep it from going under—that’s not what it was for. Only healthy banks received the TARP as represented by the fact that most of them have paid it back. 

The one thing that I have learned over 12 years of being the president of Utah Bankers Association is that every single bank that I represent is different, has a different focus, has a different niche and has a different approach. Some of those differences are subtle, but every bank is different. So when I hear people say, “Well, the bank won’t lend to me,” I say, “Well, how many did you go to, two or three? Maybe you just haven’t found the right one.” You really have to look around to find the bank that is focused on the things that you’re doing. Not a single two banks in this room or in this state are the same. And it is important that people don’t look at it like “the banks.” 

 

CAMARELLO: I think people should also know that banks are looking forward and want to be a part of this recovery. There’s not a bank that’s represented in this room that isn’t lending and there’s not a bank that’s not committed to its clients. And I think that we are essential to the recovery. It is what we provide individuals and business owners that is what this economy is built on. We want to be a vital part of their success. 

BEARD: I agree, however, borrowers need to understand is that risk is real and there’s different types of money. So if you’re a startup business and you’re going to a bank and asking for a loan that’s backed by your idea, the chances of a bank lending are not there because you really should be shopping in a venture capital bucket. And that money is going to cost you 30 to 40 percent—it’s not going to cost you 5 or 6 percent. There needs to be an understanding on the borrower’s part that there is real risk in the capitalistic system and that money is priced according to risk, and when you shop at a commercial bank, you get a lower rate, but that means the risk has to be lower than a VC-type deal. 

 

KRULL: I think that we should highlight some of the positive discussions that we’ve had with clients over the last year. We have been able to focus on taking advantage of some of the market opportunities that are presented to us today. There are a lot of investment opportunities and lending opportunities that are showing themselves today that I think we’ve missed out on. 

 

PIGNANELLI: I think bankers have done a great job in the last 23 years reaching out to schools to teach financial literacy. It’s been amazing what the banking community has done to try to instruct students. But, now we realize there’s a part to that that we’ve missed, and that is what the free market system does. There are ups and downs, and there are correcting measures. And the success we enjoyed during the last 10 to 15 years came about because of all the hard times we went through in the 1970s and 1980s. But those hard times are part of the free enterprise system. 

 

HOLT: I think a lot of our problems at every level come down to an issue of self-control. If businesses and individuals exert more self-control with regard to their spending, their growth, their borrowing, their expenses, then they will be better prepared. By exerting these self-imposed controls, people will be ready for the next downturn in 10 or so years. This time has been a great learning lesson. 

 

 

 


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