When Federal Reserve Chairman Ben Bernanke gave a speech to bankers Friday in Phoenix, it was refreshing and long overdue to hear a top-ranking federal official finally address community banks and their challenges. I applaud his candor. It was as profound a moment as when, several months ago, government officials finally voiced to the public the difference between investment banks that do deals and move money around (not really banks at all) and real banks that make loans and have deposits.
Working extensively with the community banking sector, my partners and I have shared their pain from being tarred with the same brush as their larger and generally more troubled brethren. Publicly held community banks with sound capital structures, holding no toxic assets or subprime loans, making loans, growing deposits, demonstrating growth and even posting earnings have seen their stock prices plummet. Their capital structures have been pinched by noncash devaluations caused by mark-to-market accounting of sound but illiquid holdings. Government regulators have applied the same one size fits all approach to the most earnest, transparent entities as they have to the Hydra-headed financial behemoths.
The bad economy has forced most banks to set aside additional reserves for losses. Many have suffered from troubled real estate and construction lending. Banks lend to finance retail and commercial real estate, and the sharp downturn in real estate left few untouched. Many got caught with their pants down, and there were some poor underwriting decisions made, but I still think more of a bank damaged by a construction loan that went bad than a bank creating phantom assets with exotic financial derivatives.
In general, community bankers have done everything possible to continue lending, paying fair interest rates to depositors, charging fair rates to borrowers, addressing their mistakes, and serving their communities despite being shunned, vilified and misunderstood by the media and federal government.
Small business-oriented community banks from coast to coast, like 1st Enterprise Bank (OTCQB:FENB) in Los Angeles and Centrix Bank (OTCQB:CXBT) in New Hampshire grew their loan portfolios and reported record assets in 2008, a horrendous year for the banking community. Horizon Bancorp (NASDAQ:HBNC), which reported record earnings in 2008, managed to do this while serving communities in the challenged economies of southwest Michigan and northern Indiana. It even announced plans for a second branch in Elkhart, Ind., which has been highlighted by the national media as the poster child for the nations’ economic and employment woes.
Ted T. Awkeramp, president and CEO of Mercantile Bancorp (NYSEMKT:MBR), a company whose holdings include full-service banks in Quincy, Ill. and Hannibal, Mo. that grew assets, deposits and loans in 2008, told a local Quincy publication: "There's a lot of pain out there and we're feeling some of that. But at the local bank level, we're still loaning money and we're meeting our well-capitalized levels everywhere.”
Doug Crichfield, president and CEO of Solera National Bancorp (OTCPK:SLRK), whose client base includes the Denver area’s fast-growing Hispanic-owned small business community, has commented:
Our employees have the training and resources necessary to offer solutions, not shrugs. We’re growing our customer relationships and demonstrating the value of working with a committed financial services partner. We’re also preparing for a bright future by developing new and exciting services and alliances that will help customers grow.
Members of banking’s “evil empire?” I think not.
Far from making profits at the expense of customers, banks like these prove that by running a customer-focused, service-oriented business, they can serve their communities and also create value for shareholders. Across the country, community bankers have battled liquidity and capital availability issues to continue serving people as best they can.
Chairman Bernanke injected a breath of fresh air into the mix with his recognition that all of the above are true. To my knowledge, he’s the highest ranking federal official to publicly admit that the ever-changing government plans for providing liquidity and capital to banks has resulted in mixed messages about whether banks should use the funds for lending, or hoard the money to meet escalating requirements for Tier One capital. This is nothing new to bankers, but it’s nice to hear a federal official acknowledge it.
He said bank regulators would be instructed and trained to be mindful of the balance between lending and capital adequacy requirements. He acknowledged community banks as a primary source of credit for small business. He spoke of nurturing the opportunity well-managed community banks have to continue lending at a time when troubled megabanks have been forced to pull back.
He acknowledged the complex regulatory process unfairly discriminates against smaller institutions by imposing unnecessarily harsh and expensive compliance requirements designed for larger, less transparent institutions. Although he didn’t lay out a specific action plan, he at least expressed his hope that within a year, there would be a more balanced and appropriate regulatory burden based on a bank’s size and operational complexity.
Finally, he made the distinction between regulated, responsible financial institutions and the unregulated and sometimes irresponsible financial services companies whose actions have led to much market disruption and anxiety.
These observations from America’s financial “top cop” must be heartening to community bankers who’ve been treated like the country’s neglected stepchild since the dominoes started falling on Wall Street and in megabank corporate boardrooms across the country. Since I believe acknowledging a problem takes you halfway to a solution, I’d like to believe other government officials and legislators will finally take heed and work together to develop some of the fixes to which Chairman Bernanke boldly committed.
Disclosure: The author holds no positions in companies mentioned.