Bad credit home loan and iowa

Economy demand credit quality focus

[interview: Dennis McCuistion]

Q: Banks are relying on borrowed funds more than ever to fund loans. Some regulators have raised concerns that some banks are becoming overly dependent upon Home Loan Bank advances. What's your thought on that?

The banking industry is over 100 percent loaned out for the first time in history. Most of that is in the big New York banks, where their loan to deposit ratio is 120 percent, 130 percent, 140 percent and it is all on borrowed funds. Out here in the Midwest where the major sources of borrowed funds are Fed Funds and Home Loan Bank advances, I think the concern is legitimate. It is almost all tied to real estate and real estate almost always has been a problem for bankers because it is illiquid. There have been pockets where bankers have started loaning money on what they call "market value" as opposed to how much that crop can really cash flow for. Bankers should not just say that because we have a source for funding it, we'll make that loan.

We are seeing reports of credit quality slipping a bit. Do you get a sense regulators are cracking down a little more or that exams are getting a little tougher than they were a year ago?

It is true that regulators are more concerned than they were a year ago. And they should be. We've seen the ups and downs of this literally over the last three years. The stock market bubble was built on a credit bubble. And the debt that we have in this economy now is just huge. It is obviously bigger than it has ever been in history. When you have the junk bond defaults that we are seeing now, the incredible increase in secured lending, and then consider all those companies with rising debt-- to-worth ratios, you get the sense we are sitting on a credit bubble that has yet to burst. My comment to bankers is, credit quality, as always, is the No. 1 goal.

Interest rates are very low, making the asset/liability challenge greater than it's been in many years. What should bankers do?

In an exercise I just went through with an Iowa bank client of ours, we said, 'Okay, you have a net interest margin problem. What are we going to do to increase net interest income? And secondly, what are we going to do to decrease interest expense?' We listed virtually all the things you could think of. But nowhere on that list was finding a high-interest bearing product such as accounts receivable financing, such as some SBA lending where you sell off the guaranteed portion, or such as leasing. By the same token, on the other side, when it comes to deposits, no one thought of focusing their marketing efforts on attracting non-interest-bearing deposits, in spite of the fact that they were primarily a commercial bank. If anyone is going to be able to get non-interest bearing deposits, it's them. If you can increase such deposits by even a few million dollars, that increases your net interest margin significantly.

What are the major distinctions between a high performing and low performing bank?

It's management pure and simple. Generally it is letting your costs get totally out of control or a combination of bad loans. If they have poor credit quality and they let their costs get out of control, and the board's not watching what happens, it gets pretty sad. In some cases, those are closely held banks. I've seen family-owned banks that let their whole bank go to hell because they weren't paying attention. Didn't know what to do, too easy with credit, that kind of stuff.

As you survey the community banking landscape, are you generally optimistic about the community banking industry for the next 10 years, or pessimistic?

I am optimistic, with one caveat. There is no room for a mediocre community bank. If you are going to be a mediocre community bank, sell the bank now, close the bank, do something with it because there are simply too many other choices for the consumer. But for those well-- run organizations, I think there is a market. Ultimately there is still a huge percentage of the population that wants to do business with somebody they know, as long as they can get relatively the same level of service somebody they trust, somebody they have done business with forever - because money is an intimate thing. We don't like to share that information with a bunch of different people if we don't have to. So if community bankers focus, get their marketing in line, change their culture to demonstrate a passion for helping the client, they will have all the business they can say grace over.