In a mostly sobering assessment of local banks in the area, a handful of bank presidents participated in a roundtable discussion at McAllen’s annual Economic Forecast Summit on March 30. Raymond Jenkins of Frost Bank, Ford Sasser of Rio Bank, Dan Lawless of Chase, and Doug Bready of San Antonio National Bank offered their predictions on the current and future state of banking in the Valley.
The verdict, according to the four: new rules, additional taxes, and a controversial healthcare bill passed by Congress and signed by President Barack Obama last month, are creating a “paralysis in the local market, and in the buyer-business community.”
Federal limitations coming from Washington are hampering banks ability to generate loan business on a local scale. Regulators have also taken a very hard look at banks, and put increasingly stringent limits on banking nationwide. Regulations in turn have affected banks in the Valley more than anywhere else, according to bankers at the Summit.
“I will say that the regulatory environment, as well as the things that are going on in Washington, are causing many to pause before they are coming in asking for loans,” Sasser of Rio Bank, said at the event. New loans at Rio Bank are at about one-fourth of what they were 18 months ago, he said.
“The limitations being put on our banks today is having an impact on our ability to generate loan business. It’s frustrating to our bankers, it’s frustrating to our customers, and unfortunately we probably have not seen the end to additional federal regulations,” Sasser said. “We can anticipate not less, but more regulations and not only in commercial real estate lending but across the board.”
“We have the threat of additional taxes, the changing of the playbook, for example the healthcare that was passed. Those types of things are going on and it is creating a paralysis in our markets, our buyer-business communities,” Sasser said. “Meanwhile the regulators are coming in with the same type of limitations on the commercial side, it’s still having an impact on the volume of commercial business.”
Among the most difficult loans for consumers are commercial real estate loans, which the government capped in 2006, and owner-financed homes, which the government is limiting by requiring a mortgage brokers license in order to utilize that financing, according to SANB’s Bready.
“They (the government) changed the words real estate into a four letter word,” Bready said. “The government had decided in 2006 that the total volume of commercial real estate lending in bank portfolios should be limited to 307 of that bank’s capital. That’s a cap.
“Regulators have become quite enamored with looking at that rule, and when your capital has started to peel back and the number of loans has started to become problematic, then they gotcha,” according to Bready, who predicts that interests rates will not rise until there is a stronger demand for loans.
“The things to keep in mind is that rates are just like any commodity. It’s a supply and demand issue. If there is not a lot of demand for loans, then guess what, then we are really not going to want to pay a lot for deposits if we can’t do anything with it,” he said. “Our job is to borrow money from you, the masses, turn around and prop it up, and lend it out in smaller loans at higher rates. We make money on that spread. Until we have a demand for loans, we shouldn’t be paying too much for deposits.”
The lower demand for loans should keep interest rates flat this year, according to Chase Bank President Dan Lawless. Rates can change as government spending increases, Lawless said.
“I know the Fed wants to keep rates down, but the Fed can only control short-term interest rates. Market dictates longterm rates, and as our government continues to increase its debt, then we are going to continue to see the devaluation of the dollar,” Lawless said. “As the dollar continues to devalue, the only way we are going to keep our debt attractive is to make rates go up. I think in 2011, I would anticipate rates to go up at that point.”
All bank presidents agreed in unison that the healthcare bill signed by Obama last month will have increasingly negative impacts for the region. The bill will be a contributor to the current slowdown of the economy, according to Frost Bank President Jenkins.
“This country cannot live with this debt. It is going to impact us all. I am thankful I am 55, and not 25,” Jenkins said in frank terms.
“I agree that it’s going to impact us locally just as it has these other companies that are trying to get ahead of the curve. I think I alluded earlier is that what I hear is that one of the reasons we don’t have loan demands at our banks today is because it seems like everyday there is something coming out Washington, the most recent being healthcare, which like Raymond (Jenkins) says, nobody understands,” said Sasser.
“I can’t think of a worst group to try and solve that than our people in Washington because it’s not this big problem-solving group. It’s a political group, and they want to win votes. They don’t want to solve problems,” said Bready.
“For the most part the main reason why people don’t have health insurance is because they don’t use it. I don’t see any shortterm positive effects of this legislation,” said Lawless.
Overall what will make or break business owners in the Valley as they emerge from the current economic downturn in 2010 will come down to their grasp of the basic ideals of business. Watching costs and credit, taking care of customers, and managing your debt income, are all key to survival in the coming year.
“For the citizens it has come down to some basic deals, and maybe the guidelines have gotten a little tougher because we have gone back to the basics,” said Jenkins of Frost Bank. “Debt income, in other words are you taking care of your business at home. Are you keeping your debt down? Are you keeping your credit cards paid on a monthly basis? Banks are looking at that, including the importance of your credit score. If you are, there is all the credit that you want out there.”