Bankers take credit crisis in stride

“Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.”
—Lord Polonius, Hamlet, 1603

It seems the world is taking Polonius’ advice, either through personal prudence, lack of availability, or regulatory intervention. But after years of profligacy on both the borrowing and lending sides – and exponential momentum on each side feeding the other – one thing is clear to Colorado bank observers and bankers themselves: Economic recovery will require a fully operating credit system.

Make no mistake, however: A fully operating credit system in the future, and in particular the near-term future, will look nothing like the disaster-in-the-making system that has driven both Wall Street and Main Street over the last several years. What almost everyone is now calling the worst economic crisis since the Great Depression nearly 80 years ago has forced a kind of fiscal discipline on business lenders and borrowers alike not seen in ages, and before the recovery can take place there is much work to be done.

“What was OK a year ago is not OK now,” says Denver-based bank consultant Larry Martin, principal of the firm Bank Strategies LLC. “The (banking) regulators are doing CYA right now, and everybody is having issues. If they make loans, they have issues.”

Martin adds that he heard the best admonition for these times at a recent banking symposium where a presenting banking executive told his colleagues, “You all have been lenders for the past several years; now you’re going to become bankers.”

“It’s time to think inside the box,” adds C. Randel Lewis, managing partner of Denver-based Cloyses Partners, which is a troubled-company consultant, turnaround specialist and interim management firm. Lewis is also an adjunct professor at the Daniels College of Business at the University of Denver where he teaches Strategic Finance in the MBA program. “The days of constant borrowing are over; it’s time to buckle down and make your customers pay.”

Business credit available
The hard part is in becoming bankers: managing capital and liquidity, shoring up loan underwriting procedures, working harder with customers on their own capital and liquidity issues.

But in spite of an economic atmosphere replete with commercial and investment bank failures on a level not seen in decades, the capital infusion into the American financial system of something approaching three-quarters of a trillion dollars by the U.S. Treasury, and with governments around the world propping up their own financial structures with billions of their own currencies, the news isn’t all bad for Colorado businesses needing corporate finance through bank borrowing. Many of Colorado’s leading banks heavily involved in business lending report that their balance sheets are strong, their institutions safe and sound, and that there is money to lend – to the right partners.

“We are making loans,” says John Ikard, president and CEO of Lakewood-based FirstBank Holding Co. “It’s actually a good time to be making commercial loans because a lot of competitors are out of the market.”

“We continue to make loans,” adds Bruce Alexander, president and CEO of Denver’s VectraBank, part of Utah-based Zions Bancorp. “We’re being careful and prudent. It’s a funny thing: While we (banks) are very competitive, we are the grease of the economy. If we’re not making loans, things don’t happen.”

“My message to the business banking customer is very clear,” says Scot Wetzel, president and CEO of Denver-based United Western Bancorp. “For customers who need access to debt and are healthy and profitable, they will still have access to that debt simply because banks need customers to survive.”

“We have industry-leading loan quality,” adds Mariner Kemper, chairman and chief executive of UMB Financial Corp., a bank holding company based in Kansas City, Mo., with significant banking operations in Colorado, where Kemper himself resides. “We have liquidity, so we’re active lenders. We’re able to be out selling (loans) while some of our peers are internalizing.”

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The news on the bank-lending front is not all rosy, however. Larry Seastrom, president and CEO of New Frontier Bank, based in Greeley and with operations in Windsor and Longmont, says at present his bank is making no new loans.

“Not to new customers,” Seastrom says. “We’re a large dairy lender, and we have to reserve what we have for our larger ag customers.”

Under a TARP
Just about every bank out there is getting inquiries from both large and small customers concerning their safety and soundness, and they each have gone to great pains to reassure those customers. Many are running advertisements and sending out mailers to customers with just that message.

“If you are concerned about the safety and soundness of our financial system, you are not alone,” says one such ad pitch from UMB. “Our Time-Tested approach allows you to sleep better at night.” In a similar missive, FirstBank offers “Stability. Strength. Safety,” with such text headings as “Solid History, Strong Financial Position, Excellent Earnings,” and “No Subprime Involvement.”

How we arrived at this position will no doubt be the subject of business school curriculum for years to come, at least one hopes. The same was said about the savings & loan crisis in the late 1980s that ended up costing the U.S. Treasury billions of dollars, but obviously those lessons ended all too quickly. After all, both events, ultimately, turned on availability of massive amounts of credit backed by mortgages on real property.

The difference this time was the globalization of the marketplace for mortgage-backed securities, as well as other securities backed by all manner of consumer and business debt, and the involvement of a much wider array of financial institutions, all of it led by Wall Street. By this summer it was becoming clear that the contagion had spread throughout the financial system, and the world.

Following the collapse of such venerable Wall Street firms as Bear Sterns and Lehman Bros., and the subsequent near-collapse and takeover of such giant commercial banking operations as Wachovia (in the process of being acquired by Wells Fargo), the U.S. Congress passed emergency legislation in September to provide as much as $700 billion to ease the situation. At first the public was told the money would be used to buy up so-called subprime mortgages, thereby relieving the financial institutions of bad debts.

But it became clear in October that a cash infusion directly into the banks and other institutions would be needed, and the Treasury announced a plan called TARP, for Troubled Asset Relief Program, modeled on a plan put forth in Great Britain by the Chancellor of the Exchequer. In late October the Treasury announced it would infuse $125 billion into the nation’s nine largest banks, and another $125 billion into as many as 24 regional banking companies, most in the form of buying into the companies and receiving preferred shares.

This system, it is being argued, will shore up the banks’ capital and provide some liquidity so that they may begin lending again and get the economy moving – not to mention that, ultimately, if it is successful and the banks return to profitability, the government’s (and taxpayers’) interest in these institutions might just be worth more than we paid for them.

Soon after the infusions were announced, however, it emerged that the TARP money was going to be used by some of the banks not for increasing lending, but to acquire weaker bank companies, or that they would simply hold onto it and the better balance sheets the new capital provides. Upon hearing of this, the White House issued statements that it expected the banks to stop hoarding the money and begin lending.

“What we’re trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money,” White House Press Secretary Dana Perino said.

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For Colorado’s VectraBank, the question of TARP participation was answered in late October by its parent company, Utah-based Zions Bancorp. Zions, with $53.9 billion in assets ($2.5 billion of that in VectraBank), announced on Oct. 28 that it had received preliminary approval to receive $1.4 billion in capital in the TARP program, and said in a release the infusion will raise its Tier 1 Risk-Based Capital ratio from 8.07 percent to approximately 10.9 percent. Also, in September the company acquired all of the $737 million of insured deposits of the failed Silver State Bank of Henderson, Nev.

VectraBank’s Alexander says that under TARP, “I think you’ll see the big banks, the well-run banks, absorb the weaker banks. Banks that have strong capital ratios and didn’t play in the subprime (market) will be the focus of the future.

“I don’t think this (TARP) is a bailout,” he adds. “I think it’s an injection of capital to get the banks to continue lending. It’s not rescuing the failed banks, but rather help for the good ones.”

United Western Bancorp. in Denver, with $2.2 billion in total assets, released its third-quarter results Nov. 10. For the third quarter of 2008 the company reported net income of $1.5 million, down 51.5 percent from the same period in 2007. The third-quarter results included a $4.1 million write down on two mortgage-backed securities.

It also reported a Tier 1 capital ratio of 9.82 percent at the end of the quarter. For the same period of 2007 the firm reported a risked-based capital ratio of 14.03 percent.

During an interview in early November, Wetzel declined to comment on whether the bank would participate in TARP infusions through its Capital Purchase Program (CCP). But in the earnings announcement, the bank stated it would be doing so.

“Although United Western Bank’s capital ratios remain well above the minimum levels required for well capitalized status, the company’s board of directors has authorized management to apply for participation in the Capital Purchase Program,” the earnings release said. “We estimate that between $16 million and $48 million may be available under the program.”

Local banks CoBiz Financial and Guaranty Bancorp also reported they intended to apply for TARP money by the Nov. 14 deadline, according to Securities and Exchange Commission filings. CoBiz said it would propose to sell the maximum amount of preferred stock allowed under the program to the U.S. Treasury, 3 percent of its risk-weighted assets. Guaranty said it could receive up to $59 million.

At New Frontier Bank in Greeley, a privately held institution with $2.03 billion in assets as of Sept. 30, CEO Seastrom says of TARP: “We’re looking into it to see if we qualify.”

Turnaround a ways off
It will take some time for the TARP program to fully form, and it remains to be seen whether the infusion of capital will actually boost bank lending. However, Colorado bankers and industry observers agree that, for the most part, there is capital here available for commercial lending, but that it won’t be business as usual, or at least “as usual” as we have seen over the past few years. Moreover, these banking industry executives don’t see an economic turnaround at least until late 2009, and possibly not until a year or more after that.

“We’re a resilient country, and we’ll come out of this,” says UMB’s Kemper. “There is a ways to go. If you compare it to ’87, it took three years. In the Depression, it took 10 years. We need to find the bottom. It’s hard to know when we’ll come out of it if we don’t know the bottom. Once we get there we can get out rather quickly and be out fully in two to three years.”

“I think 2009 is going to be a tough year,” FirstBank’s Ikard adds. “We’ll still make money, but it’s going to be tough. Colorado will be OK because we didn’t have a huge run-up (in real estate). I’m looking at improvements in late 2009.”

For United Western Bancop.’s Wetzel, the TARP program and other government-led relief programs will, eventually, make things better.

“You can’t have a $1 trillion injection into this economy without it having an effect and momentum,” he says. “So the question is how quickly? The length and depth of this cycle has yet to be determined, and it matters how that capital is deployed.”

“I think it could be 24 months,” says VectraBank’s Alexander. He cites two key economic areas to watch: jobs and housing.

“Job growth is important,” he says, “a clear driver of the economy. Recently Colorado has been growing in the 1 to 1.5 percent range. It’s not great, but it’s in the top five in the country. In housing I look at inventory. Until that is absorbed, it’s difficult to see your way out of it. At the peak we were generating 40,000 housing permits a year, and now we’re at 10,000 to 11,000. When you see that drastic decline in housing, it’s difficult to get any velocity in the economy.”

On the other hand, Alexander adds that “there’s also some opportunities, some properties on the market at great discounts and a lot of people who just want out.

“The glass could be half full,” he concludes.

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