Crystal Ball Finance Finance Roundtable: With losses abating, lenders eye growth
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By Nathan Peck | MiBiz
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WEST MICHIGAN — As the banking industry looks ahead to 2011, the lending landscape remains uncertain with increased scrutiny from regulators and the impact of federal legislation. There are bright spots in the Michigan economy, and a panel of bankers sat down with MiBiz to discuss the opportunities amid the uncertainty. Participants include:
Bultema: The current legislation is currently focused on banks when a lot of the problems were created by non-bank financial institutions. About 70 percent of the lending a couple of years ago was dominated by non-regulated financial institutions. It is important that we get at the source of the issue, not just the banks. We are already heavily regulated. It is important to address the issues, but it raises the cost of lending. It is important that it is applied fairly. When you are starting to apply regulation to only banks of this size and not that, you’re creating haves and have nots. We have to be sure that it is implemented consistently across the board. As with anything, it is a matter of balance.
Deur: The Dodd-Frank Act is designed to eliminate predatory lending practices with respect to consumer banking loans and credit cards. As a commercial bank, we will be required to comply with certain aspects of the act, but it will have little impact on us. Unlike larger banks, we have never employed nuisance fees or less-than-full disclosure practices. We work hard to be transparent with our clients. We always have.
While we expect more regulation and oversight, we doubt it will have significant impact on us. Compliance is a fact of life in the banking industry, and we take it very seriously.
Fillar: Our assessment, based on currently available information, is that the expected direct impacts of financial reform are manageable. It will take some time for regulators to implement the new law, and both the industry and Comerica are expected to respond with new products and services to generate revenue opportunities and reduce cost.
Kerber: The recently passed Dodd-Frank legislation will certainly have an impact on our ability to do business. Thus far, the immediate impacts are the permanent increase in FDIC insurance to $250,000/depositor, and the extension of unlimited deposit coverage in non-interest bearing accounts for two years, both of which are positive developments for our customers. Another significant change will be in the way FDIC insurance premiums are assessed, resulting in lower costs for community banks like ours with less than $10 billion in assets.
Magee: We don’t yet know the total impact the act will have on the banking industry. So many of the specific directives from the bill are currently in the hands of regulators who will determine policies and rules. There are 285 rulemaking requirements whose effects will influence, amongst other things, backroom costs of monitoring. Our position is, until we know what rules and regulations the Consumer Financial Protection Agency implements and what the Federal Reserve implements, we will remain focused on our core competencies while remaining nimble in the face of continuous change.
Manica: Financial reform will have a very significant effect on banking over the next few years. The act is very comprehensive and will lead to the formation of the Consumer Financial Protection Bureau as well as thousands of new legal and processing requirements. In addition certain fees associated with banking are being eliminated and will reduce banks’ income. I believe it will lead to further credit allocation and some consumers may experience difficulty in obtaining credit. It is likely the cost of credit and other financial services will be increasing.
Snyder: As we have experience with changes in the past, our cost of business is expected to increase. A majority of this is due to the systematic and manpower costs to produce the various new disclosures that are foreseen coming down the pike. Due to the number of changes anticipated, it makes it very challenging to examine and prepare for the additional responsibilities resulting from the onslaught of these new rules and regulations, once again, resulting in additional costs to the credit union.
Snyder: As of October 31, the number of delinquent loans at Consumers Credit Union has decreased 60 percent compared to 12 months ago. The number of delinquent loans has also decreased at the nation’s 7,500 credit unions. Looking ahead to 2011, we expect less loan losses.
Manica: While there is some evidence of loan quality improving, it is spotty at best. A return to normal is very hard to predict. What will be the new normal? Our loan losses have always been at a manageable level, and loan quality does seem to be improving. It will be a few more quarters before we know if the trend is real or anecdotal. Anytime you have a hard asset (commercial real estate) deflation of the magnitude we have over the last 24 months, bank performance will be affected. Banks will continue to be more restrictive in their loan origination policies until we know for sure the crisis is over. The crisis in personal residential and commercial real estate will not really be over until we are able to create new jobs at a pace to reduce unemployment to below 7 percent.
Magee: The industry has started to turn the corner on loan losses. They are slowing albeit not in a dramatic fashion. The most recent quarterly results show that across the board most financial institutions have seen improvement in loan loss provisions, but, as I alluded, they are still elevated above historical norms. Until all the foreclosed properties have been liquidated, expect to see continued financial stress. We’re encouraged by our trend over the past six consecutive quarters of decreased non-performing loan balances.
Kerber: I’m not sure anyone can pinpoint what “normal” is in today’s economy. We have not funded losses through our capital base, continue to be profitable, and our results are driven, in part, by a reduction in our provision for loan losses. Our provisions have been steadily decreasing, and while we are encouraged by what we are seeing, we cannot yet say that we are out of the woods, so to speak.
Fillar: Loan losses tend to follow closely the economic cycles we are in. The economy continues to improve and Comerica’s loan losses continue to decline. Since Comerica did not participate in the subprime loan expansions of the last decade, our loan losses continue to fare better than our peer group, and our equity base remains one of the strongest in the industry. With returning profits and a solid financial condition, Comerica recently announced an increase in its dividend rate. We are one of the first banks to do so.
Deur: While we agree that loan losses are slowing, they remain at historically high levels. Despite signs that the real estate market has turned the corner, we believe it will take years to work through. We were prudent with our lending practices well before the economic turmoil. This allowed us to remain profitable and actually grow despite the downturn. Unfortunately, no silver bullet or magic pill can solve what’s ailing the real estate business. It is simply a function of supply and demand. We expect a slow recovery.
Bultema: Our delinquency levels were down 10 percent in the last quarter and are at the lowest level since the first quarter of 2007. Delinquencies are a leading indicator that charge offs are declining. Our charge offs are down to 2 percent, and company-wide, it is less than $400 million. I don’t think that that story is the same everywhere — some banks didn’t take the write-downs as aggressively up front. I don’t think that there is continued deterioration. They are dealing with problems that they had. (Troubled banks) are slower to reacting to the problems they have. The issue is that the economy is not turning fast enough. We fell far and pretty fast as an economy. With all the stimulus, people expected we’d be recovering faster. It is a recovery, but not at such a rapid a pace as in the past.
Magee: Industry experts expect bank failures will peak in 2010 and decrease in 2011 due to a stabilizing economy working its way to full recovery. While the regulators would like us to retain capital, they understand the best banking model is one where a bank is growing through acquiring quality assets. I personally feel banks have an obligation to lend in the communities in which they serve. A community bank’s mission is to stimulate the local economy by making loans, so anything we can do to help improve the local economic environment will improve the condition of the bank. We are looking for quality loans and are seeing demand start to pick up.
Deur: In 2010, we saw an average of three to five small to medium sized banks being closed or taken over each weekend. In 2011, we believe this trend will continue. FDIC staffing levels may lead to a slight decrease. These levels have been a factor in 2010 closure rates. We operate at the higher capital levels that regulators may, in time, require. So, we are well prepared for the future. Banking will remain in a capital retentive environment in 2011. However, businesses with volume and profitability that support expansion and growth will be able to find loans.
Snyder: Consumer loans are expected to grow at a lesser rate than savings at our nation’s credit unions. At Consumers Credit Union, we are willing to make loans and expect our credit card and automobile loan portfolio to increase 15 percent during the coming year.
Bultema: Two-thirds of a bank’s income comes from that interest income. Saying a bank doesn’t want to lend is like saying a restaurant doesn’t want to sell food. There are not as many opportunities out there to lend. I look at our commercial-industrial book line utilization of 32.5 percent. Our customers are only borrowing a third of what they could. Those are at the lowest levels we have ever seen since we tracked it. It is not as much banks that don’t want to lend capital. There are banks that want to lend. From my perspective, it’s not the biggest issue driving loan growth. It is an uncertain economy and companies not wanting to borrow in a soft economy.
Manica: My crystal ball is just not very clear on this one. There is no question the current banking crisis has led regulators to demand more capital for all banks to operate in a safe and sound condition. Banks ultimately will probably have to restrict their growth or seek outside capital improvement. United Bank’s capital position has remained strong through our state’s economic difficulties, and we expect to be able to grow loans and deposits at a fairly normal rate in 2011.
Fillar: Most bank analysts agree that failures will continue in 2011. Some banks are not lending because they need to increase their equity base. Fortunately for Comerica, our conservative history has positioned us as one of the best-capitalized banks in the country. We have plenty of money to lend. Decreased lending is more a function of reduced demand rather than a tight supply. Until businesses experience increased demand for their products and services, demand will be muted. We are just now starting to see businesses gain enough confidence in the economic recovery to make those purchases.
Kerber: While the potential for additional failures certainly exists, Chemical Bank’s focus remains on the relationships we have with our customers and continuing to do business in the same way that has allowed us to be successful over time. We are a well-capitalized financial institution, and we have been able to maintain, if not increase, both business and personal lending, in spite of the economic downturn. As a Community Bank, our goal has always been to help strengthen the communities we serve. Regardless of the change going on around us we feel we will be successful if we stay focused on helping our customers reach their financial dreams.
Manica: We expect to be able to grow at a very healthy rate in 2011 and beyond. We grew our capital during this economic downturn and are well positioned to take advantage of a growing economy. While others may have to restrict their growth or even shrink in size we will be in a position to grow, and we will be able to meet the needs of our existing and new customers. The need for new and increasing loan facilities will be a function of how quickly the economy recovers.
Dunlap: Huntington has a long-standing commitment to supporting the growth and success of businesses throughout the Midwest. We will continue with many of our small business initiatives in 2011, including increasing small business lending. We plan to continue as the number one SBA lender in Michigan and in the Midwest markets we serve, and to achieve our overall goal to lend $4 billion to small businesses in the Midwest over the next three years. The recession provided an opportunity not only for efficiency, but also for expansion, as some businesses took advantage of less competition as weaker competitors left the market.
Magee: Throughout the downturn, Independent Bank significantly invested in new technology, improved its treasury management platform, fortified its paperless environment, refined its service culture, made preparations to deploy mobile banking, expanded its social networks and expanded its SBA lending program. Our treasury management products and services rival anything you’d find at a large bank. We take our role of being an economic engine within our communities very seriously.
Fillar: Comerica’s strategy continues to focus on building relationships with businesses, their owners and their employees. We have opportunities in all of our markets to gain a greater share of the marketplace. Comerica is positioned as well or better than most other banks to add customers. We have a highly skilled workforce with long tenure and a great breadth of experience. We have plenty of money to lend. We have the products and services of a large national bank that are still delivered to the client through locally empowered loan groups. We are one of the very few banks that still have local underwriting staff located in the communities we serve. All of these advantages add up to a better client experience.
Bultema: We see opportunities in the micro-business lending market, businesses valued at $3 million or less, which makes up 30 percent of market share in the business market. Our share in micro is 12-15 percent. While the economy has been rather bleak, there are certain pockets that are growing, and that we’re excited about. The upside to the weak economy is that there are clients that have run their companies very successfully, customers are doing well — such as suppliers in automotive, heavy-duty trucks. The strong are getting stronger, and need capital to take advantage of the opportunities that are out there.
Kerber: In 2011, we will continue to capitalize on our recent acquisition of Byron Bank in the West Michigan marketplace. This acquisition has been an important building block for us and has significantly increased our capabilities in this important and growing area of the state. Importantly, our acquisition will allow us to continue developing business banking relationships that will help our communities grow and sustain the growth we are seeing in this important market.
Deur: We are very grateful that 2010 was a profitable year of wonderful growth for us. We attribute that to our hometown roots and conservative business style. Our sweet spot is the small- to medium-sized business that wants a personal relationship with a locally managed bank, businesses looking for a partner that can offer advice and counsel beyond their loan needs. Good clients and good underwriting are two of our core competencies. The attitude of business owners has turned the corner. They are willing to play more offense than defense. Our recently completed survey found that our clients show a growing optimism for the future and are looking to reinvest and potentially add staff to support their growth.
Magee: Even though we are less dependent on the Big Three automakers now than we have been in the past, I believe the economic growth will come from their continued improvement. Our doors are always open to people who put forth a good business case. It’s exciting to get involved with a business and help it grow. Our recent investment in both the front line and back room to support SBA lending is already proving to be a good fit for many businesses.
Dunlap: The business climate in Michigan and throughout the Midwest has changed forever. Businesses understand that while manufacturing can remain a driving force, the Midwest will have to rely less on manufacturing jobs and look for greater investments in innovation and technology, as well as growth in the service-based industry. Entrepreneurs also will play a very large role in guiding the Midwest economy into the future. Michigan can accelerate this growth by increasing its support for entrepreneurs, growing the entrepreneurial infrastructure by expanding education programs and services, investing in venture capital, sparking collaboration and further leveraging our key assets and innovation capabilities.
Kerber: It is too difficult to tell which sector is going to drive Michigan’s growth going forward. While there are many thriving industries headed in the right direction, we must experience a period of sustained growth and economic activity before we really know where our future economic growth will come from. As a Michigan-based financial institution, we have faith that our state’s economy will rebound, and importantly, believe Michigan’s economic recovery is reliant on innovation and collaboration. Many businesses that have weathered the recent economic storm have done so by staying nimble and have adapted well to emerging opportunities.
Snyder: Entrepreneurs really fall into two categories. First, when we look at start-ups — start-ups are not really bank- or traditional-financing sensitive — studies show that they are being funded by family, friends or their own credits. Second, what we are really looking at are small- to mid-sized or locally controlled companies needing to extend, not so much lines of credit or operating capital, but reserves to acquire new equipment to meet new market demands.
Deur: All three — Michigan’s resurgence in the auto industry is creating great opportunities for suppliers. Continuing investments in life sciences also will impact West Michigan positively. Our bank has always admired and participated in West Michigan’s entrepreneurial spirit, a spirit that is driving our economy now and into the future. Entrepreneurs are an important part of the West Michigan business community. New technologies and area organizations that support entrepreneurial vision and effort are enabling their high-speed growth. We believe entrepreneurs will continue to thrive here.
Manica: Michigan is still a very heavily dependent manufacturing state. We cannot return to a healthy economic situation until that sector is on the way to a healthy recovery. Life sciences is growing and will continue to do so as our population ages. In the end, it is the entrepreneurs who are the job creators, and our political leaders must find a way to attract them to Michigan. Michigan must become a business-friendly state if we are to create the jobs we desperately need. It is not a need for special programs that job creators need, but a reasonable regulatory structure, a sound tax policy, and politicians who value job creation.
Fillar: Over the years, I have consistently read that about 80 percent of new jobs are created by small businesses. These entrepreneurs are the catalyst for much of our economic growth in our region and come in all different types of industries. These entrepreneurs are generally higher risk takers than the average citizen. What surprises most people is that banks have never been a primary source of capital for new ventures or start-up businesses. Most entrepreneurs rely on personal assets or borrow from friends and family members to fund their new enterprises. I don’t see this changing any time soon.