While the wave of disruptive failures and hugely expensive bailouts that rippled through the banking industry largely bypassed the Capital Region, the recession nonetheless left its mark here:
Capital Region banks and credit unions head into 2010 concerned about regulatory changes and trying to rebuild their loan portfolios.
New requirements for banks to increase their capital reserves along with a multitude of other, potentially costly regulations being debated in Washington weigh on bankers’ minds even as they maintain cautious optimism about the economy.
“Ultimately we need to be creating jobs to make up for the jobs lost in the last 18 months or so. It’s up in the air,” said Trustco Bank Vice President and Treasurer Kevin Timmons, who hopes the recent improvement in unemployment rates stabilize into long-term trends. “As a banker you have to be concerned about your core loans, even if you’re an ultimately conservative lender. If your customer loses their job that loan can be a problem asset.”
Sunmark Federal Credit Union President and CEO Bruce M. Beaudette said the reason the financial crisis isn’t easing is that in addition to the bad mortgage loans that hit the Sunbelt areas hard, many of the big banks and corporate credit unions, which provide clearing services to community credit unions, still have a lot of toxic investments on their books — particularly mortgage-backed securities.
They’re still on the balance sheets of large financial institutions, he said, but there’s no longer any market for mortgage-backed securities, so federal regulations require that they not be recorded as assets.
“It’s really depressing their earnings and inhibiting their willingness to make loans,” Beaudette said. “You have to write them down, but when the value goes up you can write them back up again. It’s extremely conservative and it’s a part of the problem.”
Another damper on the economy is the rising cost of deposit insurance for banks and credit unions.
“Banks are paying extremely high rates to the Federal Deposit Insurance Corp. to cover the FDIC’s losses,” he said. “That makes it harder for institutions to lend because they’re not making a profi t in many cases and they’re just being very conservative.”
MORE PAIN DUE
Michael Castellana, president and CEO of SEFCU, said the economic decline has eased, but it’s too early to say the economic crisis has ended.
“I think there’s going to be more pain that will come upon us in a variety of sectors, in part from the municipal areas. The budgets, state, regional and local, will come under tremendous pressure and . . . that trickle-down effect has yet to completely filter through,” he said.
Unemployment normally continues to increase even as the economy emerges from a recession, Castellana said.
“It will be a while before we see a robust increase in employment rolls — foremost corporations and certainly from the standpoint of any governmental sector,” he said.
The trend of mergers and consolidations in financial services and other sectors is also expected to continue.
“Scale is going to be considerably important. Those who are around the margins are going to need to find a partner or close their doors,” Castellana said. “Productivity increases through merger and consolidation. When that happens, there is a certain amount of job loss and dislocation that happens but the organization that arises is stronger and better able to withstand the economic conditions.”
Chris Dowd, president of Ballston Spa National Bank, said it will be interesting to see how the federal government responds to the “too big to fail” question amid financial reregulation.
“If you have a system where sizable banks are protected from failing, where’s the financial risk and how is that addressed in the regulatory framework? As a $350 million community bank, I don’t feel like I have that safety net standing behind me when I make financial decisions,” he said, adding that his bank declined bailout funds.
Between the state Legislature and Congress, the regulatory environment is seen as volatile, Dowd said. “At the least I have a fear of unintended consequences in trying to fix or enhance the regulatory framework,” he added.
At the federal level, Dowd has concerns about the cost and impact to consumers of mortgage clampdown legislation that would allow bankruptcy judges to reduce or modify the terms of a residential mortgage, mainly because it is unknown how bankruptcy judges would use the power if given to them.
Credit unions locally and across the region will look for reform that enables more competition, according to Bill Mellin, president and CEO for the Credit Union Association of New York State.
A New York state law going back to the 1920s stipulates that only commercially chartered banks can accept deposits from a fire department, school or library. Because of the law, though municipalities may sponsor a credit union, they are not allowed to use it for their own accounts, Mellin said.
By opening up credit unions to take in municipal deposits, Mellin said the benefits could be lower interest rates and keeping the money in the local economy.
“Most of the commercial banks aren’t headquartered here and the deposits go somewhere else,” Mellin said. “We think we can make this a more competitive environment if we open this up.”
This year will also mark a major push to lift the lending cap on credit unions across the nation. Instituted in 1998, the federal law states that only 12.25 percent of a credit union’s assets can be lent to businesses.
Mellin said that some regulatory relief in terms of member business lending will be a perfect opportunity to boost the economy in a way that will cost zero tax dollars.
RAISING THE CAP
In late December, New York Democratic senators Charles Schumer and Kirsten Gillibrand co-sponsored introduced Senate Bill 2919, which would raise the lending cap to 25 percent of total assets.
A recent analysis by the Credit Union National Association shows that lifting the cap could create up to 108,000 jobs and pump $10 billion in credit to small businesses in the first year the bill was in effect.
Increasing the amount of credit union loans to businesses was part of the job stimulus initiatives list given to President Obama after his White House jobs summit held last year. Local financial institutions move forward and prosper by becoming more efficient and growing loan revenue.
Sunmark decreased its operating expenses by more than $2 million in 2009 and created a program called Cost Saving Implementation or CSI to give incentives for those who can cut costs.
“We try to make it fun for our employees,” Beaudette said. “We were never crazy with our spending. Times have been good for us for many years and it was never as much as a focus as it needs to be now.”
Sunmark has banked $630,000 in savings ideas from staff, with the rest of the $2 million achieved through staff attrition, renegotiating contracts with vendors, eliminating virtually all travel expenses, prefunding its pension, and paring down the activities for its annual meeting.
“Anything that wasn’t absolutely necessary we felt we owed it to the members to be as lean and effi cient as we can,” Beaudette said.
Sunmark, now at its lowest lending levels in 25 years, continues to look for ways to generate non-interest revenue. One revenue driver is insurance.
“We have our own insurance agency and property and casualty insurance is our own product,” Beaudette said. “We will have sold over a million dollars in premiums for insurance; we get commissions off of that.”
Castellana said SEFCU’s growth continues as it expands its number of branches throughout the Capital Region and the central and western New York regions. This year, it will add five more branches.
KeyBank CEO Jeff Stone said deposits grew by 5 percent in 2009 and more are forecasted this year. Loans were down slightly, mainly due to people paying down lines of credit and companies not as much borrowing for new equipment and purchases.
“We forecast a growth in our loan balances in 2010. We’re thinking that the interest rate will stay low for the first and second quarter, which is difficult for those on fi xed incomes investing in CDs, but it’s good for borrowers,” Stone said. “All in all, I’m pretty optimistic about 2010.”