Idaho's bankers state case for strength, TARP and economy 

The Idaho Business Review in conjunction with Holland and Hart law firm, brought together bankers, investors and analysts to discuss the banking and finance industry in Idaho at a quarterly leadership roundtable.

Attending this quarter’s roundtable were Don Holley, chairman of the economics department at Boise State University; Gavin Gee, director of the Idaho Department of Finance; Tony Olbrich,  regional president for US Bank for western Idaho; Dave Player with Mountain West Bank; Jared Frothinger, manager for branches statewide for KeyBank; Jim Latta, president of Idaho Banking Company; Randy Hopkins, president and owner of Hopkins Financial, a nonconforming real estate lender, and Mark Lliteras, commercial banking unit manager for Wells Fargo Bank in southern Idaho.

Bob Faucher, an attorney with Holland & Hart, acted as moderator for the discussion.

 

BOB FAUCHER: To what do we attribute this continuity in Idaho banking and lending? Why is it that the players have pretty much stayed the same? 

DAVE PLAYER: Perhaps. I think most of the banks in Idaho are regulated by a state department of financial institutions that has done a stellar job in their auditing practice and preparing the local banks for what has come to be a pretty major financial meltdown in the last 18 months. 

I think that most of the banks that are in Idaho are traditional block and tackle banks. I don't think any of us were involved in what has become known as toxic assets. We didn't do a lot of low doc mortgages or alt A mortgages that had the borrower paying less than interest payments, and therefore, the mortgage became increasing over time. 

So most of what we did, I think, as banks was traditional commercial lending, consumer lending on mortgages that were conforming, and as a result, that traditional blocking and tackling is still a profitable business and hasn't hurt us as much.

FAUCHER: Mark, let's go back to the original question that I asked Dave, what else do we attribute the fact that in Idaho the landscape is solid and stayed pretty much the same players? 

MARK LLITERAS: I think I'd start with the fact that across the board pretty much it's a leadership issue, the leadership within the banks in Idaho and those that may be owned by parents that are not Idaho based. My perception from an awful lot of them, outside my experience with Wells, is that the leadership was sound. They understood what banking was about. 

We watched all of the details that go into a banking environment, loan concentrations, knowing who we do business with. Does it make sense the business that we were doing.

Obviously, Dave mentioned that what has become known as the subprime kind of lending, many of us didn't participate in that, for the simple reason, could we make money at it? Yes. But did it make sense?  No. 

Obviously, Wells got a wonderful opportunity to expand its footprint as a result of some decisions that Wachovia Bank made relative to an acquisition of the primary alt A kind of lender in the country. Then consequently when the recession came, it was not a sustainable business practice. 

So leadership, again, I think is the first one, paying attention to the blocking and tackling, as Dave called it. I think it starts with the personal responsibility of the organization.  We talk a lot about regulators, but if it doesn't start with the institutions having the integrity and the character to do what is right, to police themselves, to follow what they are doing – Gavin would probably say his job would be three times as hard and maybe couldn't even be done if he didn't start with the quality of the institution. 

So it starts with leadership. We stuck to the things we knew. We are doing business with people that we know. We are doing business in places that we know. We are not wandering around the whole countryside chasing business that is outside our territory. Therefore, we may not know the borrowers, we may not know the economic circumstances nearly as well. So it's all those things together. I don't think there is any one item that contributes to the Idaho banks’ landscape staying pretty much the same. It’s a lot of details that add up to success.

FAUCHER: Jim, did you have any other comments on my question?

JIM LATTA: I have a completely different take. A couple things. Everything that everybody says is accurate. So Idaho banks and bankers have been more conservative and maybe not grown as quickly as some other banks with some unusual customers or unusual products.

So what happens when you talk about the continuity of all the banks, a lot of banks three to five years ago – Idaho on demographics and population growth was a great place to be a bank. So a lot of either new banks came into the market in the last five to six years, fairly conservative, knew what the lending and the deposits were. So there was a good strong mix of banks that came in and weren't overzealous in what they were tying to do. 

The other reason, in my opinion, is that now that banks may want to buy other banks or merge or consolidate, the regional or community banks tended to have an inflated view of what their banks were worth. And when you looked three or four years ago and trading at 17 to 20 times price earnings ratios and 2 1/2 to 3 1/2 times book value, people may have thought their banks were worth a lot more than they were economically. So other banks that wanted to come into the market didn't buy anybody. 

And now in this environment the other reason you have continuity is we were, again, seasoned lenders, did business the old-fashioned way, we had pretty strong capital. But the other side of that is it's very difficult to have mergers and acquisitions when the TARP money that some of the banks got, I think there is some criticism that Congress doesn't want them to use that to buy other banks, although that could be one of the end results. 

And the second thing is it's very hard to value what you are buying in this environment. Typically in banking you could predict the next quarter, the next six months, the next year.  Now it's more difficult to predict value of assets, what is going to happen in the next week. So it's much more difficult to merge banks or partner with the other banks because of the valuation issue and the decline in our asset values that is happening because of the economy. So a little different take on what everybody else had, although what they said was accurate.

FAUCHER: Don, first of all, the background of all our discussion obviously is the downturn in the economy. And can you give us just – obviously we can't explore it at great length, but to what do we attribute this downturn?  What are the key factors that brought us here? 

Second, I would like to use that to jump into the discussion. I think it's fascinating, and I'm sure the people in this room have been challenged, that for whatever reason it's the banking industry that is really at the forefront of these dramatic changes in regulation and government intervention in the economy. 

So it's essentially a two-part question: How did we get here?  And then why is it that banks are – I think it's fair to say that banking and lending is the industry that has been most affected in which the regulatory landscape has changed the most.  Why is that? 

DON HOLLEY: OK. The first question, how we got here. We go back a couple years when we first realized that the housing market was just out of kilter, and the forecasters, the economic forecasters saw the housing bubble, but they didn't see the underlying financial crisis that was bubbling up underneath it. 

And the initial reaction was: Well, we need to sell off this unsold inventory of homes and when that is done we'll be OK. It will take maybe a year or two, maybe a year nationally and locally too. We had maybe a year of inventory to sell off, and when that happens we'll be back. And you go back a couple years, and yeah, we'll be out of this pretty fast. 

And then Bear Stearns hit, and for about three months things seemed to settle down. And the forecasters and economists in general said:  We might have braved the storm here. And then that weekend when Lehman went, Merrill Lynch went.  That was a great weekend for you guys. (Laughter.)

FAUCHER: Which is not to suggest that any of people at this table were involved in those transactions. 

HOLLEY: There are four events that really stand out in my mind, not in order: But watching those planes fly into those towers, and watching the Berlin wall come down, and Kirk Gibson hitting that home run against Oakland, and that weekend, for some reason in my mind, Merrill Lynch going down, that was like the Berlin wall going down. 

By then they realized just how these – all the terminologies that has come out since then, and it's all finance, it's all banking. 

To go back, what got us into it was this speculation in residential construction. We have gone through these housing bubbles before, and it looked like bigger than normal, but it was just another housing bubble. But it wasn't just another housing bubble, it had these financial implications and repercussions as well. 

 

BANKING MESS

 

FAUCHER: Jared, do you have a view of the subject also? Kind of what got us into this and why is it that the banking industry has really been at the forefront of the industry that is most affected by the regulation that the government is using to get us out of it. 

JARED FROTHINGER:  A couple of things I would point to.  I think we did get overzealous. Everybody could buy a house, everybody could have a boat, everybody could have a second home. And anybody that probably stops today and looks back on that, would say: Boy, maybe that doesn't make sense.  But at the time, I missed it and I think a lot of us in banking missed that. I think we are getting back to some of the basics. And really, what we did a long time ago in using some of the old standards, I think we got further and further away from that in using the, again, no doc situations on our mortgages, we started shortcutting things. And as an industry, I think we failed there. We certainly had some help, but I think that we should have maybe looked at it differently. 

With that said, once these things come out, we had to look at it differently and we've got to make changes to the future. There is nothing we can do about a couple years ago, but I hope what we are doing today is really looking at: How do we take it from here and move it forward, and we may never get back to where we were at two years ago, and I don't think we should be where we were at two years ago, but back to a healthy economy and a normal lending environment instead of what we are at today. 

TONY OLBRICH: Can I take sort of a macro approach to it for a second?  We represent the pipeline operators of the economy. We operate the pipelines through which the most fundamental commodity in our economy flows, and that is money.  And there have been disruptions to that entire network of the pipeline through the various things that the other folks have described, and we can take an entire day talking about all that. But in any case, the natural instinct of people who want to fix the system is to fix the pipeline. 

And so I think in a very simplistic, maybe sort of an analogy type of term, I'm telling you it makes sense to address the banking industry because it is the system through which all of this economic activity flows by virtue of that basic commodity, and I think that is really what the regulators, the government is trying to do, is just fix the pipeline. And we represent the guys who – we are station attendants or whatever we might be out there in that pipeline system. 

HOLLEY: To elaborate on this, as things crashed and as these assets declined in value, the banks responded and the financial system in general responded by saying: These assets that we held that were worth ‘X’ amount are worth half that or a third of that, so they just hung onto this liquidity.  Instead of engaging these normal lending activities, they just, to exaggerate, they just stopped lending. And when they stopped lending, other people have got to stop borrowing. And when they stop borrowing, they have to stop spending and they brought the whole economy with it. It's not a traditional business cycle.  The traditional business cycle is when people just reduce their spending. 

But here, when their availability of credit stopped or wound up, then we really had a problem. 

PLAYER: I'm not so sure it was that banks constricted their lending willingness as much as it was the entrepreneur decided they didn't want to take the next plunge, they didn't want to make that next project in reality.

HOLLEY: Have you ever looked at what happened to excess reserves in the commercial banking? 

 

NON TRADITIONAL LENDING

 

FAUCHER: Randy Hopkins, you’re with Hopkins Financial Services, a more entrepreneurial company that is not a bank, but is a real estate lender. Can you follow up on Jared's comments. From your point of view, you are a lender and you lend principally on real estate. What is your insight as to how we got to where we are and is it any different in light of the fact that your business, unlike these other businesses, is a nonbank? 

RANDY HOPKINS: Well, I always say I was raised by a depression-like father that buried cash in coffee cans in the backyard and I'm kind of one of those weird business majors from the College of Idaho who minored in economics. So I see as a nonconforming – I say "nonconforming lender." We are private money. I joke and say the friendliest loan shark you'll ever meet or the softest hard money guy, is that we've always made loans on nonconforming real estate, a real estate broker's license and a mortgage broker's license. 

So this reminds me a little bit of the early '80s about, there is an aspect, and that is when prime was coming down from 21 percent.And I got into real estate and I saw situations that banks wouldn't make loans where I thought they should. So I became a private money lender and started actually just raising private money for individual transactions. Well, at that time the bank was not in the private money lending or the nonconforming lending. 

What turned it into subprime, to me, started off as a private money equity lending, where you are looking at the asset more than the borrower. And there are practical common-sense reasons to make a nonconforming loan; self-employed or the asset is a little bit weird. But what happened, when I first got in the business, I thought Wall Street is going to embrace this one day and want to build the biggest thing at that time. 

Well, it got to a point that the underlying economic viability of that niche got blown way out of proportion with the credit swaps, with making loans that had no underlying economic viability, meaning that, to me, it reminded me of the dot-com thing, is that there wasn't price ratio, it was all based on speculation. 

And frankly, and obviously the Idaho banking community more conservative, didn't get a lot into the subprime, where really there was what you say low doc. It was no doc or no underwriting. And the structure, to me, of that Wall Street embracing of the equity lending market was set up for failure. To me, the mortgage broker guy locally who would call my company as a private money lender, started making loans instead of an equity loan, started going 100 percent loan to value with no income on that person.  And we were all living beyond our means. Well, if the borrower can get 100 percent loan to value loan even if their credit is very bad, have whatever ability to pay back, they are going to take that money, especially in an appreciated real estate market because we are in God's county. 

The other thing that has been a blessing for this whole table, me included, is I don't think we are Florida or California, I say "God's country" because high quality of life, cheapest power in the country, still room to grow, from ag to high tech, recreation out the back door.  So we still have, I think, some in-migration of people that is coming to Idaho that don't have to work actually, and I think that buffers our economic climate. 

But going back to me, how we got here. To me it's greed from Wall Street to Main Street.  When you see a 30-year-old or a 25-year-old couple, I'm 50 now, so that youngster being able to buy a house and then, say, in a year or two down the road to get a second line of credit, a HELOC, a home equity line of credit, for 50 or 100 grand and then go buy boats and Skidoos or whatever, that was like manna falling from heaven.  So it didn't have any underlying economic viability of really the re-payability of those people.  Well, that fueled this residential thing. 

To me, along with in Idaho there was, of course, the external speculation because it is God's country.  We have a lot of room to grow, we have water, we have power, we have all these things.  That is why I think at the other end of the cycle it will probably come back quicker than other folks. 

So I just think what happened is the nonconforming, I say equity lending, got embraced that as you could do that industry in the same way that you could do regular banking in a large- volume systematic way.  Well, nonconforming is nonconforming, meaning that really you have to look at more entrepreneurial variables to make sense of a good equity or subprime loan, and to try to institutionalize that in a huge volume way doesn't necessarily fit as easy, because evaluating someone that doesn't fit within an institutional box is really kind of not totally one-on-one basis, but I think has to be more grounded in that case-by-case basis to make sure that it makes economic viability. 

I always say that a nonconforming loan, a mobile home on an acreage that doesn't have a foundation that can't get underwritten in an institutional way, or there is nonconforming property, borrowers and time frames, but to try to do that in a big-volume fashion is difficult. 

 

CREDIT CRUNCH

 

FAUCHER: Mark, let me turn to you. There is a credit crunch and it's still a problem. Do you believe that is the case or not? What would your response be to those borrowers who are taking that view in the marketplace? 

LLITERAS: If you can’t get credit, there is a credit crunch, whether it’s the good times or the bad times, Bob. Life has changed, there isn’t any doubt about it. One, a lot fewer people qualify for credit today with the downturn in the economy and downturn in their business. They just don't qualify. There is not as many people that qualify for credit. Loans aren't being made. 

Have loan standards tightened up? It depends on what happened during the good times. If you changed your loan standards to fit the occasion, then yes, you’ve tightened up on loan standards. And probably everybody to some degree or another has tightened up on loan standards, as they call it. But in reality, I think it's a credit crunch because a lot fewer people qualify. Consequently, if you are struggling with some issues in your business, you may not be able to get your credit, whether it's new credit, whether it's renewed credit. So it's where you sit. 

Are loans still being made today? Yes, there is no doubt about that. But it comes down to the fundamentals. If we can’t, as lenders, figure out how we are going to get repaid and have confidence in it, to do the other things that we look at, the economic conditions through your industry, not just the whole economy, but every industry is impacted differently by it. 

And maybe part of the problem, the first and foremost thing that we worry about as lenders is the character.  And during the good times, the old adage: All ships are raised by the rising tide fits.  It's through the downturn that we find out really who are the good managers, who have all the skills it takes to get through a complete economic cycle and run a business. 

We may have learned that, in your example, that whoever is running that business may not have had the skills. So that is part of the decision. Again, I don't mean to be flippant about it, but if you can't get credit, then there's a credit crunch, whether it's the good times or whether it's a recessionary period. But there are a whole lot of factors that are going into that, and it's not the case that the credit has dried out. Loans are still being made, business is still being done today, but it fits the conditions and the times that we are in. 

FAUCHER: Dave, what if I posed the same question to you: Is there a credit crunch in the commercial marketplace, in the real estate marketplace right now?

PLAYER: I think Mark hit the nail on the head. Many people do not qualify. I spent a fair number of the last few days, last few weeks in the Ketchum area trying to underwrite transactions for the bank that failed, for those customers over there. And unfortunately, many of them have had a bad '08, many customers in the marketplace have had a bad '08 because of the economic times that we are seeing. And it's unfortunate that many of those folks can't get qualified.  It's too bad they don't have a bank they can take a renewal with and let the bank kind of ride that out with the customer, which is what would typically be the case if they had a bank they could stay with. 

So the economic conditions as a whole have driven companies to show losses that heretofore haven't shown losses. And so as a result, it is more difficult for customers to get credit. 

I think in many cases though the standards haven't changed remarkably. Are we as banks doing less commercial real estate? Yeah, the FDIC told us to stop doing that in 2006 I want to say.  They started telling us that we should measure that against your Tier 1 capital and do more than 350 percent of your Tier 1 capital. So, yeah, we've been pulling back on commercial real estate, like land development loans, et cetera, which is part and parcel of our local problem, the excess supply that has been created from land development loans. 

But otherwise, I think credit is available. And I don't know that we have pulled back the credit standards so severely that they can't qualify as much as Mark said. Companies don't qualify because they aren't making money and we are concerned with the ability of them to repay the obligation.

FAUCHER: Don, did you want to comment on the subject? It sounds like you were interested in sharing your thoughts on the so-called credit crunch problem. 

HOLLEY: There is one observation. You look at the data and there is this huge spike in excess reserves in the banking system.  Why are they holding onto this money?  In Econ 201 we say: You give the banks more reserves, the banks will lend more money. 

OLBRICH:  Over what time frame, Don? 

HOLLEY: Starting in late 2008 through current. It went from basically nothing up to about $800 billion. It's down a little bit, but it's still well above $500 billion. 

DAVE PLAYER: But isn't that testimony to the same conclusion, in other words, if you have no loan demand and you've got those reserves, it doesn't necessarily mean you are going to out and find a riskier borrower to put that money in their hands. 

HOLLEY: That's the question.But then you hear the stories about, and I have no personal experience, but how they are tightening up on consumer credit and rewriting these contracts. I don't know, I'm not familiar. 

LLITERAS: Don, on the consumer side, there has been a change in advance, for example, unless you've got some stellar credit even then you could have problems, as I understand it. Getting more than an 80 percent loan today could be a problem. As was mentioned earlier, Randy said after year or two you'll get a home equity loan. Well, there's lots of stories, and I'm not a mortgage lender, that you can go get your home equity loan at the same time that you got your first mortgage loan and end up with 100 to 105 percent or more loaned against the residence. You didn't have any money to put down into cars, boats, ATVs.

And obviously the other part of that is, the consumer is out of work. Unemployment is up to, what, 8 percent roughly in Idaho, 81/2 percent on a national level. So you are in a period of uncertainty.  And what do we all do when we've got uncertainty? You step back, you take a look, you wait to see if you can get better direction in terms of where are we headed and what should we be doing. 

That's why, I guess, to a certain degree is we mentioned the TARP funds. We gave you the money, why didn't you go loan? Because we are having a problem qualifying, whether it's the consumer or whether it's the business. Sure, if you are in the real estate business, housing, it's not a recession, it's a depression, if you are housing related today, because nothing is going on. 

So it depends on where you are fitting in, in what part of the economic cycle and where are you at within the economy within the country. So it's a little hard to make a carte blanche statement that says: Credit is dried up. And I think you did see, back to your point earlier, when we had the problems last fall, for the first time in the economy, the banks led the economy into its problems.  Typically it had been our customers that had problems and then the banks had problems, I think historically.  This time we had our problems.  And we got a broad brush on it. We keep talking in this room, for example, if the numbers are right, I think 70 percent of these subprime, the toxic assets, residential lending was not done by commercial banks, they were done by mortgage brokers and such. 

Then Wall Street jumped in with a problem. There is plenty of blame to go around, as was earlier said. This is not just a consumer problem, it's not just a bank problem, it's not just a Wall Street problem. 

My recollection is during this time the political system decided that they wanted increased home ownership and everything, whether that was Congress or whether that was the administration at that point in time. As an economist, you probably – if you give our economic system a duty, it's really good at getting that job done. If after the fact you decided you wanted some sideboards on it, then maybe we have some other problems going on.

FAUCHER: Mark, you raised an interesting point. Don is talking about excess reserves, and you've raised the subject of TARP. Tony, why don't you take a minute and tell people what the TARP program is, and whether in your mind it's worked as intended. 

OLBRICH: Can I go back to Don for just a second?

FAUCHER: Sure.

OLBRICH: I'm wondering, Don, if the number that you are citing doesn't, in fact, include the effect of the TARP that has gone out, because, in fact, it's come onto our balance sheet as reserves.  So in other words, it's a little bit of a – I don't want to say a fallacious number, but if you put $700 million out into the banking sector and we are putting it on our balance sheet in the reserve account and there it is. Anyway, didn't mean to sort of jump on that. 

HOLLEY: That's fine. 

OLBRICH: What TARP is, TARP is the Troubled Asset Relief Plan, it's the program that was established in the fall of last year. Secretary Paulson, I think, was the major driver of it. I can't tell you all the various components. But it was created by the, or was conceived, I think, by the situation that Don Holley was talking about earlier, which was the infamous middle of September, I don't want to say the collapse of Wall Street, but a significant disruption, let's say, to the entire system. And a decision, I think, was made.  And, again, I'm just speculating, but something needed to be done to create a safety net and some stability to the system and it had to be done relatively quickly. 

We have to recognize that the entire system ultimately rests on sort of – I don't want to say faith, but maybe I will say faith, because I'm saying that word.  It's trust and confidence in the system. What was happening there in the middle of September, I think there was a real disruption to that, potential disruption to confidence. 

So the government felt they needed to establish some kind of a safety net to accomplish that.  So the Troubled Asset Relief Program was conceived.  And frankly, I think – I can't even remember what the original concept was, but it was really for the purchase of troubled assets at that point in time.  And then very quickly, once the legislation was passed, and if you recall it was passed relatively quickly through Congress, immediately signed by President Bush, almost instantaneously the application of those funds was changed.  And instead of using those funds for a government agency to purchase troubled assets from the banks that had those, and "troubled assets" being loans that were not being paid, that were clearly distressed loans, fairly quickly the decision was made to actually inject those funds directly into the largest component of the banking sector. 

So literally on day one, I believe it was nine banks, including, what, five or six commercial banks, and three or four investment banks were called into Secretary Paulson's office and they were sat down and they were told: You are each taking this amount of this piece of money.  And famously the Wells Fargo chairman, Mr. Kovacevich said: We don't need this, don't want it, don't need it, don't want it. And everybody looked at him apparently and his colleagues looked at him and the officials, Mr. Paulson, Bernanke, looked at him, they all said:  You don't have a choice in the matter, you've got to take it.  Mark, you could probably tell the story better than I can. 

But in any case, it was basically deemed that for the stability of the system you had to call in these eight or nine largest banks, and you had to say:  You guys are all taking this TARP money.  We are not going to distinguish between who needs it or who doesn't need it.  In other words:  Kovacevich, if you don't need it, you are still going to take it because Pandit at Citicorp is going to take it too and we want to keep this as a level playing field.

FAUCHER: Tony, aren't we talking about, isn't the end result in the hundreds of billions of dollars, am I correct, that has gone into the banks across the country? 

OLBRICH: Hundreds of billion of dollars. Again, that was the first tier. US Bank was in the next group, which happened about two weeks ago, two weeks after that. 

FAUCHER: Jim, I know in the newspaper reports there has been discussions as to Idaho banking companies' relationship with the TARP funds.  Your bank is not a gigantic bank like the US Bank or Wells Fargo. Why don't you give us some insight as to your company's history with TARP.

LATTA:  We were the first non-SEC reporting bank to receive TARP.  And these hundreds of million you talked about is huge to us.  $6.9 million was quite a large sum.  We looked at it from, we did quite a bit of analysis and I've actually done a little road show that I do of what TARP actually means.  And there is a couple factors, I think, that maybe Congress didn't intend. 

From a capital base, if you are looking at banks, need to keep 10 percent capital on hand, so for every $1 in capital, theoretically I could grow my bank by $10.  So $6.9 million, $7 million, theoretically I could grow from 70 million to $100 million.  And the idea from Congress is that primarily we invest in loans, so we are making loans into community.  So from that capital standpoint that makes sense. 

Two other things happened.  The other things you can use TARP for is to shore up your balance sheet.  A lot of banks, including us, have done that.  As you have had losses in the real estate industry, you put some of that into your reserves to make sure you can lend and fight another day. 

The second thing, to put that $7 million, in our case, to grow at 70 or $100 million, I really can't do that unless I have deposits.  Well, so now all the banks are looking at:  How do we grow our deposits to we lend that money back into the community.  When you going through an economic situation down to the pipeline, your same customers have less money in their checking accounts, people have less money to invest and put in the bank, so now it's very competitive for deposits to put that money to use. 

I don't think Congress realized it's not just capital, but you have to have deposits in your system to help lend that money back into the system to really make TARP more effective.

FAUCHER:  Jim, are the TARP moneys a loan or are they what the populus generally calls it, which is a bailout? 

LATTA:  Well, we don't see anything – it has nothing to do with a bailout.  It really is a loan that the government has called capital.  It's 5 percent interest the first five years.  And in our case, because we are not an SEC reporting, I'll just round it, the 6.9 or the $7 million we borrowed, in addition to the 5 percent interest we pay every quarter, when we pay back the 7 million, we have to pay back $7,345,000.  So not only do they get interest, they get more money than they lent us in the first place.

So we don't see it as a bailout.  We have to pay interest on it. 

On the other side of that, it was a form of capital that we couldn't have gotten any other way.  So in that sense you could say:  Well, nobody else would lend us the money, like some of our customers, the government did, but we still have to pay it back with interest and above interest, we have to pay extra over principal.

HOPKINS:  I understand it's preferred stock; is that correct? 

LATTA:  It is.

FAUCHER:  Is that correct, it's preferred stock in every instance? 

OLBRICH:  Yes.

FAUCHER:  Dave, you wanted to talk a little bit about TARP.  Why don't you say a little bit about what Mountain West Bank's experience with TARP is, if any. 

PLAYER:  First let me make a comment that I think part of the intention was that as we realized these troubled assets, there is an allowance that must be taken for those doubtful accounts.  That hits your income statement.  It eventually makes its way to equity. 

So part of the TARP isn't just to make new additional loans, it's to create fortress- like balance sheets for banks as we recognize these problems that are out in the marketplace.  So that is part of the process that I think that was part of the intent of TARP. 

What Mountain West Bank did is, we are owned by Glacier Bank Corp.  We were fortunate enough in November at a very stressful time in the marketplace to do a capital raise and sell stock at a premium.  So we raised about $93 million and then made application for TARP, was approved and then we declined to take TARP because it was our preference to just not have the government – well, it was sort of the Kovacevich approach to life; we didn't want to have the Feds telling us what to do and how to do it. 

So we were very fortunate and we are thankful we didn't have to take TARP funds. 

FAUCHER:  Gavin, I'm sorry, obviously we talked, and one thing that I want to say is that Gavin, unlike the federal government, doesn't have the opportunity to spend billions and billions of dollars he doesn't have.  I'm interested in your take on TARP and all this stuff.  Obviously you've got less funny money to play with than the feds do. 

GAVIN GEE:  Way less. 

I was going to weigh in on TARP.  The other reason it's not a bailout, which I think does a disservice to those banks that took TARP, is you do have to apply for it.  Except for the largest banks that essentially it was forced on them, as Tony described, the community banks that we regulate, there is an application process.  And it's not cheap money, as Jim described, it's expensive money. 

Quite frankly, the banks that probably needed it the most can't get it.  One of the requirements is that you have to be a viable bank.  The Treasury has to actually make a determination that you are a viable bank. 

So banks that you see around the country that are failing, we've had 32 bank failures around the country today so far, didn't get TARP money and can't get TARP money.  The ones who needed in order to avoid failure aren't the ones able to get TARP money.  You had to qualify and meet those qualifications, a viability test set up by the Treasury. 

Then, of course, you have to pay it back.  It's not free money.  It's expensive capital.  And it comes with conditions.  It does come with some strict conditions.  A lot of banks didn't want to accept those conditions.  Any federal money comes with strings.  There were definite strings.  And it's the changing strings.  The rules, even since TARP was announced, the rules have changed.  Now that you've accepted TARP money, you have to do X when we told you that you only had to do Y, kind of thing. 

There are limitations, all kinds of limitations on dividends, on salaries, executive bonuses, all kinds of things.  A lot of institutions just didn't want to accept the money because of the strings attached. 

FAUCHER:  Mark, do you want to comment a little bit on that?  Now that Wells Fargo, whether it wished to or not, is the recipient of TARP money, what conditions were attached and how has the bank dealt with those conditions? 

LLITERAS:  Well, I'm not sure that I know all the conditions that are attached.  As Gavin mentioned, they've changed.  I think TARP, you've got a good two or three things embedded in it.  I know the Federal Reserve believes the preferred stock is secured and consequently, the taxpayer will have no loss ever in terms of the money invested in it. 

As Gavin said, it's expensive money and consequently, the rules that are attached to the organization, because you accepted TARP, keep changing.  I would note, we will call it the controversy over compensation is an item that has gotten attached to TARP before it got done. 

So TARP is not a bailout.  It is expensive capital.  It has strings attached to it.  There are equity considerations, certainly in the first nine banks that happened.  For example, I think, flippantly, the US taxpayer is in the moneys, I'd say, on at least Bank of America because their equity warrants on it are exercisable at 6 and a quarter dollars, I think something like that, and it's up to 8 or $9.  Again, not to be flippant, but so far the rising stock market makes that look good. 

But TARP is, as you've mentioned, it comes with federal strings attached to it.  We already feel, from a banking industry, we are very well regulated, whether it be at the state or the federal level, between the examiners, the FDIC if you are a bank holding company, the Federal Reserve; all of those players are in it. 

And consequently, I don't think it's unique to banking, the more that you have the government involved in your business trying to micromanage it, then you are going to have problems in terms of being able to run your business, to attract people, attract capital, and get your job done. 

So I think everybody that has received TARP is looking forward to the day of being able to repay it as quickly as possible.  Some rules are still being promulgated in terms of how are you going to able to repay it.  Initially, the only way you could repay it is if you issued new equity, if I remember right on Gavin.  And that has got all kinds of ramifications to it as well.  So now you've got the federal government backing it up and they are trying to figure out what the rules are going to be.  So it's that uncertainty again that makes it advantageous to get your institution back in a place where you can repay the TARP and go about running the business in a sensible, strong way as opposed to having a partner that is driven sometimes by things other than what ought to be driving that business and how it ought to be run properly. 

FAUCHER:  So, Mark, I assume based on what you've said that if Wells Fargo wanted to repay the TARP moneys today, it essentially would not be able to; is that a fair conclusion.

LLITERAS: I think, as I understand it today, we are all waiting for the rules in terms of how can we repay it, under what circumstances.  I just saw a brief one, one of the articles in the Journal today, that I haven't read, is talking about the conditions that may prevail in terms of being able to repay the money.

OLBRICH: A couple of smaller banks though have already repaid. 

LLITERAS: Yeah. 

LATTA: Originally you couldn't repay it for three years. Barney Frank got up there and said: If anybody wants to pay it early, we'll figure out a way to pay it off early. So there is still some restrictions. I think you have to get your regulator approval and some other things, but you now can pay it off early under certain restrictions.  I'm not sure exactly what those restrictions are, but you can pay it off early. 

LLITERAS: That is part of the problem with TARP, back to Jim's point. Nobody really knows what the rules are, case-by-case basis. Again, another case of uncertainty. In uncertainty, we all tend to move slower, more conservatively and wait to see how the landscape plays. 

But I think, again, everybody is working towards relishing the day they can pay off TARP and we can go back to running our business the way it was structured and I think is proper for the long run. 

FAUCHER: Jim, Mark has talked a little bit about the terms and conditions of TARP money and it sounds like it's not too clear exactly what they are. In addition to the obligation to pay back the lent funds with interest, does the TARP money come with any strings attached insofar as equity is concerned, to your knowledge? 

LATTA: Well, from our bank – we are a little different, we are a non-SEC reporting bank, so we are not widely traded like some of the large banks. So when the large banks got TARP, they got preferred stock at a 5 percent coupon rate or interest rate and they also got warrants or the ability to purchase common stock at a price. Since ours isn't widely traded, we gave them additional preferred stock that they get paid on when we pay it off. So they have an investment in our bank. 

Just to go through the costs, if we estimate the cost was 5 percent, over five years it would actually average out to about a 6.5 percent yield, but because of preferred stock and that interest, those are dividend payments that run through your capital.  So you can't deduct those like interest from your tax, they are not a tax deduction.  So your net effect, your cost is between 10 to 12 or 10 to 13 percent, depending on your tax bracket. 

On the other side for our company, if we could go out and raise common stock, for the first couple years that cost would still be about 10 or 12 percent.  So it's expensive, but it's still not a bad alternative because you have no alternative to get common stock. 

Now, the question was some of the restrictions. 

FAUCHER: I wanted to get a little bit about some of the equity implications and I think you have spoken to that.

LATTA: Again, so what that helped us, all the banks, it's very important that we stay above the regulator's definition of a well-capitalized bank. And the key one we use is the risk-based capital number, and that is 10 percent. So at year-end without TARP, our bank was at about 10.7 percent and then when we received our TARP in the first quarter, we went up to 14 1/4 percent.

It comes back to an earlier question, so now our capital is stronger, our balance sheet is stronger and that will help us, one, make loans, but also survive to the next day. So that did help our balance sheet. 

FAUCHER: Tony, let me ask you a broad question. I don't know to what extent you can answer it, but has TARP worked? 

OLBRICH: I would say, Bob, that depends on what your expectations of TARP were. I think from the government's perspective, if the expectation of the TARP program was to stabilize the system, restore confidence, at least in sort of a very rapidly declining scenario in the fall of last year, I think it accomplished that. I think that worked. So I'd say that is a positive. 

If the expectation was that the banks would take that money and immediately plow it back into the economy in the form of loans, maybe on the same underwriting standards or just sort of assuming that everything was status quo as it had been up to that point in time, I would say no, it hasn't worked and shouldn't have worked that way, because that wasn't really the intent of this. 

The intent was to add to the capital and reserves of the banks to create a fortress balance sheet and to protect the system against any potential future losses that were the result of the rapidly plummeting scenario. But I think the consumer out there incorrectly assumed this money would immediately come back into their pockets in the form of lending, and that wasn't the intent. 

So from that standpoint, the consumer would say: No, I don't think it's worked. But I'll have to say that wasn't really the purpose of TARP. 

Again, it gets back to the discussion; one of the conditions of TARP was not: Change your underwriting standards and use this money to just push it out into the economy based on a totally different set of standards. We maintained the same underwriting standards.  We maintained the same processes and measures and so forth. Again, back to the points that were made earlier, the borrowers don't measure up against those standards the same way they did before. 

Another key component to underwriting, particularly when we are talking about real estate-secured lending is the appraisal.  The appraisal values simply aren't any longer what they used to be, based on the overall decline in the scenario.  Back to the point that Mark and Dave made, I think, earlier, the operations, just the track records, financial operation of the businesses isn't what it used to be.  And again, for that reason it doesn't measure up against the standards the same way. 

So TARP did not tell us, the government didn't tell us:  When you take this money, you've got to change your lending standards and, therefore, plow it back out into the economy.  That wasn't the way it was intended.

FAUCHER: Dave, let me ask you a question. I think you are a good person for this one. I would think that TARP is one of the main federal government actions it's taken with respect to banking in connection with the downturn. But your institution didn't take any TARP funds. What other regulatory changes, if any, have you seen? In other words, what other regulatory efforts have been put in place by the federal government other than TARP? 

PLAYER: Well, they are in the process now of making changes to appraisal reviews on properties that are commercial real estate that are deemed troubled, but those are advance notifications. They really haven't made that much in the way of changes to the way we operate that I can think of. Am I missing something? Can you guys think of anything? 

OLBRICH: I’m not sure. 

PLAYER: I think the overall marketplace has made changes that we talked about before, but the regulatory environment really hasn't changed significantly really at all other than TARP, to my knowledge.

FAUCHER: Is it fair to say that the principal action of the government getting more involved in the banking business to date has been the TARP program; is that a fair conclusion? 

LATTA: They've just come out with a new program, I'm going to forget the name of it, the Homeowners-something program, where – let me give you an example. Let's say three years ago you bought a home, you put 20 percent cash down payment, you had an 80 percent mortgage loan, but you did one of these loans that is going to interest only and adjusts in one year or something and now you are worried about the rates are going to go up, so you want to go refinance the loan, you get the appraisals come down, now you are at 100 percent loan to value, and no bank will refinance you at 100 percent even though you have good credit and made all your payments.

So they've come with a new program saying that it's okay from a regulatory standpoint and you won't be criticized, that you can refinance that first for a bank and you can sell it into the secondary market for mortgages up to 105 percent loan to value and you won't be criticized for it.  So in a way to help some of these people that are meeting their payments, they had cash in their property, but because the value shrunk they couldn't refinance their loan to get out of trouble. So that is, I think, in the last month or less, that has been approved by Congress and now is working its way through the system as to how you do that. Because Congress says: Do this, and then you have to figure out how you tactically do it through the secondary market and through the lenders. And that is, again, just working its way through the system now. 

PLAYER: They've done a few things to facilitate consumers on their mortgage loans that are in place.  Jim references the most recent attribute. 

OLBRICH: The Idaho Housing Finance Association or Administration has also just been awarded a commitment, a funding commitment, and I don't recall all of the details of it, but it basically is designed to take sections of communities that might be concentration points of foreclosed properties, where because you have this concentration and the properties are empty and they start to sort of deteriorate neighborhoods, and there is a program, I think through IHFA, by which relatively low-cost funding can be put out to community organizations to maintain the integrity of neighborhoods to kind of fix that scar, let's say, on a neighborhood. 

Again, I don't remember all of the details of it, but IHFA could probably describe that. I know they were just awarded that kind of piece of that money through, I think, HUD just very, very recently. You probably know that program better that anybody. 

LLITERAS: Bob, you've got a couple of other things going on, back to Don's point, is the markets have frozen up in trading assets as well.  I think you've got PIP – and don't ask me what PIP stands for, I go straight to the acronym and there is TALP – which the fed is trying to restore market making into the system, because as a result of the meltdown, the lack of confidence that anybody knew what the credit quality was. 

I mean, one of the other problems was, of course, this meltdown of the securitized mortgages, so many of them were rated, quote, unquote, AAA, the highest rating, yet they weren't exhibiting AAA kind of characteristics, so the market quit trading. That is still a problem in that assets that need to trade in the market flow so the capital can flow is not going on. 

You have got the fed coming in again with PIP and TALP, which is intended to get assets moving, consumer assets. I think the PIP is the consumer assets they are looking at buying, securitized credit card receivables, auto receivables, and those kinds of items. Again, in order to try to restore market actions into the economy, because we do need that. I mean, obviously the mortgage securitization has been a long time there with Fanny and Freddie Mae. Then we went a step further with Wall Street jumping into both the origination as well as the securitization of it.  But you have to have some of those in order for us to accommodate the demand for lending in this country in particular. But it’s a worldwide event as you move across it, so we do need to restore that. 

The syndicated loan market, which are loans that are shared amongst multiple banks, went dead literally for a long period of time. It is showing some signs of revival, but it still is a market that is having its problems in returning because the banks and the lenders aren't sure how to judge credit quality, particularly if somebody else, if you are relying upon somebody else's judgment on it, i.e., the credit rating agencies who have taken their fair share of hits relative to the work they did or didn't do in the ratings of securities.

LATTA: A couple of other things they did that we tend to forget about that was pretty important is they raised the FDIC insurance on deposits from 100 to 250,000.

FAUCHER: Jim, let me interrupt there. I appreciate you bringing that up. I think it's important for the readers to know, we talked a little bit about Idaho Banking Company and Mountain West Bank being State-chartered banks. But explain the fact those banks, like the other banks sitting at this table, do have the benefit of Federal Deposit Insurance.

LATTA: Going back to Don Holley's comments about the weekend where Bear Stearns and Lehman Brothers and everybody was starting to fail, to help those there was concern that people would start flooding money out of all brokerage and brokerage money market accounts. So the federal government said: We need to raise that and insure those from 100 up to 250. Then there was a grave concern that now you are going to create a run on banks to take money from depository institutions and that could create a worse problem than we have already. So the government said: Let's raise the Federal Deposit Insurance Corporation's guarantee of deposits up to $250,000 and later if the bank opts in, if it's in a non-interest-bearing account, I think that insurance is an unlimited amount, to help not only have capital, but now you help your depositors with some additional safeguards to safeguard their money so it doesn't stay at home in a mattress or the coffee can in the backyard, but it stays in the system. 

Because again, your TARP is the capital, you need the deposits to reenergize the money into the pipeline back into the economic situation. We tend to forget about it, but that was one of the huge efforts and changes the Congress and the government made.

FAUCHER: Is that a temporary change or a permanent change? 

LATTA: At this point, as I understand, correct me if I'm wrong, it's temporary until December 31, 2009, but there is discussion in Congress to make that either longer term or permanent.  I think the last change up to 100,000 was back in the 1973, 1974 time frame. So it's been over 30 years. 

FAUCHER: Gavin, I'm going to direct a question to you now. I think implicit in a lot of the subjects we've been discussing is the concept of regulation and the fact is that recently the government has gotten much more involved in the banking industry.  I just think it's, frankly, fascinating from kind of a historical and legal perspective that you have a relatively small number of presumably well- intentioned people taking very, very drastic actions without really much of a regulatory or legal framework at all to figure out how this is going to work out.  Essentially we have major transactions involving hundreds of billions of dollars and as Mark pointed out earlier, we still don't really know what the rules are and they are still making up the rules. Is this a dramatic change in your mind in the nature of regulation and specifically banking regulation in this country or are we able to put this in a historical context that, no, this is kind of what we think of as standard regulatory action.

GEE: Well, thanks for the question, Bob. Let me first go back to the prior question. You talked about government programs. If you go to CNNmoney.com's bailout tracker, there is about 50 different federal programs.  It's really rather remarkable when you look at all that the federal government, I'm talking about all the agencies. The Federal Reserve has a number of programs to strengthen the banking industry and get credit flowing again. Obviously, the Treasury and others, the stimulus package that Congress passed. There is a whole slew of them. 

In fact, the total for this according to this Website is over $10 trillion. Not all of that went to the banking industry; some of that went to the automobile industries, we know recently, and some other industries. But the lion's share of all of this effort has been directed at lending and the banking industry to shore up the banking industry. 

So to answer your question, obviously we have seen a number of initiatives, particularly from the federal government, and a lot of money being allocated to strengthen the banking industry. I think a lot of that is due historically to, one of the lessons we learned from the Depression was where we had over 4,000 banks in the country fail, is that the government didn't do enough initially to strength the banking industry. And we had, of course, all of the negative consequences of the Depression until the FDIC was created in 1933 at the height of the Depression and it was the creation of the FDIC that stopped the number of bank failures. 

Most of those bank failures back then were liquidity failures, not necessarily insolvency failures, they were liquidity failures. People lost confidence in the banks, there were runs on the banks and the banks had closed because of that situation, until the creation of the FDIC, which dramatically slowed the number of bank failures in the country as a result of the government taking that action. If you look at it historically, even in the '80s, the recession of the '80s, for several years we had over 200 bank failures a year. We haven't anywhere near reached that point. They are predicting maybe as many as 100 this year bank failures at the current pace of bank failures. But, not even what it was in the '80s and the S & L crisis. 

One thing that is going to come of this, in fact, Congress is already holding hearings and a lot of discussion about the regulatory structure of banking, and how did we get to the situation where we were in this recession where we had, especially the large investment banks that were essentially unregulated, a lot of very large institutions that created a lot of the problems, were not subject to much, if any, regulation. So how do we address that from a systemic perspective? That is a lot of the discussion and debate among regulators and the Congress now is: How do we deal with the systemic problems? Do we need a systemic regulator so that regardless of what kind of institution or how you are structured, whether you are a bank, an investment bank or some other kind of institution, how do we address this and prevent these kinds of problems from happening from a systemic perspective? 

If you look at bank regulations, banks are among the heaviest regulated industries in the country today. I mean, very, very significant regulation at the federal level, state level, we have a wonderfu

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