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Thursday, Mar 28, 2024

Banking Pros Impart Lessons From the Financial Crisis

The current state of the banking and financial industry is not a pretty picture. Financial institutions and consumers alike are in a period of survival of the fittest. Banking industry veterans claim the recession is the worst they’ve seen, and few believe a significant turnaround is likely until 2010. The effects can be seen in decreased return on assets, return on equity, net income, and the like. Late payments on loans, defaults on mortgages, and foreclosures on residential and commercial property are major issues. Couple these trends with icy lending markets between financial institutions and lack of a market for troubled assets, and some banks have had to shut down and others tap federal assistance. Don’t be mistaken, some of the more conservative institutions are weathering the storm and even profiting. But across the board, lenders have become increasingly strict in their underwriting in order to get themselves back in the black. The following series of stories addresses banker’s take on the financial crisis; the state of big banks modifying troubled mortgages; the reason some local institutions tapped federal assistance; and where business owners can find financing. Jack Feldman President and CEO First Commerce Bank, Encino Jack Feldman has experienced plenty of ups and downs in his more than 50 years of experience working in the banking industry. But this recession is the worst, he said. “The entire business spectrum has been affected, including job loss, construction, vacancy rates, and the retail community,” said Feldman. “It’s unlikely we’re going to see any significant turnaround in 2009, and it’s just as unlikely that we won’t see a turnaround in 2010.” One of Feldman’s biggest complaints about how the recession has shaken out is that the media have painted broad brushstrokes about the banking industry. He said smaller community banks have taken a lot of heat for the mistakes and greed of some of the large Wall Street banks. But, the fact is some smaller banks overreached too in hopes of turning an extra profit when times were good, especially when it comes to investing in real estate. “Bankers who chased the yield are the ones who’ve experienced the greatest difficulty,” said Feldman. Even banks that made what seemed like conservative loans on real estate at the time got hit when property values began to plummet. Those relatively “lower risk” investments suddenly turned sketchy. “Banks have had to write down loans and make large provisions to their loan loss reserves, even though some of those riskier loans are still performing,” said Feldman, adding making large loan loss provisions looks bad on the balance sheet. Now, Washington is putting a lot of pressure on banks to start lending again, in order to spur the economy, he said. But simultaneously, regulators are holding a steady flame on banks to lend conservatively and keep their balance sheets in check and to stay well-capitalized. “We have pressures today,” said Feldman. “And capital is king.” Marla Vasquez Region President Wells Fargo Community Bank, San Fernando Valley Region Marla Vasquez has been with Wells Fargo for more than 15 years. While she’s probably too young to have professional war stories about recessions prior to the 1990s, she said the current economy has been an eye opener and certainly affected some of Wells Fargo’s lending practices. “We want to make sure we’re not putting people at risk,” said Vasquez. “It has definitely heightened our awareness. There are more checks and balances. And it could take longer to get loans.” It’s going to be very difficult, if not outright impossible, to secure a stated income loan these days. Proving one’s ability to pay back the debt is one of the key things underwriters are looking for, she said. Vasquez contends that putting customers first is one line of defense for avoiding a similar economic crash in the future. And by that she means educating customers about financial issues by placing more service professionals on-the-ground. Despite the increased scrutiny in lending, Wells is currently hiring 100 new employees and eyeing five sites for new branches in the San Fernando Valley area. The company also remains committed to giving back to the community in the form of donations to good causes in the Los Angeles area, she said. Wells also recently merged with Wachovia and will be integrating the two businesses in the Valley in 2010. Nationally, Wells Fargo was not immune from the effects of the financial meltdown. The company received $25 billion from the federal government’s Troubled Asset Relief Program, a program that allows the government to help strengthen financial institution’s balance sheets by investing in or insuring troubled assets. The company has publicly stated it plans to return the money. But Wells Fargo is also one of the big banks that performed poorly on the federal government’s recent “stress tests.” James D. Hicken President and CEO Bank of Santa Clarita James Hicken, who is in his 50s, has spent his whole professional life in banking, and said this recession is by far the worst economic climate he has seen in his life. Echoing Feldman, one of the hardest parts is that financially solid community banks are getting blamed for some of the mistakes of the big boys. “The banker used to be the most trusted person in the community, and that star has been tarnished,” said Hicken, adding while he has not lost any customers he has had to do a lot of reassuring that the bank is solid. He said some community banks that lost their shirts in the crisis got caught-up in real estate development and acquisition loans. Hicken believes in many cases, managers boosted their investments in these areas in reaction to shareholder’s desire for larger returns. “We never got into that segment,” said Hicken. “Since opening in 2001 we have always chased quality not just profit. We wanted to build for the long-term. It’s a different mindset.” The bank has not changed its loan underwriting standards across the board. But it is taking a lot closer look at loans for commercial and industrial real estate and avoiding some high risk investments. Companies with sound business models and good credit, and consumers with good credit and ability to pay their debts should not have difficulty getting loans. Marginal borrowers are the ones likely to get denied the most, he said. Operating a conservative community bank is no walk in the park, he said. Increased regulatory oversight is a burden on staff and puts pressure on earnings. The FDIC also recently increased surcharges for community banks. But he is confident financially sound community banks will pull through the recession. And those that gambled a little too much during the boom? They will become targets for acquisition.

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