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A community banking spring?

Smile-there's some good stuff going on out there

There has been some talk of lending bubbles the last few months. More money pouring into lending products that have been dormant or starved in recent years is encouraging for bankers to think about. 


Is such a thing possible during this time of national fiscal uncertainty;, political hackishness at its most repugnant; and continuing gridlock over spending, entitlement reform, and tax increases?  How can this be?


Yet there are signs of springtime. Business reports from a wide variety of sources suggest improving conditions, rising optimism among major economic segments, and a forward-looking orientation to much of what business seeks to do in the coming year.


Banks are loosening the purse strings to credit and even the examiners have backed off somewhat since the deadening years of 2008 and 2009.


Crocuses and daffodils of economic possibility

There are many indications, some more persuasive perhaps than others, that things are definitely better.


1. Survival and renewal. Banking has survived as an industry and our customers have largely healed their finances, while we have healed our own. 


Many banks of all sizes, once burdened by crushing levels of problem assets, are no longer in danger of foundering.


2. Customers' hands are back on the reins. Our borrowing customers have made remarkable improvements in their financial conditions due to better management of their balance sheets and profitability than we might have thought possible just five years ago.


That many bankers gave freely of their experience and counsel to customers who valued it is a largely untold and underappreciated story of this recession.


3. America's regaining its sense of reality. There is a growing consensus by the private sector that government has lost its way and is dysfunctional.


Now, government has always been dysfunctional, if one relies on the wisdom of America's pundits and prophets such as Will Rogers or perhaps Calvin Coolidge.


This time, though, the American public seems to have a better sense of what to do than the politicians. They realize with a reluctant resignation and acceptance that they must wait out the partisan posturing and then force their will on the national government.


It will happen--but meanwhile, it's the children's hour.


4. Regulatory reform of banking is largely accomplished. We know the shape, size, and many of the details.


The fact that we largely don't particularly like what we see is not the point.


We also don't fully appreciate or know what some remaining major choices will be taken on too big to fail strategies and other important components of Dodd-Frank. 


But, significantly, we can begin to see the terrain and already have crafted our strategies and tactics to deal with it. Not everyone in banking today remembers the alarms and concerns arising from the industry at such key regulatory initiatives as repeal of Regulation Q (interest paid on deposits), CRA, Regulation B (Truth in Lending), interstate branching, and a slew of other now largely forgotten concerns.


I do recall most of them and have been reminded many times of Winston Churchill's quip, "I've spent a lot of my life worrying about things that never happened." 


5. Big banks have largely ceded the high ground of customer service to the smaller banks. This is the biggest gift of all.


The majors have overreached, in testing the patience of consumers and smaller customers in matters of service and congeniality.


If the "big city ways" suited everybody, then everybody would live in a big city. Community banking is a part of the industry that serves everyone and has differentiated our models to accommodate access to those who want what we offer and the way we deliver it.


I find it interesting and perhaps ironic that the greatest challenges to the banking business today are felt most acutely at either end of the size spectrum.  The biggest banks will be affected, perhaps radically in some cases, by final legislation on too big to fail issues. Ultimately, downsizing or a dramatic upward revision of capital requirements can upend the whole return on equity equation of the big banking companies. Meanwhile, many small banks (and some not so small) are struggling with higher costs as a direct result of compliance issues and new (always more) requirements.


Let's not underestimate the risks

We're not out of the woods yet as either a national economy or an industry of banking companies. We can still be tripped up by factors outside our control and even some we can largely control.


In the big picture sense, we and our elected representatives can badly bungle the course of our somewhat fragile recovery. 


Probably monetary policy is the biggest near-term risk, while tax reform is the biggest challenge for accomplishing long-term reform and improvement of our business climate.


We all seem to understand that ,so it's likely that meaningful change will come in due course. But there are no guarantees that we'll figure it out in proper proportions.


In the realm of self-inflicted damage there is the matter of banks so anxious for income that they forget the basics.


Perhaps to say that they forget is too kind.


There's evidence all around that some banks are ignoring time-tested credit principles to compete with each other for available loan business on price and terms.  Net increases in loan portfolios may contain hidden elements of increased credit risk and these may in some cases be subtly shifting the overall credit risk of lending portfolios. Failure to sensibly price for risk and to compete on the basis of watering down loan covenants (while not increasing the price commensurately) is not any proven strategy for improving asset quality.


Are we unable to learn from the past? 


Are we unwilling?


Or perhaps afraid? 


Do we have a form of credit Alzheimer's? That is, a condition where we operate in a brain fog that obscures our expensively earned lessons? 


Let's be realistically optimistic

I'm not particularly optimistic on our ability to keep credit quality on the pedestal of respect and deference it deserves, especially by practitioners who make their livings by taking risks with other people's bank deposits.


Yet, I'm optimistic that we are in a community banking spring.


Business is better and the environment has improved in virtually all respects, compared to the bleakness we experienced not very long ago.


Yes, and even the big banks are validating our business models for us.


We have got to work smarter, though, and that means achieving more consistency in our credit quality, operational efficiency, and in the reliability and predictability of our returns on equity.  


Do you share Ed's optimism? Tell us about it in the comment boxes below.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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