Bad loans will now be a pressing issue for large banks, creating a ripe opportunity for smaller banks
by W. Henry Walker
Slow and steady — that is the new normal as the nation’s economy recovers in 2011 from a difficult fiscal year. Financial institutions across the country will begin to see glimpses of stabilization within the industry. Consistent, upward momentum in job growth will enable consumers to once again flex their purchasing power for consumer goods, as well as re-enter the real estate market.
While last year we saw more bank failures than in any of the past 19 years, I think we will see this trend begin to slow this year. We are finally starting to emerge from this recession, and it is the responsibility of large banks and community banks alike to ensure safety and soundness.
The recession was a “crisis of integrity” that slowly eroded the viability of US financial institutions. One bright side is that this crisis awakened the consumer conscious to the importance of supporting values of honesty and integrity when it comes to investing and spending with banking institutions.
As more customers find gainful employment, their confidence in spending will increase accordingly, but they must carefully make decisions on where to invest and choose a sound-banking establishment that will preserve their financial assets.
Just as George Bailey (Jimmy Stewart) chose to stay the course of honesty and integrity without falling prey to the enticement of Mr. Potter’s greed, banking customers are evaluating the core values of their financial institutions.
Farmers & Merchants Bank (F&M) was in a similar scenario, choosing not to invest in sub-prime lending amidst the booming housing market. This was not a popular decision at the time, but it has allowed community banks like ours to remain stable in a struggling economy.
Management of bad loans will now be a pressing issue, particularly for large banks, creating a ripe opportunity for smaller banks to magnify levels of customer service provided to their clients. National banks will be focusing on recovering from the poor housing market, trying to gain market share in a skeptical banking environment. Not since the Great Depression have we seen this “crisis of integrity” open doors to a more conservative approach to banking.
While a number of larger institutions participated in the government’s Troubled Asset Relief Program (TARP) in 2008, many community banks, such as F&M, chose not to participate based on values and principles. TARP comes with strings attached and community bankers don’t want to be locked into government stipulations. Additionally, banks that take TARP money are automatically restricted in how they pay dividends and compensate employees. F&M did not have a need for troubled asset relief; therefore we do not have to rely on the government to drive us forward.
In previous years, national banks engaged in consolidation practices of acquiring smaller banks to expand their presence in various regions. Concerns and issues raised within individual institutions will still exist and banks will continue to be bought because they are selling for less than their capital. However, the key to this process is stabilization and I see the number of consolidations beginning to slow.
Reports indicate that jobs in healthcare, senior care and infrastructure may be on the rise this year, but the majority of positions created from small business and entrepreneurship will drive the economy forward. This is good news for many reasons, including the positive domino effect that results from higher employment levels. Because we are a consumer-driven economy, high unemployment serves to freeze spending, particularly recreational spending, deepening the downturn even further for all sectors. The banking industry, and the economy overall, will be further stabilized as increased credit purchases by consumers are expected in this coming year.
Real estate, the sector most impacted these last few years, is slowly becoming more predictable. This industry appears to be flat. We do not expect any broad appreciation in either residential or commercial real estate, forcing us to accept a shift in perspective and adjust to a new normal.
As we move into 2011, financial institutions of all sizes appear to be seeking initiatives to further stabilize internally. I see many banks revising their earlier free checking programs as they seek ways to be compensated without further frustrating their customers. And the trend continues of large banks offering customers convenience, with more branches and ATMs; and smaller institutions emphasizing more personalized service and a friendlier community environment. Smaller banks that have survived the recession and are very strong financially are doing well, offering a personalized service environment and I see this continuing. As long as they can continue to assure customers that their deposits are fully protected, they will thrive.
This year will be a slow crawl toward recovery, but the banking industry is reaffirming its place in the national economy.
W. Henry Walker is the president of Farmers & Merchants Bank. ER
