Local banks are “flush with liquidity” and competing for loans to turn that cash into an interest-earning asset, local experts said at a recent roundtable discussion hosted by The Daily Transcript and sponsored by Squar Milner.
“There are a lot of good loans to be made; there are a lot of good borrowers; there are a lot of good companies; there are a lot of good real estate investors; and those who turned the corner and survived the downturn are now looking to grow and expand,” said Stephen Gordon, chairman and CEO of Opus Bank.
There is more demand in certain sectors — such as residential, commercial and multifamily — but there’s less demand for traditional commercial and industrial lending, said Alan Lane, president and CEO at Silvergate Bank.
“There’s less demand than there are banks chasing that business, and that makes it very competitive and very price competitive,” Lane said. “So the companies that are out there that are looking to grow that do want to borrow — there are 10 banks lined up to take that loan.”
And those businesses are starting to look toward the smaller banks to be more creative in making those loans, Gordon said.
“When you consider that some really good companies struggle for a couple years, and then there’s this rigid box that ‘you have to have two years of positive earnings,’ you’ve got to get to where, as a bank, you’ve got to think a little bit creatively,” said Gordon. “If I had that rule for ourselves — I just started a year and a half ago — the first year we weren’t profitable. How am I going to turn to somebody and say, ‘Sorry, you weren’t profitable last year, I’m not going to lend to you?’ It’s hypocritical.”
Donald Murray, president of the Commerce Bank of Temecula Valley, said his company funds about one deal for every 10 applications made — four are approved, one walks and two are siphoned off by big banks that can offer better rates.
So why are businesses saying banks aren’t lending?
“Banks are flush with liquidity. They need assets, they’re hungry for them,” said Greg Garrabrants, president and CEO of Bank of Internet. “The issues are more related to actual real demand in the economy. The regulation on businesses which they’re buying creates a series of downturn effects related to the actual ability of borrowers to create businesses that are worth lending to.”
Gordon described it as delineation between the “haves” and the “have-nots.”
“When I say the haves and the have-nots — now you’re left with institutions that have a lot of capital, a lot of liquidity and they want to get things done. They want to do things for the local economy, for businesses, for entrepreneurs, for real estate investors, etc.,” Gordon said. “And then you have those who are kind of stuck. Those who don’t have so little capital they’re going to get seized, but they don’t have enough capital to be able to do anything meaningful and significant. And those are the guys that I think we’re hearing a lot about, that they’re not doing anything.”
Wendell Daniel, audit partner and community bank leader at Squar Milner, said while demand has increased, it’s not quite at the level banks want it to be at.
“There’s a lot of opportunity here. There are a lot of good banks still looking to make loans, trying to jump-start the economy. The fact that it’s not where we would all like it — it’s not because these guys aren’t doing everything but standing on a corner waiving a sign saying, ‘we have money to lend,’” Daniel said.
And while the community banks are competing with the bigger banks for the loans, rule makers will continue to sift through and implement regulations defined in the Dodd-Frank Act, which could further change the banking world.
“The regulatory pendulum needed to swing to this end,” Gordon said. “Something went awry in the last decade. And there was maybe a lack of regulation, a lack of respect for what we are in terms of being supposed pillars for strength in the community. And somewhere along the way, during the complete meltdown, the government realized that banking is a matter of national security and maybe the world. So regulation did need to swing to an extreme, and it’s probably right in being there. The question is, how do you implement it?”
For Garrabrants, the regulations thus far have caused his company’s compliance staff to become a little bit larger and more expensive, he said.
“I’m small enough where it doesn’t really affect me,” said Murray of the Dodd-Frank regulations. “It will, as those rules get put in place and larger banks define best practices on those rules — that’ll trickle down and that’ll cost me money.”
Gordon said the overhead cost can’t be quantified in some instances, but it can be quantified in terms of extra time spent. It may take a month to implement the same thing that took a matter of days in the last decade because more people are needed to review the process.
“So it’s not like you went out and hired someone to do it, so you can’t tie it to a cost. But that means that our eye is taken off of maybe focusing on doing business,” Gordon said.
That process has stopped Murray from pursuing some products because he can’t afford the due diligence with the size of his bank, he said.
Daniel said examiners are informing banks that if they use a third party model to do anything, they could be expected to hire an independent third party to validate that model.
“Once it trickles all the way down to the smallest banks, it will have a bigger impact on his bank than it will on larger banks, just because he’s smaller due to simple scale,” Daniel said. “He can less afford to hire an additional regulatory compliance person or go to a third party, or outsource one additional function that he has to write a check for.”
That extra cost to smaller banks could cause more consolidations, Lane said.
“In general, the smaller banks are going to have a tough time because we’re all held to the same regulatory standard,” Lane said.
At a recent FDIC roundtable discussion he attended, Lane said the FDIC explained that stress testing is not just for the big banks – and he agreed. If his bank doesn’t know how it will perform in different economic environments, then “shame on us,” he said. And Daniel said he has already been told to consider stress testing best practice.
“Things that are in place for the big banks will eventually trickle down and when you’ve got these third parties that have to be looked at at some point, a small bank is relying almost 100 percent on third parties for everything from data process to advertising, marketing — everything that a bank is doing, they’re relying on a third party,” Lane said. “And when you have to have all of that reviewed by a third party, at some point, it just becomes cost prohibitive. At some point, I do think that there will be continued consolidation and in part, driven by regulation.”
Wendell Daniel, Audit Partner & Community Bank Leader,
Squar Milner (sponsor)
Greg Garrabrants, President & CEO, Bank of Internet
Stephen Gordon, Chairman & CEO, Opus Bank
Alan Lane, President & CEO, Silvergate Bank
Donald Murray, President, Commerce Bank of Temecula Valley