Robert Taylor thinks Louisiana banks are in a good way, certainly compared with the plethora of banks that have shuffled off this mortal coil so far in 2009.
One reason the Louisiana Bankers Association CEO has confidence is the severe impact that the savings-and-loan scandal had on the finance industry and oil prices circa 1991, the recessionary year he started with the regulatory advocate.
“Part of what Louisiana has benefited from is just the real senior, seasoned management we have in banks that saw what happened here in late ’80s and early ’90s,” he says. “When you see colleagues have their banks closed, real prudent lenders … they lived through that and learned a lot. That’s just part of their DNA now.”
Only one bank on the list of failed institutions compiled by the Federal Deposit Insurance Corporation in the last nine years was based in the state. Still, banks have folded dramatically this year—95 by the start of October—following the collapse of such financial titans as Lehman Brothers holding company and Washington Mutual.
When the FDIC announced late last month that its insurance fund for depositors had dropped from more than $30 billion at the start of the year to zero, some observers were surprised at the speed of the depletion, given that a special assessment was levied midyear to raise $5.6 billion from banks.
Federal officials now say they had underestimated the problems facing banks and have proposed to replenish the fund—which guarantees an account holder up to $250,000 of his deposit—by collecting fees up front over the next few years that banks usually pay quarterly into the fund.
“What they did was better than what they could have done,” Taylor says. “The FDIC came to realize that the special assessments were probably doing more harm than good. Take that money out of the banking system, that has consequences. It’s not good for lending.”
He says one of his clients whose annual budget already was in place decided to forgo building a new branch because of the special assessment. “It was completely unforeseen,” Taylor says. “They had to find a way to make that work. The bank is going to have to react in a rational way.”
Louisiana banks contributed $25 million toward the FDIC fund at midyear, he says. Banks now are calculating what their chunk of the 2010-12 assessment would be, due at the end of the year and expected to raise $45 billion. The idea is up for discussion until late this month, but most bank spokesmen see little alternative. One possibility would be to borrow from the Treasury, but the fear is that such a move would look like another taxpayer bailout.
“There’s a number of financial institutions that would be OK with prepaying, but the consensus is those banks feel they should pay at a discount or get a break based on front-loading their payments,” says Joey Quinlan, president and CEO of First National Bankers Bank.
He says the FDIC plan estimates a 5% annual increase in deposits over the prepayment arc, something that is not guaranteed if account-holders shift their money out of the safe harbor of insured banks and into higher-yield investments. “If you’re an optimist and you expect the economy to rebound, that money should go back into the stock market,” he says. “A lot of the liquidity the banks have now could go and be invested in other ways.”
Still, he says community banks don’t want to see another special assessment, whatever other course the FDIC might take. He says the agency should reward banks that make upfront payments, given that struggling institutions might have to request an exception to the levy. “We’ve got a lot of healthy banks in the country that don’t want to have to pay for the sins of a handful,” he says.
Randy Ransom, branch manager for Fidelity Bank on Jones Creek Road, says in general, smaller community banks such as his have been unfairly lumped in with offending lenders who took on too much risk.
“Banks like us that have … done their homework during this period and maintained credit standards, we seem now to be bunched together and have to pay the penalty like everybody else,” he says.
After attending a talk this month by Ross Little, an executive vice president and chief retail officer for Teche Federal Bank, on the threat of a broadly empowered financial regulator that Congress is considering, Ransom said risky lending practices didn’t become an issue for lack of oversight, but because existing monitors such as the FDIC and the Federal Reserve failed.
“Banks are going back to the fundamentals of lending,” he says, noting that voluntarily stricter standards are a healthy market response to over-speculation. “It’s amazing that the industry, through greed and a focus on profitability, just forgot what fundamental lending standards are. It goes back to shareholder expectations. Why not say, ‘You won’t make as much as last year [but] your money is safe?”
Don Ayres, chairman, president and CEO of American Gateway Bank, worries that the upfront FDIC fees will take away lending capacity from community banks such as his, even though the prepayment won’t be reported as an immediate expense but will be accounted for each quarter.
“We will lose potential earnings just because of the time value of money,” he says. “If it’s $2 million or $3 million, and I’m paying it in advance, that is potential lendable funds which is a nonearning asset. It will further restrict bankers’ ability to lend money.”
Although there is no certainty that the prepayment plan will prevent the levying of another special assessment in the coming months, he agrees that such a move should be a last resort.
“Special assessments, they hurt earnings immediately,” he says. “I understand why they have to do something. Fortunately we are considered a ‘healthy’ bank; the greater impact is to the banks that are in trouble. If you’re a 3- or 4-rated bank, I’m not sure it’s not going to put some banks over the edge.
“If you participated in the booming real-estate market, that’s where the majority of your loans are. I don’t care how good of a banker you are, you’re in trouble. Typically Louisiana, Mississippi, Arkansas, a number of Southern states, we don’t go through the big upcycles. I don’t think our real estate was overvalued. We were somewhat overbuilt, but not tremendously.”
Taylor says of the banks that failed this year, not all will go out of business; some will recover from bankruptcy. “We do have this system in place, and it does work,” he says. “That really should be viewed as a healthy process. We’re going to have fewer banks in the next two years. People understand their insured deposits are going to be insured.”
It is unregulated aspects of the finance industry that he says are a bigger headache for investors when trouble ripples into the banking world.
“You just have had an unfortunate runup in residential and commercial real estate values that have now come down,” he says. “[President Barack] Obama said 94% of toxic subprime mortgages originated outside the banking industry. A lot of these were generated by independent mortgage lenders and brokers. In Louisiana, we did not see that. Go to the hot markets—Georgia, California, Arizona, Nevada—a lot of bad stuff happened.”
Ultimately, Taylor says federal officials will establish some kind of regulatory overhaul, but how restrictive the solution will be to the private sector has yet to be defined.
“We need to play defense,” he says. “The government is generally going to win, it’s just a matter of what it looks like and how much it costs. Anybody that runs a business knows that it never quits.”
