Mr. President: Community business banks are ready to make responsible loans
By Kris Grant
Paul Rodeno, president and CEO of Security Business Bank in San Diego, expresses the sentiments of many local business bankers in the region when he says, “We’re open for business and we’re anxious and looking to make loans.”
His remarks come on the heels of President Obama’s meetings with bankers – one meeting for the large bankers, i.e., those bankers who didn’t get fogged in on their way to the capital last month. One wonders: couldn’t the leaders of Goldman Sachs, Morgan Stanley and Citigroup have taken the train? Or planned ahead, maybe traveling a day in advance? After all, this was a meeting with the president, the guy who helped bail them out just a few months earlier. (But the following Sunday the president, still livid, one suspects, over his forced conference call session, got in a punch back, saying on “60 Minutes,” “I didn’t run for office to be helping out a bunch of fat-cat bankers.”)
It was a different set of circumstance for the gathering of small community banks called by the president on Dec. 22 (They all made it.) Rodeno wasn’t in that meeting, but has been back to Washington this year, meeting with senators, as his banks and others work their way through the credit crunch. But Rodeno isn’t seeing it as a real credit crunch, “just a return to normalcy, a return to a more sensible way of lending.”
Of course, what is problematic now is that most consumers and businesses aren’t seeking loans; rather, they’re hunkering down.
And while part of the problem is that “banks cannot manufacture loan demand when there is none,” the American Bankers Association, on the eve of its Dec. 22 meeting, gave the president a list of six recommendations of how the Obama administration and banking agencies could enable small community banks to make more loans. The recommendations included:
1. Do not use distressed sales prices when valuing performing loans. The ABA cited in its letter that “Some examiners are reportedly directing banks to write down the value of collateral based on distressed sales prices creating the anomalous ‘performing non-performing loans.’” The ABA said this can set in motion a downward spiral for the borrow and ultimately the bank, as the bank requires more collateral or more equity from the borrower, the borrower cannot meet the new requirements, the loan defaults, and another property in dumped into an already depressed market. (Rodeno refers to this as the chicken and the egg spiral.)
2.Rationalize the rules governing brokered deposits. This issue has two components. First, the current rules governing brokered deposits treat certain deposits – such as those swapped by banks that are part of a network like CDARS – as brokered even though the deposits are generated largely from core deposit customers and perform like core deposits. As a result, community banks are discouraged from competing for larger deposits that could provide the funding for new loans. Secondly, examiners are criticizing banks for using brokered deposits even though such deposits often are cheaper and more stable sources of funding than deposits obtained through other sources. Where a ban is using brokered deposits to fund rapid growth, examiners have a right to be concerned, said the ABA. But criticizing deposits solely because they are brokered hampers a bank’s ability to obtain low-cost funding and thus limits the bank’s ability to make loans, the ABA contended.
3. Consider all insured deposits as core deposits. Examiners continue to view deposits between $100,000 and $250,000 as non-core deposits, notwithstanding deposit insurance cover up to $250,000 per account. This can make a bank’s sources of liquidity look more volatile than they are, thus discouraging banks from accepting the larger deposits. Fewer deposits translate directly into fewer loans.
4. Permit more of a bank’s reserves to be counted as capital. The agencies’ capital rules permit a bank’s allowance for loan and lease losses to count as capital only up to 1.25 percent of a bank’s risk-weighted assets. The bankers argue that “this is an arbitrary limit that fails to recognized fully the loss-absorbing abilities of the allowance. Because each dollar of capital can support up to $10 of loans, counting more of the reserves as capital would enable banks to make more loans.”
5. Avoid procyclical capital rules. Examiners often are directing a bank to improve its capital ratios significantly above the “well capitalized” thresholds at a time when private capital is unavailable or very expansive. In addition, the capital rules require dramatically more capital in certain circumstances (such as when debt securities are downgraded to below investment grade.) A bank that is faced with an examiner directive or that is holding a downgraded investment often has no choice but to reduce assets – including loans – in order to remain in capital compliance. The agencies should not increase minimum capital requirements during a downturn, and the regulations should avoid the “cliff effects” produced by sudden and large required increased in capital ratios.
6. Use a small amount of TARP funds to help viable community banks. TARP funds have not been made available to a large group of community banks that are viable but that are working through asset quality problems, said the ABA. The loss-share agreements offered by the FDIC when a bank fails are encouraging private investors to wait for a bank to fail instead of investing in banks that are going concerns.
Rodeno says that his bank – and most business banks – haven’t made it any harder this year for borrowers. “The lending business is such that you go through an analytical process to make loans,” he says. “We want borrowers that have good cash flow, good capital income, strong balance sheets and strong personal balance sheet – we look to the borrower and the guarantor.”
He doesn’t think the banks have changed the way they look at lending. Instead, “It’s the borrowers that aren’t as strong as they have been,” he says. “It seems to me that the government is asking us to lower our standards to make more loans. And that’s a challenge.”
In fact, it’s downright irksome to Rodeno. “It is, quite frankly, the reason that subprime lending became so prevalent. They threw the standards out the window.”
And now Washington is asking business banks to do the same? That doesn’t sit well with this bank CEO. “It’s why we’re in the situation we’re in; they’re asking us to do it again.”
True, Security Business Bank was the recipient of capital from the government. “We took it way back when,” Rodeno says. “We were approved in October 2008 and funded in January. We were in a unique group that was considered a private bank because we had less than 500 shareholders.
“Citi gave back $20 billion, but there are certain requirements to give it back and at this point the capital markets aren’t strong enough. I’m not willing to do that yet,” Rodeno says, pointing out that banks have a responsibility to their shareholders.
Rodeno says there is one area where the bank has grown its loan portfolio: SBA loans. “The government has increased guarantees for SBA loans to reach larger companies, and we’ve taken advantage of some of that. We’ve had several SBA transactions and want to do more.”
Security Business Bank of San Diego primarily serves the service industry, comprised of attorneys, technology companies, real estate and professional services firm.
If 2008 was the year of the financial crisis, Rodeno says 2009 could probably best be described as the year of the hangover.
And so how would he describe 2010?
“Probably a bit of a milder hangover,” Rodeno says with a wry smile. “As long as unemployment is high, it will take time to work through this. It showed a slight decline this month, but there is a huge increase in temporary workers. And next year, there will be a blip with the census workers (about 770,000 people will be hired to count and track Americans). But that, too, is temporary; there are a lot of anomolies. As long as there is high unemployment, we’ll have a challenge. Seventy percent of the economy is driven by the consumer. And the prospect for 2010 is to ‘pull in your reigns.’ I’ve experienced it in my own family. It’s the nature of where we are, it will take several years to work this out.”
Rodeno says he’s still waiting for the stimulus plan to kick in. And he says that interest rates and inflation continue to be of concern.
Still, there are positives. “There’s a continued resilience of our American economy,” he says. “Given what we went through in ’08, it’s amazing that we’re still here. I thought unemployment would be much much higher.”
In this time of economic challenge, Rodeno says Security Business Bank is doing its best to “embrace employees and shareholders, and to offer support via financial counsel to customers in a flailing economy. The bank offers ongoing product development, streamlined approval processes with in-depth need assessment, creative problem solving and collaborative partnerships.
“We’ve very much open for business and want to help companies succeed,” Rodeno says. “We have a very active calling program of prospecting and growing our business.