TOPICS > Economy

For Community Banks, Survival Can Often Trump Lending

December 22, 2009 at 12:00 AM EST
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President Obama met with community bank leaders at the White House on Tuesday and pressed them to boost lending. Yet in a year in which some 140 community banks have been forced to close, the focus among small lenders is often more about keeping afloat.
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JUDY WOODRUFF: Small banks took their turn in the presidential spotlight today. President Obama invited representatives of a dozen institutions to the White House to hear their concerns and to make a new appeal.

The president sounded a familiar message, but with a friendlier tone than he had for big banks last week. He told a clutch of community bankers, more lending is the key to recovery.

U.S. PRESIDENT BARACK OBAMA: There remains enormous opportunities as we come out of this recession for businesses to start growing again and to start hiring again. And everything that we’re going to be doing here in the White House over the next several months is going to be geared towards catalyzing and spurring additional lending, particularly to small businesses, because we feel very optimistic that the worst is behind us and that now is the time for us to seize opportunities.

JUDY WOODRUFF: The nation’s 8,000 small banks make more than half of all small business loans under $100,000. But they face precarious times. Some 140 have been forced to close this year, the most since 1992.

And the Federal Reserve reports their total loans are down 8 percent and likely to continue sliding next year. The president made clear again today he thinks most of the blame for all this is with big banks.

U.S. PRESIDENT BARACK OBAMA: I think it’s fair to say that most of these community banks were not engaged in some of the hugely risky activities that helped to precipitate the financial crisis.

JUDY WOODRUFF: To ease that crisis, the administration plans to pump $30 billion into a new small business lending program. And the Fed has tried to help by holding interest rates at practically zero.

Don Giorgio at United Northern Mortgage Bankers in Levittown, New York, says business would be even worse without the intervention.

DON GIORGIO, United Northern Mortgage Bankers: Where we are now able to lend to people because the rates are low, so it is helping to make up for all the other people that we can’t lend to because they have to repair their credit. So, those low rates are helping keep us open.

JUDY WOODRUFF: In Brighton, Colorado, Donna Petrocco’s family has been in banking for 40 years. And, like many in her business, she argues the real problem is red tape.

DONNA PETROCCO, Valley Bank and Trust: Things have changed. The economic conditions have changed. Regulatory burden has changed. Requirements for reporting have made banking a whole lot more difficult than it used to be.

JUDY WOODRUFF: Petrocco told the “NewsHour”‘s Tom Bearden the president is urging banks to lend more, but regulators are holding them back from finding new customers.

DONNA PETROCCO: I can’t loan to them because field examiners, our local government, has said I can’t make them loans.

TOM BEARDEN: What do they tell you why you can’t make those loans?

DONNA PETROCCO: Because I have too much real estate secured loans. I have too much in land development and construction loans.

JUDY WOODRUFF: At today’s meeting, Mr. Obama acknowledged some regulations may indeed be getting in the way.

U.S. PRESIDENT BARACK OBAMA: We are looking to see if there are possibilities to cut some of the red tape. We don’t have direct influence over our independent regulators, but we think that the more that we can highlight that in some ways the pendulum may have swung too far in the direction of not lending after a decade in which it had gone way too far in the direction of getting money out the door no matter the risk — that if we can get that balance right that there are businesses and communities out there that are ready to grow again.

JUDY WOODRUFF: Small banks hope the president’s push to overhaul the financial regulatory system will help. That’s in sharp contrast to larger banks, which remain strongly opposed to reform now moving through Congress.

For more on that meeting and the state of community banks, we turn to Matthew Gambs. He is chief executive officer of Diamond Bancorp in Schaumburg, Illinois. He attended the White House meeting today. And Karen Shaw Petrou, managing partner of the consulting firm Federal Financial Analytics, which advises the financial services industry.

Good to have both of you with us. We appreciate it.

Matthew Gambs, as we said, you were in that meeting today. The president went in — or what he said to the cameras was that this was all about getting small banks to loan more to businesses that need it. Did he make the case?

MATTHEW GAMBS, CEO, Diamond Bancorp: He did.

He went around the room. It was a very — a conversation, more than a meeting. It was — he went around and asked every person. The 12 were from around the country. What I heard was everybody has a little bit different circumstance. Some places have a lot more loan demand than others.

But there wasn’t anybody who was saying they were absent of willing to try. And I thought your piece said it really well. I mean, community bankers, the banks under a billion dollars in size, this is what we do.

I mean, what’s going to fix things is small bank.

JUDY WOODRUFF: So, when the president says banks your size need to lend more, that the money is — not enough of that money is getting out there, is he right about that?

MATTHEW GAMBS: He is. He is. I would say in my case in Northern Illinois, we have increased our commercial loans by 55 percent this year, to $92 million.

It’s never been a better time to do some of that for some companies. But there are challenges that are on community banks to do this. You know, we are small businesses. We don’t have large staffs. We don’t have things to do. If we are spending a lot of our time dealing with other issues, we can’t go out and find new businesses to lend money to.

JUDY WOODRUFF: Karen Shaw Petrou, how much demand is there for — for loans right now?

KAREN SHAW PETROU, Federal Financial Analytics: There’s less demand than there was because the economy — when you’re in a recession, people are hunkering down and not expanding.

But that isn’t to say there isn’t demand. And small business lending in particular would help to restart some segments of the economy, if there were more credit available than there is right now.

JUDY WOODRUFF: Well, how much more room is there for the small banks like Mr. Gambs’ bank to do more?

KAREN SHAW PETROU: It’s a balancing act, because, as one of the bankers in the piece pointed out, there are problems in the small bank sector, particularly in commercial real estate.

And the problem often in small banks is that they have all their eggs in one or maybe two baskets. And one — if one of them is fragile, the bank can be fragile, too.

And we learned the hard way in the S&L crisis that, when banks are trouble, you need to be really careful and not let them get in any deeper. So, it’s a tricky balance.

JUDY WOODRUFF: Mr. Gambs, how much — why have small banks gotten so much into commercial real estate? Because we read that is a big area. The shoe is left still to drop in that area.

MATTHEW GAMBS: Well, you think about it, it makes sense, right? I live in Chicago, which I have the luxury of being a diverse economy. And we have manufacturing. Most of what I do is in C&I lending, you know, or manufacturing, people who own the business.

JUDY WOODRUFF: I’m sorry. C&I is?

MATTHEW GAMBS: Commercial and industrial lending. Lines of credit, equipment, stuff when you think of people who make stuff.

You know, I used to always say, if you could punch holes, grind — bend metal, we would loan money to you. Now that’s expanded to people who design clothes or people who bake cakes. I mean, entrepreneurs have a wonderful spirit about them. And they fit really well into community banks.

But if I — where I grew up in Western Colorado, predominantly, you did two things. You built homes or you lent money to restaurants and bars. So, you know, if that’s what you do in your town, that’s what you do. And I think you hear from bankers who said — you know, that’s what the woman in Brighton, Colorado, if you’re Front Range of Colorado, it’s not surprising to hear that.

And it’s also economies of scale. If you only have…

JUDY WOODRUFF: But is that the balance that Karen Petrou was just describing?

MATTHEW GAMBS: I think the — as you grew your institution, if that was the only thing that was going on in your economy, your economy would do that, no different than if you were a banker outside Detroit, Michigan. Not surprising that you’re probably concentrated in people who built things in the car industry.

JUDY WOODRUFF: So, Karen Petrou, how then — if that’s what’s going on, if you do have clearly some banks doing well, but others in hot water, what is the remedy here?

The White House is saying, lend more. We would like to see the regulatory agencies lean on you a little less.

KAREN SHAW PETROU: It’s a balancing act, as I said.

It’s important to remember that banking isn’t like any other business, because we back it with the FDIC and with other supports through the Federal Reserve. And, so, when banks take risks, we as taxpayers take risks along with the rest of the economy.

And the president, I think, recognizes that to encourage more lending needs to be very carefully done, so that banks don’t go out too far and expose themselves to losses which they can’t absorb.

JUDY WOODRUFF: And is that something that a bank like yours is able to do?

MATTHEW GAMBS: I think that never before — you know, I think you have found in the last two years who is good at this and who isn’t.

You know, it is a risk business. I mean, that’s why we charge interest. That is the element to it. But when you have never had a situation where so many people are failing at once, and if there is not a place for these loans to go, I mean, you’re caught in a situation now where you have identified the problem, but there’s not a remedy to that problem.

And, so, now that’s where we’re kind of stuck. Given those choices, I think what the president is asking us to do is to accomplished. I mean, he said it in the top of the piece of his statement. Never has there been a better opportunity to do this. As a community banker, I look at the landscape now and am very excited about the opportunity.

JUDY WOODRUFF: And, if that’s the case, Karen Petrou, what is to stop these bankers from doing exactly what the president is asking?

KAREN SHAW PETROU: Where there’s opportunity, they should go for it. And I think the community banking franchise is a terrific one. You know your community. Nobody knows it better. You can do things the big banks can’t. But you have to do it carefully.

Small banks need risk management. Some don’t have it. They need internal controls. Some don’t have it. They need discipline. Some don’t have it. And that’s where I think we have to be careful. The economy is not out of the woods yet. And taking risks right now is dangerous.

JUDY WOODRUFF: And when the president said today that the regulatory pendulum may have swung too far, we heard him say, in the direction of not lending, how can the White House persuade the regulatory agencies, to pull back? They don’t have direct oversight over these agencies.

KAREN SHAW PETROU: And that’s a good thing. We don’t want politicians telling regulators whom to favor when. This should be a disciplined decision based on real risk, not short-term goals.

I know their policy objectives here. And more lending is a very important one, but we need to be really, really careful.

JUDY WOODRUFF: What do you look for, Matthew Gambs, as somebody who is out there on the front lines? What do you look for from this administration and from the regulatory agencies now?

MATTHEW GAMBS: Consistency. You know, you hear this a lot. You fear that your regulators are saying one thing, and you hear the president of the United States say another.

You know, we recognize, I recognize that I’m in a regulated business. I recognize the fact that there’s a responsibility that I have to the communities that we serve. But we are a for-profit institution at the end of the day. I mean, that — we have a responsibility to our shareholders to give them a return.

And if the pendulum that he was talking about swings so dramatically to a point that small businesses can’t afford this, the risk management, the things — the tools that you would have to do just to understand it — and that’s what we talked a lot about today. Be consistent. We’re not asking for something special or to be treated any different, but just recognize that our challenges might be a little different than Citibank’s or Chase’s, and that, given the right opportunity, we can serve — probably get the job done faster than anyone else in the marketplace today.

JUDY WOODRUFF: How realistic is that, Karen Petrou?

KAREN SHAW PETROU: I think it is realistic for some institutions. Matt’s is a great one. There are many others out there.

But we do have some very, very weak community banks. In fact, we have got maybe 1,000 of them. We have got a lot of troubled banks out there. And those are the banks we need to watch with care, and not encourage them to go out too far too fast, or that the FDIC, which is already in tough condition, will have even more losses none of us can afford.

JUDY WOODRUFF: A word of warning.

Karen Shaw Petrou, good to see you.

KAREN SHAW PETROU: Thank you.

JUDY WOODRUFF: Matthew Gambs, we appreciate you joining us.

Thank you both.

MATTHEW GAMBS: Thanks for having me.