The Headache:
Banking In “Interesting Times”

In terms of our credit stance, one change is that we are not funding spec projects for noncustomers, unless the borrowers have longer-than-usual staying power. As residential home sales slow, we want to ensure we can be there for our existing customers first.
 
In addition to the downward trend in industries related to residential real estate industries, our lumber industry is in a slump, as is the motor home manufacturing sector, both significant contributors in our local economy. But, local and regional economists are predicting that most areas in Oregon should fare comparatively well in this recession. There are many sectors of our economy, such as medical, that continue to grow and have a positive impact. And, our markets weren’t as “hot” as some of the markets that are cooling rapidly.

The most troublesome aspect of our current situation is that we all get painted with the same brush on Wall Street. We’ve had to communicate with shareholders that our stock is not down due to current or expected losses in our loan portfolios, as is the case with the large banks that have played a major role in the growth of the subprime business. Like thousands of community banks, we didn’t make those loans nor invest in securities backed by them. But the public doesn’t understand these differences.

What gives me a headache is that the Fed bails out these huge banks with rate cuts, yet there’s no reason to expect any change in these banks’ “short-term-focused” strategies in the future. We received 12 credit card solicitations this week at our house, all from the big three. Half of them were addressed to my two sons who are in college and have no income to repay credit card bills, not to mention no credit history. In fact, we received a few more unsolicited solicitations than usual, including offers with low starting rates and additional complications that could push card holders into 30% rates. 

Regrettably, unless there’s a founder or major shareholder at the helm, it’s getting harder and harder to find responsible leadership at gargantuan companies in any industry, including mine: banking.

Remedy 2
Blair Hillyer, president and CEO, First National Bank,$171.5 million-assets, Dennison, Ohio.

The Fed rate cuts haven’t changed anything, except for hurting our profitability for the rest of 2008.

We have tightened up some in the credit area, mostly in indirect auto. We also are watching home values carefully, to make sure that equity is real. We are also refusing to take out credit card companies who have been irresponsible with our customers. We are letting them share the risk.

The local economy is satisfactory, I think. It is a little less satisfactory than last year, but not bad.
 
We are tightening up on credit approvals, contacting borrowers more quickly who are past due. We are also repossessing cars more quickly if the borrower is unable to pay and has been uncooperative with the bank in working out a resolution. The rate cuts will hurt our earnings, but it appears most of the damage will be later in 2008 or in 2009.

Remedy 3
Edward J. Norris, III, chairman and CEO, Plantation Financial, Pawleys Island, S.C. 

The recent Fed interest rate cuts have had little to do with activity in our markets. The long-term rate declines have influenced our markets, however. While the Fed cuts have reduced our collectible interest on our loans tied to prime, our liability costs have not fallen (at least not by 75 basis points, as of the first part of February). We are thus struggling with net interest margins.

In terms of credit, we have certainly paid more attention to the diversification in our loan portfolio. My banks are looking at the concentrations in acquisition and development and other construction loans. We have seen the housing market slow down considerably, so we are not actively pursuing acquisition and development loans. Our credit standards have always been pretty stellar, so I don’t feel that we’ve tightened credit underwriting. We’re probably just more selective in what goes into our portfolio.

Compared to a year ago, our economy is still pretty vibrant along the coast of South Carolina, although we’re seeing a slowdown in sales. December was pretty bleak, but January picked up a lot. I think the lower rates on mortgages have spiked our residential real estate loans. Prices seem to be holding pretty steady in residential, but with the slowdown in sales, we’ll have to wait and see. January and February are not the best “tourist months,” either, so for our markets this has an effect. I think we’re going to see good loan demand in the spring.
 
Communication with our employees about the economy is our most positive step. We have pointed out that the subprime problems have filtered down to all banks, and that customer service needs to be our priority. We want all of our employees to be able to discuss the troubles that their customers read about in the newspaper or see on TV and to reassure them that the economy is correcting and that their bank is solid.

Remedy 4
Jim Matthys, president and CEO, Buffalo Savings Bank, $41.2 million-assets, Buffalo, Iowa. 
 
You should change the title to “Pass the Whole Medicine Cabinet.”
 
The effect of the Fed cuts in small-town U.S.A. is that the market is standing still. Our bank is cutting deposit rates in an attempt to maintain some spread.
 
Credit is definitely tighter, and should remain in that condition for all of 2008. We are strengthening our underwriting procedures for investments and lending.

Remedy 5
Barry Williams, president and CEO, First State Bank, $219.1 million-assets, New Braunfels, Texas.

We have both consumer and commercial customers calling, utilizing their embedded option by requesting us to lower their fixed-rate loans. Then we have the CD rate shoppers bringing in ads from banks and credit unions from Maine to California, asking if we’ll match those rates. As a result, there has been a great deal of marginally profitable activity probably best described as defensive in nature.
 
We have not made any significant policy changes. However, we read the papers and they have psychologically affected our underwriting. We have trended toward a more conservative posture and perhaps scrutinize new relationships a bit more. We are less aggressive than a year ago.
 
We are primarily located between San Antonio and Austin, Texas. We appear to not have experienced many of the issues found elsewhere. We are still seeing quality commercial requests that are primarily end users. However, this has become a very competitive market. There is a slowdown in residential construction markets as inventories have built up. The economy is not quite as robust as it was a year ago. We are very cognizant of borrowers’ cash flow and relationships right now. We are staying away from most types of asset-based lending. We are trying hard not to make any dumb deals. We are trying hard to take care of our existing customer base. BJ

 

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