It's not all gloom and doom (January 27, 2009)

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It's not all gloom and doom (January 27, 2009)

Upset by the industry’s portrayal on news programs, community bankers sound off on exactly what’s happening in their towns.

By Steve Cocheo, executive editor, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Posted on January 27, 2009

Media’s broad portrayal of banks and economy irks bankers. But everybody’s challenged to some degree in 2009

It really is gloomy where Gary Fox does business. His Bartow County Bank is based in Cartersville, Ga., about 40 miles north of hard-hit Atlanta, and banks in the area are getting hammered, he says. The $427.4 million-assets bank, founded 35 years ago, has its own share of challenges.

“In our area, lending’s pretty well ceased,” said Fox, president and CEO. “Banks are trying to run customers off. Everyday I have people come in my bank saying, ‘I’ve never missed a payment, but so-and-so bank wants me to move all my loans.’ And it’s strictly because of the risk-based capital standards. The banks are trying to get their capital levels up.”

“Of course,” Fox continues, “we can’t take in these borrowers, because everybody’s kind of in the same shape. We’re all trying to reduce loan outstandings to increase our capital ratios.”

That’s not Bartow County Bank’s only challenge. Fox says that deposits have become very expensive. Area bankers have started cutting back on reliance on out-of-market deposit sources, so local funds command a higher premium. And correspondent banks that used to be reliable standbys can’t be counted on.

“They’re drawing back just as much,” says Fox.

He adds that the real estate market is frozen, and the only properties that move are foreclosed ones where the selling bank is glad to finance the buyer.

So 2008 net income was down for Fox’s bank, and he anticipated a challenging 2009. And many bankers share a piece of the angst Atlanta has seen in buckets. Some were part of the same roundtable discussion group that Fox and some fellow members of the America’s Community Bankers Council participated in during early December.

But while many of those bankers fit the pattern frequently portrayed in the media as the whole picture for banks, other roundtable bankers from other parts of the country objected to reporters’ habit of portraying the entire industry and the entire economy in a uniform shade of black.

“No offense to the journalism business,” one banker observed, “but part of the problem is 24-hour cable news.”

Success amidst horror
Even where things are admittedly awful, not all banks can be put in the same convenient box. Take the experience of de novo banker Greg Patton, president of Sierra Vista Bank, Folsom, Calif.

“Folsom has a prison [immortalized by Johnny Cash], a dam, and Intel,” said Patton of the bedroom community of Sacramento, the state capital. Patton noted that the immediate market is actually quite stable, because Folsom was “pretty much built out ten years ago.” Employment has been steady, with some losses due to a falloff in regional construction being compensated for by rising government employment. Further from the city center, he said, housing prices have fallen significantly.

“We’re not making many home construction loans right now,” said Patton, “though a few strays have walked in the door” with the right attributes.

Patton’s bank enjoys the advantage of having only opened its doors in early 2007, so it has no legacy of troubled loans in its portfolio. Many borrowers, invited to leave by capital-hungry banks, shop for new lenders, and have come looking for credit to Patton’s institution.

“We have some capacity,” says Patton, “so we are actually making loans.” In December, the bank was running a 100% loan-to-deposit ratio.

This is not to say that Sierra Vista does business in some protected bubble—just that sometimes corporate youth has its advantages. Challenges continue. While his bank has picked up some good lenders from other community banks that are out of the lending business for now (“we’ve seen senior vice-presidents standing on street corners, literally, with cardboard placards, looking for a job”), there are problems related to the increased credit opportunities.

“We can’t find anybody to participate loans to, even on the solid gold deals,” said Patton. A correspondent who formerly did such business with Sierra Vista slammed the door on more.

“They’ve got 19 reasons they don’t want to look at a deal now,” said Patton.

ABA Banking Journal Roundtable Panelists

Rheo A. Brouillard, President and CEO, Savings Institute Bank and Trust Co. Willimantic, Conn., $833.8 million-assets

Gregory Patton, President and CEO, Sierra Vista Bank, Folsom, Calif., $55.6 million-assets

Gregg Vandaveer, President and CEO, Sooner State Bank, Tuttle, Okla., $130 million-assets

Gary L. Fox, President and CEO, Bartow County Bank, Cartersville, Ga., $427.4 million-assets

Jon J. Prescott, President and CEO, Katahdin Trust Co., Houlton, Maine, $465.3 million-assets

Barry Williams, President and CEO, First State Bank, New Braunfels, Texas, $243.5 million-assets

George R. Marx, President and CEO, Copiah Bank, N.A., Hazlehurst, Miss., $128.5 million-assets

Myron D. Rozell, President, First State Bank of Mapleton, Mapleton, Iowa, $39.6 million-assets

Ron Wiser, President and CEO, Bank of the Southwest, Roswell, N.M., $142.8 million-assets

Battling mental flu
There’s a wide spectrum between boom and absolute bust. And it’s the steady drumbeat of media gloom that irks and worries—insidious and infectious.

“Perception becomes reality,” said another participant, Barry Williams, president and CEO at First State Bank, New Braunfels, Texas. Williams points out that while his market, between San Antonio and Austin, has had some issues, business conditions have been relatively decent. While the residential market hasn’t been doing well, some contractors continue to do business and prices of homes have only moderately fallen. The bank tightened up, and “we’ve enjoyed a fair amount of success lately,” said Williams.

But you would think things were much worse, said Williams, based on attitudes.

“There’s so much negativity, even in our area, where there’s not that many bad things happening,” said Williams. “What we’re beginning to see is this: When you keep hearing how bad things are supposed to be, you begin believing that things are bad. And it has some real impact, then. We’re beginning to see this have some influence on opinions and thought processes. I’m beginning to believe it too.”

Williams noted that 2007 was the bank’s best year ever, and, due to margin compression, 2008 was off. “We don’t have any bad loans,” he said in December, but the compression was going to see the bank finishing the year down 20%-25% in net income. For 2009, he expected a flat year, to be met by basic “blocking and tackling.”

Some of the same “mental flu” has been seen in other areas, too, where there isn’t the obvious causes seen, say, in Atlanta.

“The Oklahoma economy is doing really well right now,” said Gregg Vandaveer, president and CEO, president and CEO at Sooner State Bank, Tuttle. “It was doing even better a couple of months ago, when oil was $100 a barrel, but it’s still holding on pretty well.” While real estate prices have fallen a bit, they had never rocketed up in better times, either, said Vandaveer, so there’s been less pain.

Yet customers watching national media don’t get it. “Little old ladies in Oklahoma sit and watch the markets tank, and they come in and say to us, ‘I’ve got $20,000 in my account here. Is my money safe?’,” said Vandaveer, annoyed.

In Maine, Jon J. Prescott, president and CEO of Katahdin Trust Co., Houlton, has seen negativity weigh in.

Lobstering and logging are both troubled, and the bank is involved in both industries. The tasty crustaceans have been pulling weak prices of late, and some mills have been shutting down. But Katahdin Trust, $465.3 million-assets, would actually have made 2008 a record year for earnings, had it not been for investments in mortgage GSE preferred stock, which chopped results about in half.

“But our 2009 budget’s coming together,” said Prescott, “and we show that we will probably eclipse where we would have been this year,” absent the securities loss. There’s more to Maine than lobsters and logs.

“The recession doesn’t seem to be affecting our market as much as it could be,” said Prescott, “but the attitude of our customers, all the local people, is extremely poor. It creates an atmosphere of negativity. There is a lot of fear out there.”

In rural Connecticut, Rheo A. Brouillard, president and CEO of Savings Institute Bank and Trust Co., Willimantic, said his area’s health is belied by headlines about foreclosures in other parts of the state and New England.

“If you take a close look at the foreclosures in our market, it’s the large institutions, the Citigroups, the Deutsche Banks, not the community banks, doing it,” said Brouillard. “We’re not facing those issues.” He said his markets enjoy some stability due to several large employers, though some of them are having trouble, too. In some areas, home prices are rising.

“In fact,” adds Brouillard, “2008 would have been our best year in a long time,” and that in the context of substantial investments in new branches. Fannie and Freddie preferred investments killed the otherwise rosy picture.

Here was the trend in other areas represented in the roundtable:

Mississippi. “Our economy has held up rather well,” said George Marx, president and CEO, Copiah Bank N.A. Some area sawmills have had major layoffs and that was causing the bank to pay more attention to cash flow analysis with borrowers. “Some of our customers are getting pinched, because of their job situations,” said Marx.

One positive for Copiah Bank: In the course of preparing for a Comptroller’s exam, Marx and his staff confirmed that construction lending for “spec” projects was at minimal, and containable, levels.

“A good thing was that we had no more than two [spec loans] to any one builder, and no more than two in any one subdivision,” said Marx. “So it turns out that our exposure was very low, and so far we have not had any loss on construction loans.”

Iowa. “New lending is slightly more conservative than how it had been, especially in terms of loan-to-value ratios,” said Myron D. Rozell. “And we are looking more deeply at cash flows, to determine not only what they are, but how much our borrowers depend on those cash flows.”

Rozell, president at First State Bank of Mapleton, Iowa, said that strong farm income over much of the last few years—excepting the last few months of 2008—had helped in both loan demand and deposit generation.

“Overall, we’re marketing more, and making people aware that we do have money available to lend,” said Rozell, “and to tell them that we are not one of the subprime lenders. We, ourselves, are trying to keep a longer-term perspective.”

New Mexico. Bank of the Southwest is based in Roswell. Ron Wiser, president and CEO, said his markets “have been fairly resistant to what’s been happening in the national markets.” He credits this to the strength of the government, oil and gas, and agriculture sectors.

Outlook: Challenge, with some optimism

Georgia’s Gary Fox spoke for many participants: “I think 2009 is going to be a challenging year. Hopefully, we’ll work our way through things, and towards the end of 2009, we’ll all be feeling a little better.”

Most see 2009 as a year to survive, but a few remain optimistic that 2009 will, in their locales, be a time to thrive. Savings banker Rheo Brouillard, for instance, points to Trust, a good income producer.

“Once I get expenses in line,” he said, “I’ll be purring along pretty well.” BJ

Ax or scalpel? Cost-cutting tips from the roundtable

The first items to go will be those things you almost forgot your bank was spending on. None of the roundtable members were going in for slashing and burning yet, instead seeking small things and pursuing incremental efforts.

“Over the years, if you really want to be truthful about it, we’ve probably gotten a little bit chubby in some areas, and it’s a good time for us to look at reality and cut some of the fat,” said Barry Williams of First State Bank, New Braunfels, Texas.

“We’re trying to determine some areas where we can make some cuts without it having too adverse an impact on customers,” said George Marx of Copiah Bank, N.A., Hazlehurst, Miss.

Stop building for a while. Many community banks have been on a branching binge in the last five years or so. One panelist whose bank opened seven branches over this period said his institution would curtail that activity, to bring down the expense ratio.

Play ball... a little less. Season tickets habitually bought for sports and concerts are getting chopped. Some roundtable participants pointed out that their banks were purchasing so many tickets, it was often hard to find enough customers for game and concert dates.

Rethink donations. Banks are cutting back on these, somewhat. One institution represented in the discussion made 50% cuts to charities across the board in 2008.

Reconsider mailings. While some bankers said their banks are actually doing more promotional mailings, some are rethinking routine mailings. For instance, more effort is being made to move towards electronic statements.”

Reach out electronically. A couple of banks had begun outbound e-newsletters to customers.

One banker was somewhat skeptical: “I couldn’t really tell you that we’ve seen any new business out of it. But the more you can touch people, the better. If nothing else, the e-letter is communication.”

Said another, who had just started: “We’re trying to cut down the cost of promotion. Our hope is that they will open e-mails from our bank, rather than just—pfft!—deleting them. I guess we’ll find out.”

Consider outsourcing. One bank, which already farmed out its imaging, sent its statement mailings to the same servicer.

“That has saved us a pretty significant amount of money,” the CEO said.

Look at being a “beta” site. One way to help contain technology costs could be agreeing to be a vendor’s guinea pig. One participant said his institution was a beta site for the bank’s outside data center. That status secures discounts on processing costs and other savings not otherwise available.