The Peck Perspective

Curiosity struck me recently as I became interested in how our local community banks have faired in the aftermath of the ‘Credit Crisis’ that ensnared our country and the rest of world.  For the most part, it has been all quiet on the South Plains banking front with virtually no public mention of local financial stress–that’s a good thing.  If I recall correctly, around 2009 and after the credit crisis had a firm grip on the nation, one or two local news sources had reported that one of largest banks originally from West Texas did in fact take a form of TARP money, but not for reasons of financial stress.  The bank did it mainly to access cheap government money to shore up the bank’s balance sheet to continue to fund the growth into the larger metropolitan areas in Texas. Perhaps it’s just crafty business for the leaders of that bank to take advantage of their FDIC-insured status and our nation’s financial crisis to access taxpayers’ money to be used to finance their ambition to pull away from their local peers. Why shouldn’t Wall Street’s tactics work here? Personally, it leaves a bad taste in my mouth, just because you can, doesn’t mean you should.

All that aside, my anecdotal viewpoint is that the Lubbock and surrounding areas have fared well in years after the initial credit crisis, with many small banks thriving.  The 3-legged stool of economic stability in West Texas has long consisted of agriculture, non-profit organizations, and the oil and gas industry has held steady in the face of a disruptive, malingering economic recession that has plagued counterpart cities of similar size across the country.  Here in West Texas, it’s the right balance between risk, reward, and responsibility.  The stability and prosperity of this region make it uniquely attractive to start-up banks and mega-banks alike. Take a look around, there is no shortage of banks that want your loan business and deposits.

So, is there a cause for concern in the health and stability of our local banks? Maybe, but discussing this issue (publicly) is like cussing at your mother and using the Lord’s name in vain in the same sentence. It’s almost sacrilege, but I will carry on with my blasphemous view and opinion.  Besides, don’t we all have personal relationships with bankers that extend outside the branch office? Or was that just a commercial?  I don’t have an axe to grind, I have a couple of concerns beyond just the customer service issues I’ve experienced lately with both small and Too-Big-To-Fail, (TBTF) mega-size banks. I write about these concerns from the point of view of an advisor to clients, with client capital to allocate across the risk spectrum. My job is to manage risk and I see risk in our sacred banking cash cows of the community.

One reason you won’t hear about these concerns publicly is that there is a fine line between expressing concern and exclaiming calamity that leads to a run on a bank–the latter is NOT the case.  For the most part, when I hear about concern it’s in my private meetings with clients and prospects that have large deposits at banks of all sizes.  A large deposit is a relative term and the folks that I talk to are more singularly concerned with yield and income than the health of a bank.  These folks have significant cash reserves and they are seeking alternatives to low CD and bank deposit interest rates.  Many realize that holding cash is costing them dearly and that holding cash within the walls of a FDIC-insured financial institution has not been worth the price of admission.  In other words, you may have been better off by replicating your banker’s investment portfolio, and accepting the principal risk, than holding your cash in the bank earning almost nothing.   After all, when you consider inflation and taxes, depositors/CD investors are experiencing negative yields.  The low-interest rate environment that we live in today has forced all types of investors (including bankers) to take on more risk. As it stands now, all savers are pegged to the longer end of the treasury yield curve; whether they are getting paid for it or not.  When interest rates rise in the near future, we will see how well risk is being managed.

From my view, I see some areas of concern in our local banking ecosystem.  The first concern is the rise of the “unbanked.” Those individuals that, for whatever reason, choose not to use a bank for everyday personal transactions.  The next concern is reliance on revenue from non-traditional banking segments and fee revenue, rather than loan growth revenue to support overall bank profitability.  Another area of concern is that there are too many banks chasing the same customer.  A condition that is leading to an extreme of only small banks and megabanks in the West Texas area–Lubbock specifically.  A growth by acquisition strategy is good for the bankers and shareholders but it’s not good for the account holder.  Customers don’t like change or uncertainty.  It certainly narrows the field on which banks are truly local and truly reflect the traditional West Texas banking values they so publicly pride themselves on.  Think about it, have you noticed the change in “terms and conditions” statement to your account in recent years?  Perhaps you haven’t noticed, but I have.  The last area of concern is the greatest–the changing regulatory environment.  If you are a lawmaker and have enacted legislation that bears the name, Frank-Dodd, Durbin Amendment, Sarbanes-Oxley, et. al, you have contributed to the concerns and uncertainty we face.  For better or for worse, we have yet to fully experience the ramifications of the legislation that has been foisted upon the banking and financial services industry.  Those in the financial services industry bear the burden, the customers bear the cost and the legislators proudly declare that they represent the interests of their constituents.

The devil is truly in the details.  As of December 2011, one of the top 4 banks in West Texas (by deposits) is rated a grade “D” by a bank monitoring and analytics company called Institutional Risk Analytics (IRA).  The letter grade for this bank has bounced around over the past 2 years from A to C, with the year-end grade falling to D. This may suggest concern for asset quality and bank capitalization as it could signal progressive deterioration.  I’ve come to respect IRA’s proprietary work on financial institutions.  They were spot-on during the Credit Crisis and their analytics have become an early warning system for problem banks. Bankrate.com currently has the same West Texas bank ranked 2 out of 5 stars.

The early warning indicators and the negative factors that impacted the rating include:

• Earnings
• Asset Quality
• Non-performing Assets (commercial real estate and construction lending)
• Capital Adequacy (below standard capitalization)

So what does this all mean? In my opinion, we have a local bank that is experiencing trouble with bad loans, it is less profitable and the bank may need to raise capital in the future if conditions continue to worsen.  The truth is, as many have come to loathe Wall Street, our local bankers have been just as culpable, sinful but maybe most are just not as greedy.  If I recall correctly, most of the top 5 banks in West Texas had at one point offered subprime loans through their subprime loan lending department.  If you have ever served on a board of any non-profit organization then you have certainly experienced a conflicted banker softly pitching their bank and their investment management services.  No person or entity is perfect in business, but I see way too many portraying the image of Mr. George Bailey from It’s A Wonderful Life–give me a break.

Friends, there are no “bragging rights,” or “see I told you so,” moment for having this difficult conversation.  My hope is that the imbalances within this bank self-correct and that other banks remain well-capitalized—although troubles do still linger.   If you will notice, I did not mention any bank by name and I don’t consider myself a financial journalist by any stretch of the imagination.  To manage risk you must be able see it and discuss it openly and honestly, no matter how sacred the cash cow may be.

This is a blog post that reflects my thoughts, opinions and conversations with clients, prospects and business owners.

Peace & Prosperity,

MDP

Sources:  Institutional Risk Analytics, Bankrate.com, Subsidy Scope, Treasury Department, Federal Reserve Bank of Dallas