The Banking World As We Know It
By Stephen M. Klein
January 22, 2010
Introduction
It’s been several months since my last CyberGraham. As I sit on a plane, yet again, I struggle to reduce my thoughts to writing. I guess my senses have been overwhelmed by what has gone on and continues to go on in our world of community banking.
Back to the Future
One memory which flashes through my mind is the day over a decade ago when I got a call from the FDIC advising that two of our new charter applications had been approved – Charter Bank in Bellevue with Keith Jackson as CEO and Community First Bank in Kennewick with Rick Peenstra as CEO. Funny, my friend Jim Grabicki and I visited the FDIC in San Francisco with Charter’s organizers in the morning and Community First’s in the afternoon. We all got street side shoeshines between meetings. My, oh my, have things changed! Charter was sold a few years ago, but Community First, after a dealer paper blip some years ago, continues on better than ever. Those were the “glory” years.
Where We Stand Now
With the recent failure of Horizon Bank and numerous other prominent banks in the Northwest at risk, the community banking landscape is poised to change dramatically. The FDIC seems to be on a mission. Examinations are brutal. Even they admit that a “3” rating is a good thing. There is no benefit of the doubt. The fear of Inspector General Reports has overwhelmed the regulators. Unfortunately, aggressive downgrades have created a self-fulfilling prophecy, making successful capital raises difficult, if not impossible. Our experience is that CAPITAL is the whole ballgame. Those that have it can survive. Those that don’t, may not and will struggle mightily in any event.
Appraisals, Appraisals, Appraisals
Appraisals of OREO or real estate collateral underlying troubled loans are killing the banks. We hear that appraisers are “low balling” everything in fear of being criticized in the future. Why are appraisers totally unregulated? They inflated values and now are depressing them. Until real estate values stabilize, banks will continue to be wounded by write-downs, write-offs and reserves, further eroding skinny capital levels. Further, until then, I am convinced the banking regulators will not take their foot off the downgrade pedal.
When regulators say they haven’t yet gone back into a bank in the Northwest for an exam where the condition hasn’t deteriorated, that mindset becomes pervasive. Why no OTTI for real estate where the bank has the holding power has been adopted is beyond me. The Banks will suffer, while real estate speculators lick their chops. Insanity!
What’s a Bank To Do?
It is very frustrating for our many banking clients trying to navigate the economic and regulatory landmines that they encounter everyday. If you can raise sufficient CAPITAL, that is the best tonic we know. It allows you to aggressively work your problem assets and provides a cushion for losses and a flak jacket against bank regulators.
The Need for Tolerance by Regulators
We are in the epicenter of the fray. As a former regulator, I recognize the incredibly challenging job bank regulators have. However, unless the FDIC has a preordained mission to shrink the banking system (as many speculate), the bank regulators must try to use some measure of tolerance and allow the banks to work their way through this mess. Only time, tolerance and some capital will solve the current challenging situation.
