For the most part, local banks didn’t engage directly in the sub-prime fiasco. But they did lend heavily to developers who were selling units based on buyers getting loans, buyers flush with cash from a refinancing or buyers with a job in an industry that relied on consumers spending like mad.
Then late last year they looked in the mirror and had an “uhh ohh” moment. Now they want to make sure you can pay back your loan, and want to make sure a business is on solid footing. And within the last month, six Virginia banks have paired up faster than high schoolers on prom night.
Business owners, meanwhile, say their local banks are becoming dangerously stingy — in some cases even threatening the lifeblood of business.
Late last week BizSense sat down with the the founder of Strategic Risk Associates, a consultancy that helps banks address risk, to discuss the state of local banking and what it might mean for local businesses.
Below is an edited transcript with Michael Glotz and his business partner Rob Mitchell.
Richmond BizSense: We’ve had at least three mergers between community banks in the last 2 months, what is driving this trend?
Michael Glotz: From the buyers point of view it’s a good time to increase distribution of their products. There are a number of Eastern Virginia banks that have acquired institutions in Richmond. In some cases you might consider a lot of these institutions a bargain so they can increase distribution in a target market and do it at what appears a really good price relative to what they would have paid a few years ago.
RBS: What about from a seller’s perspective?
Glotz: Bank sellers have looked at their business models and in a number of cases they have depleted capital because of significant charge offs due to problem loans or due to their marketable securities dropping. They may not have capital to lend. They are not profitable and they need to hook up with a healthier institution. In some cases, their employees and their facilities and their customer base have value even if they are losing money.
RBS: What role do federal regulators play in driving consolidation?
Glotz: Federal regulators have raised the bar in terms of what they expect out of community banks: more capital, more sophisticated risk management, and better compliance. All those are expensive and in many cases that’s driving them to consolidation.
Rob Mitchell: All these banks are being required to have this internal infrastructure that they can’t afford. They can’t access the market to raise capital like the big banks. BB&T raised a couple billion dollars this week in the stock market; these little banks can’t do that. A lot of them want to and they are exploring other ideas on how to raise money.
RBS: How many jobs are lost in a bank merger?
Glotz: There are really two types of models. An in-market acquisition where you are acquiring a bank in your footprint so you have overlapping branches and corporate headquarters. In that case many banks strive for a 50 percent reduction in staff and they close branches.
Most of what we have seen in Virginia they are out-of-market so there isn’t overlapping branches. The job loss is more minimal, mostly corporate staff that is reduced. You don’t need two CEOs or two CFOs.
Mitchell: I would say less than 5 percent; a lot of these banks are understaffed already so they really need everybody.
RBS: Several Virginia banks took TARP funds, how are they using those funds and are they trying to pay it back already?
Glotz: The federal government had to rush in to stabilize the banking community last year when it was on the verge of collapse. It was needed fast and right then and there.
A lot of banks that did take TARP money did take it because of the uncertainty over the economy. Having more cash is better than having less. I think we’ve spoken to many bankers who are unhappy with the rules and overhead associated with those investments from the federal government.
RBS: Do bankers have buyer’s remorse?
Glotz: A lot of them wouldn’t do anything different given the level of uncertainty at that time. If we take the money we will show investors we are a healthy institutions because the government was only giving tarp money to healthy banks.
It was an insurance policy. Now that they are seeing profits creep back in they are saying they don’t need the TARP capital. A lot of banks want to pay back the money; they are planning to pay it back over the last two years.
RBS: TARP was intended to increase lending, has that happened?
Glotz: I think there is a whole range of outcomes from that money. One range were banks that felt they didn’t have enough capital. For some it helped their capital position but it didn’t increase their lending. They wanted a bigger safety net.
Those that already had adequate capital it allowed them greater safety and security to lend. Capital is for safety of all the bank customers. It is necessarily always there to lend.
RBS: Banks everywhere have more troubled loans, especially real estate holdings. How are local community banks being impacted to those and what can they do to turn that situation around?
Glotz: We spend a lot of time helping banks across the country better manage their problem assets. I would say it’s an issue most banks didn’t have to deal with five years ago.
Community banks are struggling to manage those problem assets.
Mitchell: Some banks have a borrower that’s in default not making payments, the bank has several options. Maybe they can find someone that will buy the loan itself for a 20 percent discount. Wachovia has lots of loan pools for sale doing exactly that. They would rather take the loss than keep them on the balance sheet.
Community banks are more relationships driven so they don’t want to dump a loan or force a bankruptcy.
RBS: We here from business owners who have had their credit lines pulled even though they have never fallen behind. Why would a bank do that to a customer?
Mitchell: Banks were more comfortable with more leverage two years ago than they were to day. Business used to be comfortable lending three or four times cash flow, now they are saying two times cash flow. The business might be doing the same as last year but the bank is not as comfortable giving them as much leverage.
And a lot of businesses are not doing as well as last year.
Al Harris is a BizSense reporter. Please send story tips to [email protected]