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VOL. 125 | NO. 35 | Monday, February 22, 2010

Little Guys, Big Guys

Community banks gain clout as larger brethren bite the dust

By Andy Meek

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Bank tellers serve customers in the lobby of First Tennessee's corporate headquarters at 165 Madison Ave. The bank has 5,700 employees and 180 branches around the state. Photo: Lance Murphey

No one would mistake a local institution like Tri-State Bank for one of Wall Street’s mighty titans of finance, whose recent woes brought the U.S. and world economies to their knees.

Tri-State Bank, like most of the roughly 8,000 U.S. banks backed by the Federal Deposit Insurance Corp., is a traditional, relatively uncomplicated community bank. In general, such institutions offer a basic menu of financial products, put a premium on customer relationships and rarely stray from their home turf.

Over six decades, Tri-State Bank has tried to play a transformational role in the civic life of blacks in Memphis, providing a sorely needed outlet for mortgages and other loans.

In the 1980s, Tri-State Bank loaned $60,000 to help save the old Lorraine Motel from foreclosure. Enough money ultimately came in from other sources that a foundation was able to buy the property and turn it into the National Civil Rights Museum.

Like its fellow community banks, Tri-State Bank is small. Based on the most recent numbers from the FDIC, the bank holds less than 1 percent of all customer deposits in the Memphis-area banking market.

Yet despite its size and relative anonymity compared to nationwide giants like Citigroup and Bank of America, a few weeks ago the bank’s president and chairman, Jesse Turner Jr., was seated at a conference table in the nation’s capitol.

15 minutes of fame

The setting was the Eisenhower Executive Office Building next door to the White House. Turner was part of a small discussion group at a jobs forum convened by President Barack Obama’s administration.

A few chairs away from Turner sat U.S. Treasury Secretary Tim Geithner and Small Business Administration administrator Karen Mills. Eric Schmidt, CEO of Google Inc., settled in beside Geithner.

The scene was an example of how desperately Washington’s political establishment is continuing to scramble as the ugly stretch marks of the Great Recession linger. Obama and his economic team convened the Dec. 3 Jobs and Economic Growth Forum to strategize about how to break the recession’s back.

Participants were eventually split into groups. Geithner, bottled water and notepad at the ready, kicked off the discussion for Turner’s group. Its subject was small-business growth.

Geithner wanted to hear from the bankers and business owners in the room about credit financing and how to relax the credit constraints businesses face.

Cadence Bank, 1516 Union Ave., is a regional bank with more than 35 locations in Mississippi, Tennessee, Alabama, Florida and Georgia. Photo: Lance Murphey

It was a timely discussion. With a national jobless rate around 10 percent and Memphis-area bankers like McCall Wilson predicting “2010 is going to be a miserable year,” the U.S. economy clearly remains fragile.

The financial industry itself is also at a tipping point. It’s hamstrung by uncertainty over the direction of comprehensive reform and how well the average borrower will be able to keep treading water.

It’s enough to keep local bankers like Wilson – the president and CEO of The Bank of Fayette County – intensely focused on their short- and long-term business plans. Turner conveyed that sentiment in comments to Geithner.

H. McCall Wilson Jr. is president and CEO of the Bank of Fayette County. Operating since 1905, the bank is independent and locally owned. It has branches in Moscow, Collierville and Somerville. Photo: Lance Murphey

About 230 miles separate the centers of political and financial power in the U.S. But one of the most game-changing elements of the financial crisis is the way Washington’s shadow now looms larger than ever over Wall Street. And that close contact is reverberating all the way down to Main Street.

A clear example of those still-shifting circles of influence could be seen at Turner’s meeting.

Twelve months earlier, Geithner had been at the center of a constant flurry of deal-making among government officials. For months on end, Geithner – the then-head of the New York Federal Reserve – and others kept arranging shotgun marriages and financial life preservers for banking behemoths whose demise might have spurred a second Great Depression.

In the aftermath of that crisis, though, the voice of a banker like Turner is now heard loud and clear. At one point during that small group meeting, the 75th treasury secretary of the United States motioned for Turner to continue after a side discussion got under way.

Said Geithner to the Memphis banker, “Sorry, Jesse. Keep going.”

Careful and jaded

The Treasury Secretary recognized what Turner had to say was important, and there’s a reason for that. The community bank level is where the average consumer is likely to feel the most direct and sustained effects from the way banks are repositioning themselves.

Regional bankers are also joining their community-level brethren in waiting to see whether new federal regulations being considered for the industry will get hammered into shape.

Other factors driving the agenda for banks include commercial real estate woes, unemployment and foreclosures.

Community and regional banks are especially vulnerable to and can ill afford big blowups when commercial real estate loans run into trouble. Expect them to continue scouring their loan books for problem areas and shaving as many of the edges as they can.

Kirk Bailey, chairman, president and CEO of Magna Bank, told The Memphis News current loan demand is tepid at best.

In a way, that’s a chicken-and-egg problem. Overleveraged borrowers aren’t attractive loan candidates. But borrowers who have lost some or all their income and who can’t pay their mortgages are the most desperate for credit and are borrowing more and more to stay afloat.

Teller Katherine Hall, left, helps a customer at Triumph Bank, 5699 Poplar Ave. The bank was formed by a group of local bankers and business leaders seeking to create a hometown banking experience for Memphis customers. Photo: Lance Murphey

Tim Amos, general counsel for the Tennessee Bankers Association, summed up the struggles community banks will face this year and next this way:

“There’s a perception that banks aren’t lending,” Amos said. “But the fact is a lot of our borrowers are cutting back. If you’ve got a small business and they’re cut back on sales and they cut back on their hiring, their need for more funding is not there. It’s kind of – what comes first, the cart or the horse?

“The second point is obviously we’re in a very tight market from a regulatory standpoint. And we can’t lend to people who don’t come in with good proposals. That aspect may soften up over time. But we’ve got to be cautious about who we are going to lend to.”

Avoiding some of the trouble may come down to happenstance.

“The third big point is just concern for weakness in certain markets and certain borrowers,” Amos said. “Commercial real estate, for example. It’s all part of this same chain. With a commercial shopping center that’s got store XYZ, when that store doesn’t have sales and that store goes out of business, it weakens the cash flow of the shopping center. Which puts stress on that borrower, too.

“It’s all symptomatic of the general slowdown in the economy.”

One example of a bank that’s taking a hard look at its commercial loans is Starkville, Miss.-based Cadence Bank, which operates a handful of branches in Shelby County. Part of its risk aversion is the result of Cadence agreeing to abide by a rebound plan between the bank and its primary regulator, the U.S. Comptroller of the Currency.

Several quarters ago, Cadence began pulling back on high yield-high risk loans in commercial real estate and especially residential construction and development loans. And it’s not alone.

“We’re seeing with commercial borrowers, there’s at least one bank in Memphis that seems to be tossing out its commercial borrowers,” Turner said during his Washington meeting.

Banking Scene

The Memphis-area banking market is dominated by a small number of big players.
First Tennessee, Regions Bank, SunTrust Bank and Bank of America collectively hold more than 60 percent of the local market’s $22.2 billion in customer deposits.
That’s according to the latest market share numbers from the Federal Deposit Insurance Corp.
The largest of Memphis’ homegrown banks, First Tennessee, commands more than a third of the area’s deposit market share by itself.
The next-largest is Independent Bank, which has 2.6 percent of the local market.
The FDIC numbers are a one-day snapshot of where customer bank balances are held, and they’re current as of June 30.

Problems in that sector of banking may worsen quickly, according to the congressional panel acting as a watchdog for the federal government’s taxpayer-funded bank bailout program. The panel just released a troubling report about small banks and their susceptibility to commercial real estate woes.

Among its findings: In the next four years, about $1.4 trillion in commercial real estate loans will mature. And repaying or refinancing them may be tough to do in many cases.

The panel’s report found that about half of the loans are currently “underwater,” where the borrower owes more than the property is worth.

The panel estimates commercial real estate loan losses for small banks in 2011 and beyond could get as high as $200 billion to $300 billion. And if the worst of all outcomes came to pass, hundreds of small banks could go bust as commercial real estate problems hamper the industry, according to the report.

“The continuing deep recession that the economy is experiencing is putting at risk many sound commercial real estate investments that were soundly conceived and reasonably underwritten,” the report reads. “A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.”

Those are potentially big losses to swallow for small banks – something the Memphis area may even have too many of to begin with.

Shake your moneymaker

Several local bankers told The Memphis News too many banks are competing for too small a pie, which is likely to lead to consolidation. Bailey said he thinks that will start to play out this year.

“We have about 12 banks based in Shelby County,” Bailey said. “In 2009, three or four of those are going to make money, meaning eight or nine are going to lose money because of either capital issues or things like lack of growth opportunities. And I think there’s going to be a point where they view the opportunity to consolidate with somebody else as the better option.”

Many may not have a choice. “He not busy being born is busy dying,” Bob Dylan once sang, and Wilson agrees banks need to adhere to their own version of that idea.

TARP Redux

U.S. Treasury Secretary Tim Geithner laid out the blueprint last month that will guide the federal government’s slow unwinding of the Troubled Asset Relief Program, the rescue plan for the economy cobbled together in 2008.
Its four elements include:
l Limiting new TARP commitments this year to foreclosure mitigation and housing market stabilization, providing capital to small and community banks and supporting securitization markets for things like consumer, small business and commercial mortgage loans
l Terminating many emergency programs the government put in place starting in fall 2008
l Restricting the use of funds to existing commitments unless it’s necessary to respond to an immediate and substantial threat to the economy.
l And managing the government’s new investments acquired through the myriad emergency programs in a way that protects taxpayers.

He said they can’t afford not to stay growing. And consolidation at some point might be unavoidable.

“I think there’s got to be consolidation,” Wilson said. “A lot of the banks that started and said, ‘We’re going to loan money on construction land development,’ they don’t have a market left. There’s no place for those banks to get business in Memphis.

“If a bank doesn’t grow, it’s dying. Your expenses go up every year, your personnel costs, all that stuff. Everybody wants a raise. Your property taxes go up. But if you’re not growing your asset base, you’re not making any money. You can only get so efficient. And the problem is a lot of banks are going to cease to grow.”

Whatever else they do, Magna, the Bank of Fayette County and others large and small in Memphis also have to consider a relatively new and powerful shareholder in many of their institutions: Uncle Sam.

At one point during his meeting in Washington, Turner shared a few words of praise for the $700 billion bailout of the U.S. financial system enacted in 2008. Known by the acronym TARP (Troubled Asset Relief Program), the program was essentially a $700 billion defibrillator intended to jolt the economy back to life.

One of its central and most controversial elements included making up to $250 billion available for the federal government to buy stakes in banks around the country.

One of the biggest knocks on the program was it offered cheap money to banks at a time it would have been harder and more expensive to get elsewhere. Existing management could stay in place at the TARP recipients, and the government didn’t exert direct influence over the banks’ operations beyond executive compensation.

The banks also weren’t required to show how they used the money.

To get an idea of the contentious debate that’s surrounded the program, one financial executive recently told The New York Times that TARP ought to stand for “Total Abdication of Responsibility to the Public.”

On the other hand, Kevin Reynolds – a bank analyst for Wunderlich Securities in Memphis – said TARP likely will go down as perhaps the U.S. government’s single best investment idea.

“Maybe the Louisiana Purchase can top it,” Reynolds added. “At the end of the day, they’re getting their money back – plus premiums, plus interest, plus warrants.”

Turner’s bank was one of more than 700 around the country in which the government bought an ownership interest through TARP.

“We think it was a good idea,” Turner told the discussion group. “And actually, we did it more for proactive reasons … The capital really helped.”

Adding up

The program will remain a flash point as the industry revives, because the government now has options for how to spend the repayments as they come in. And banks are slowly becoming healthy enough to repay the money.

Even before they get to that point, they’re also paying regular dividends on their TARP infusions.

By the end of December, Memphis-area banks that got TARP cash have collectively made almost $60 million in dividend payments to the government.

They include First Horizon National Corp., the parent company of First Tennessee Bank, and smaller institutions such as Magna Bank and First Alliance Bank.

The $60 million includes payments from banks with branches in Memphis and Shelby County but that are headquartered in neighboring markets, like Mississippi-based Trustmark and Cadence banks.

All told, the government has collected more than $12 billion in dividend payments through December from all TARP participants.

Meanwhile, Tennessee’s junior senator has emerged as a leading voice in the discussions about the federal government’s continued response to the crisis. That response includes everything from what to do with TARP repayments to comprehensive new rules for the industry to avoid or minimize the next crisis.

U.S. Sen. Bob Corker, R-Chattanooga, told a Wall Street Journal reporter this month he’s willing to be the lone Republican voting for a financial industry overhaul that’s being pushed hard by top Democrats in the Senate.

In another twist, Corker said this month he’ll be working with the ranking Democrat on the Senate Banking Committee – Chris Dodd – to craft the legislation. Dodd had previously hit an impasse with the leading Republican on the committee, Sen. Richard Shelby of Alabama.

“If we do nothing else, we need a resolution mechanism in place so that when a systemically important institution fails, it fails. It’s out of business,” Corker told The Memphis News. “And any discussion about any entity in our country being too large to fail is done away with.

“One of the problems they had during this last crisis – there wasn’t an orderly way for large institutions that were systemically important to go out of business. So we ended up in a situation where these institutions were propped up.

"What we’re doing in this country is really great damage to capitalism. And we’re doing great damage to Americans’ trust to how we do things in Washington. This should have been in place years ago.”

Whatever Washington comes out with, Wilson said bankers like him will find ways to work within any new regulatory framework.

At the same time, those bankers will continue working to pull their industry out of crisis mode in a way that involves more than numbers on a page.

“Banks exist to support capitalism,” Wilson said. “We’ve taken chances on people, and we’ve done it where we both become wealthy and where we both lost.

“Everybody in this industry lives for every three months. But the world can’t be only about return. Our bank doesn't live quarter-to-quarter like public banks. We live for the next 10 years.”

PROPERTY SALES 23 23 1,365
MORTGAGES 21 21 1,068
BUILDING PERMITS 117 117 3,173