Banking and financial services have experienced tremendous growth and change in the last decade as the nation has recovered from the recession and has implemented new rules for governing lenders. Leaders of banks, credit unions and other financial institutions are now marketing their services in a highly competitive and rapidly changing environment. They face competition from non-bank lenders, online lenders, and other new entrants to the lending market.
The lending environment now
In 2017 overall, lending was relatively flat compared to 2016. But we saw a steady increase from about midyear through the fourth quarter. It consistently just got stronger and stronger, and that is now spilling over into first quarter. We are actually seeing very significant growth since January of 2018, through 2017. We’re seeing lending increase in all sectors.
I think with some of the recent announcements in the political environment, businesses are looking to move, grow, purchase, and make capital expenditures. In the sectors that I watch daily, lending in the first quarter of 2018 is almost double lending in the first quarter of 2017.
I can speak to that in the credit union industry as well. Up through the third quarter, the credit union industry was up 17 percent year-over-year to the third quarter through 2017. We’re up 50 percent this January compared to last January. We have very strong consumer confidence, strong job situations and growth.
From our numbers, it was relatively flat industry-wide, but we just got a big surge in the second half of 2017 into 2018.
One hundred percent of the loans we make are to people who can’t get a bank loan. Last year our lending increased 10 percent in Boise area, and this year it will grow about 25 percent. That’s a little bit counter to what we’re used to. When the economy is really strong, we actually see fewer deals; banks are more able to lend.
In downturns, lots of people have a hard time getting a bank loan. I can’t chalk it up to anything other than that we’re doing a little bit better of a job getting in front of lenders and working with them in the area.
Businesses come to us for financing across all sectors, and they’re doing things to expand. So there’s this forward- leaning growth rather than coming back from a downturn.
The Federal Reserve is anticipating 5.4 percent GDP growth in the first quarter, about double what was expected before the tax change. Some of the specific trends that we’re seeing in the intermountain West or in Boise are a push toward equipment lending, specifically automation to help companies to get over labor restraints.
My customers having trouble finding qualified labor who can pass drug tests for example. Machines, they don’t have to worry about that. They’re looking at ways to borrow from anybody that will lend them money to automate the process that they didn’t think about before.
We’re also seeinga lot of early refinance of fixed debt. If someone has a loan maturing in ’19 or’ 20, and if they can do it and they’re not paying too much for repayment penalty, they’re refinancing that now before we see dramatic increases. Some of that is a bit surprising. We’ve had clients that are prepaying penalties now to get out of their existing fixed rate debt.
I’m not a lender, but we say that our client base has quite a phenomenal growth in their business with stronger financial statements than in the past. I’ve seen several companies being sold lately; it seems like things are looking good for a lot of small businesses. I think a lot of them will be looking to expand and will be looking at the lenders for some capital.
Talk of an economic bubble
One of the things that we did last year as a company was sit back and batten down the hatches around asset management to make sure that we understand what all of our partners look like, financially what the weak parts are, just getting ready.
The regulators require the banks and credit unions to really test their balance sheets so we definitely have a lot of analysis that goes into testing adverse situations and what happens with rates and all of that. I do think that the liquidity is going to be a concern. We are loaned out and that may tighten up some availability of lending.
That being said, we’ve got really strong capital. I do think that there’s some regulations out in regards to making sure that we’re sufficiently reserving for loan losses. Short term, institutions are going to have to put more away for potential loan losses to plan for that level, which may tighten up the availability of some funds for expansion. I do think there is a potential that it could affect us.
Know that financial institution are under pretty tight scrutiny with capital requirements and testing our balance sheets to make sufficient funds are available.
From an enormous bank perspective, the recent downturn and the regulatory environment that followed it challenged banks to dramatically grow their liquidity and balance sheets. I’m sure we’ve all heard of the stress tests. That has created the big monster banks with balance sheets that are just incredibly strong. The fortress balance sheet may be one of the greatest positives that came out of the post financial crisis regulatory environment.
There is some easing on that and I think the macro features of the economy are not a bubble bursting anytime soon. We don’t see where that would come from. We don’t see a big housing bubble based on subprime lending or Russia or bitcoin. You see the green that comes right before the downfall. Banks have gotten permission from regulators to issue dividends in excess of earnings this year, and that hasn’t happened in decades. We’re not anticipating a great downfall right now.
We all have a personal balance sheet and stress testing on these types of events. I think it is easier to manage your corporation’s emotions as an entity compared to an individual’s emotions. We got a lot of calls from people in December about bitcoin. It’s that euphoria; people have the fear of missing out. You have to step back and look at the bigger picture, and understand what it is. It does it actually have an intrinsic value.
As far as wealth management goes, it’s great economic growth and people’s balance sheets are getting stronger. But the savings rate is at one of the lowest points it’s been, even pre-recession.
It’s good economic growth, bubble-wise it’s good economic growth, but nobody can tell the market.We’re in this for the long term, we need to manage our lives and have a better understanding of not making irrational choices based off of our fear. As things go way up, then they can go way down too.
I want to touch on a lot of things that Connie mentioned. We have a lot of similarities. Idaho is one of the fastest-growing economies in the nation and we don’t see that ending anytime soon.
Idaho’s economy is as strong as it’s ever been. It doesn’t appear that there’s really any near end to that. We’re seeing a large population growth and personal income growth.
Interest rates will be something that none of us can absolutely predict. We all know that the only way we’re probably going to go is up, because they’re the lowest they’ve been in a long time. So, people have to plan for an interest rate risk and also there’s some talk about there being a housing bubble because of fears that we’ve had before.
As Doug mentioned, because of the last recession, there’s been so many policies and procedures and regulations put in place that banks aren’t lending speculatively when it comes to real estate. That’s partially what got us into trouble. There are certain regulations in place to make sure that people borrowing money actually have the ability to pay the loan back. Because of those things, I don’t think we’re going to see the kind of housing bubble that we did in the past.
The lowest savings rate in decades
There are a lot of variables. No recession is good obviously, but in tough times sometimes you go through a lot of pain to better your balance sheet. I think now with just an increase in housing prices, equity markets, people are starting to feel that they want to catch that wave, so they just stop saving. They’re taking loans out of their 401k’s and doing things that will hurt them in the long run. In the short run there’s that irrationality: “I know someone who leveraged and bought something that increased them in a lot of value.” Consumer confidence is good, but that’s when people start to take it too far and start making poor choices because of it.
Regulatory issues and the financial services environment
A lot of the regulatory environment that was created by the previous administration is being sort of systematically deconstructed. Huge financial institutions are doing stock buybacks, and that is not something that would’ve been acceptable three years ago. But when you have Wells Fargo and JP Morgan and Citybank broadcasting that they’re buying their own stocks back, that is a regulatory change that’s pretty significant.
It’s definitely easing up this year, and that’s with a lot of great effort by the financial institutions. So much of the regulation had well-intended consequences, but it’s really become an obstacle. Disclosures, for example, are slowing down processes making it difficult for consumers to understand what’s going on. I applaud Sen. Mike Crapo because he chaired the Senate Banking Committee and he had bipartisan support and that committee passed Senate Bill 2155 which is the Economic Growth Regulatory Relief and Consumer Protection Act, and it’s moved to the full Senate for consideration. That is going to right-size some of that regulation for the community banks and credit unions.
We’re a heavily regulated industry. Regulations are put in place primarily to protect consumers, and banks see that as a good thing. But sometimes those unintended consequences can end up harming consumers. For example, there’s regulation related around appraisers to do home loans, business loans, etc. In larger communities where there’s lots of appraisers, those regulations were probably good. It meant that appraisers were going to have to have a certain level of education and expertise. There would be some consistency to appraisals and evaluations would be reliable, all positive things for both the consumer and a bank that might be lending.
But an unintended consequence is that those education requirements have become so restrictive that a lot of people are getting out of the appraisal business, and the costs are increasing.
It is really nice that Sen. Crapo and a lot of our legislators are starting to see those unintended consequences and your bankers are actually out on Capital Hill on a regular basis lobbying for some reform and regulation. I think the typical consumer who might not be as well educated by all these issues, may think banks are just going to Capital Hill to complain because it’s costing them money. At the end of the day, we’re all about the customer and trying to help the customer.
We see trouble in the unregulated lending market. Thirty percent of the loans we make to existing businesses in the Treasure Valley last year have been taken up by unregulated online lenders. They’re encroaching on bank space, and they’re doing it without any rules at all.
We see small businesses and families come to us and they’ve been decimated. Their cash flow has been soaked; their money has been taken from them at exorbitant fees. We are able to go in sometimes and refinance that predatory debt, but it’s something that I’ve been adamantly against for many years because they don’t have the rules that mainstream financial institutions have. It’s so easy to get a loan there; by the click of a button you can literally have $100,000 overnight but pay dearly for it.
The protections that are there for consumers don’t apply anyway in commercial lending. When I went from consumer banking to commercial lending, it was like ‘wow we can just change the contract if the client objects?’ That was kind of shocking. The thing about predatory lending is folks who run businesses that are not talent-oriented, they don’t see how these predatory loans are disgusting. I had a prospect who signed up for a $150,000 loan and day one the balance was $200,000. It’s incredible.
There are rules around consumer lending. There are rules when it comes to lending to a business online. The click of a button and you’re immediately paying fees that would translate to 50-250 percent APR. There’s really only one entity that can provide that oversight and that’s the Consumer Financial Protection Bureau. If you know business owners who have similar stories, they should call Sen. Mike Crapo.
Consumers in a lot of industries are not knowledgeable on how they’re regulated or what their fiduciary responsibility is. That’s the start of why we’re having the Department of Labor fiduciary rule. In June, a lot of it was implemented, but there was an 18-month reprieve from reinforcement of it. That’s very confusing for consumers not understanding where they go for financial planning, what is the responsibility of the firm, what is that client relationship like.
Unfortunately, with things changing back and forth with politics it just makes it a lot harder for consumers and people who plan on investing that.
Tax reform and the financial industry
Because the announcement of the tax cuts is still relatively new, it honestly is very hard to tell exactly how it will impact the lending, although so far when talking to small businesses and consumers everyone seems to be very pleased about the tax cuts.
This tax bill is so new that we’re still trying to digest it. it’s a huge bill and there’s a lot in it. The only thing that I think we know absolutely for sure is that we are not going to be filing post card-sized tax returns. CPAs are pleased that we’ll continue to have a job.
There are sweeping changes in this tax bill that impact virtually every single one of us and every single business in the country, some for the positive and some for the negative. It helps a lot of my clients. It hurts some of the wealthy. The idea that it was a huge tax break for the rich is not true. But there are some things that benefit the rich, certainly.
We’ve seen that everyone’s paycheck is just a little bit bigger than it was in January.
It will be interesting to see the impact when we do the 2018 tax returns. Some people will be helped; some will be hurt. I’ve read to where 80 percent of the country will get some type of a tax break. For businesses and big companies, there’s a new corporate tax rate at 21 percent that you would think would help them quite a bit. You hear about the big monster companies who are paying their employees more or investing in something. For Idaho, we don’t have too many Fortune 500 companies; my client base definitely doesn’t have any Fortune 500 companies. Its all small businesses, partnerships, S-Corps., sole proprietorships. Most of those people are going to see some type of tax benefit.
I have a feeling that it’s going to be summer or fall of this year before we really understand what this is going to mean to us and to our clients. We’re still looking for some further guidance in some of these new provisions. For example, the 20 percent deduction for past income for small businesses. It’s a horribly complicated tax law with lots of restrictions and limitations and I’m not sure that we’re really going to have a great handle on that until we get some more guidance and can apply it on case-by-case basis to our clients.
We wondering if it will affect decisions such as home equity, lines of credit. But because of the $10,000 cap I’m not anticipating that it’s going to affect us and we are hearing more positive than negative about the impact to our primary clients.
If you’re buying a piece of equipment that lasts 15 years, the previous tax law says that you have to depreciate that over 15 years. Now in many cases you can take a full depreciation in the first year, with a maximum period of time.
In five years we anticipate that is going to further drive capital and expenditure lending, equipment lending. As it specifically relates to lending in the tax reform, there are significant downsides to lending in that bill. Lower tax rates reduce the relative benefit of using debt at all. There’s a 30 percent cap on the amount of interest that you can take as a deduction, 30 percent of it events out. So, if you look at highly leveraged types of businesses, it’s not going to make nearly as much sense.
Higher interest rates can also increase the expense that those companies have on interest so as the rate environment increases. But, the economic expansion may offset some of those concerns. It’s going to be a really interesting year. The thing that has shocked me the most is middle income workers will see 5-6 percent after-tax income increase in ’18. That should raise all boats.
Consolidations of lenders and branches
We are continuing to see consolidation. Last year National Credit Union Association, which covers the federally insured credit unions, had 5,785 members. This year there are 5,642. However, I will say the consolidation has slowed down significantly.
I would echo Connie. We still see some consolidation nationally, but it has definitely slowed significantly. In Idaho especially, we saw quite a bit of consolidation three or four years ago.
Resources for borrowers in under-served or rural areas
We have seen, especially in Montana, less in Idaho, small banks disappearing and being acquired. It just makes it harder for small rural businesses to get a loan when there isn’t a bank in town that speaks their language. Sen. Mike Crapo is working on easing that burden for small banks, which would be a big benefit for small businesses.
If some of this regulatory burden can be reduced, it will be good for really small banks and business. We need all size of banks, regardless of whether it’s a small community bank, credit union, regional bank, or national bank. We all play a key role; we’ve all got niches and it’s good for the economy and consumers to have a lot of choice when it comes to financial institutions.
With online banking, mobile banking, all of the products and services that are out there today, there are so many other ways that consumers and businesses can do their banking vs. just walking into a brick and mortar branch.
Because of technology there are a lot of resources and tools out there so that most consumers and businesses shouldn’t feel that they’re without services. There’s still the possibility that people want to go in and speak to a banker.
I am really proud of what credit unions are doing in rural communities. 55 percent of the Idaho population are members of credit unions, and we have 153,000 rural members in the state, which is about 44 percent of the rural population. We’re seeing credit unions willing to go into those areas, where some of the larger banks have pulled out. I’ve actually gotten three calls in last year asking if we would go into a rural community.
One of the biggest affects that government and private investment can have on rural communities is improving the broadband infrastructure so that those rural communities can have high- speed internet to access the systems that banks do have in place. I think banks in general can do a better job of letting our rural communities know what kind of lending can be supported by USDA loans.
Financial planning firms can reach out to rural areas through technology. You can still have a relationship virtually and you might not meet as often, but you can still fulfill their needs. I just don’t think that’s been communicated as fully as it needs to be.
About 30 percent of our loans in Idaho are to rural places. Just last year, we lent money to someone in St. Anthony for a burger store. In our “urban” offices, we had to change the way we think about how a business operates in the city. In Glendive, Montana, years ago we made a loan to a car wash cell-phone store, both in the same store. We looked at it and thought ‘what, that couldn’t possibly work’. It’s taken a little bit of mental yoga.
Protecting business and consumers from fraud
It isn’t the banks and the credit unions and financial institutions that are causing a lot of the cybersecurity challenges and fraud. It truly is at at the merchant and small business level. If there was any message I could give, is really take that seriously as a small business owner, because that is where we’re seeing the breeches occur.
Unfortunately, that causes challenges for the financial institutions, because we’re the ones that are reissuing the debit cards and accepting a lot of that fraud. But we have independent security audits and such. We invest a lot in cybersecurity and make sure that the preventative measures are in place. We get you alerts as soon as possible if something is out of character. That is all investment that is put in place by the financial institution.
We deal with cyber security risk every single day. We try to focus on awareness and education. The American Bankers Association said that cybersecurity and loss related to deposit accounts is up 48 percent.
The American Bankers Association put out statistics for 2016 fairly recently. There’s a little less than $3 billion in full on loss to American banks in 2016, but they stopped $17 billion. The pace and intensity of cyber attempts against banks is increasing exponentially. We spend $3 billion a year developing technology at bank of America. That’s a staggering number, and I don’t say that to pat ourselves on the back. The information security that banks need to have is constant vigilance. Cybersecurity is the only area of Bank of America with no budgetary restraints.
We’ve hired firms to help us protect ourselves and that’s 8 percent of our expenses now, just safeguarding.
In our practices as a public accounting firm, we’ve become a target in many cases of cyberhackers because in our systems we have the financial information for hundreds of businesses and clients and individuals. I don’t think I’ve been to a conference or seminar that cyber security wasn’t a topic. I get an email from the IRS on an almost daily basis about this.
I’ve had several clients that have had their identities stolen. I’m working hard to get our clients to stop sending us information over unsecured email; it happens all the time. We talk to our clients about this all the time.
Your financial institutions have put in a lot of tools to protect you, and the adoption rate of those is pretty low. We have a card valet where you can actually control and get a text every time your card is used, or set a mile radius to where it can be used, or what type of retailers you want it track at. Ask your financial institution what tools they have to protect you. Do not assume that every email you get is legitimate, look at it carefully and at the true address that it’s coming from.
Most banks protect consumers against losses so when a customer reports an unauthorized transaction, it’s really the bank that typically takes and absorbs that loss and doesn’t pass it on to the consumer.
How is Idaho’s growth, especially in the Treasure Valley, affecting small businesses?
I think we’re going to meet our quarter one small business lending goal in the next two weeks. We are seeing very positive things from what’s happening in Boise. Some other communities in our area and region have similar – although much smaller scale – wonderful growth happening.
One of the things we didn’t necessarily anticipate seeing in the Treasure Valley was business ownership transitions. We’re seeing a lot of retiring small business owners transitioning their businesses to millennials, which has broad-ranging impacts to the strategy of the company. The owners we’re talking to waited until the 2010, 2011 financial statements were no longer impactful to the price of their company. We’re seeing that with medical and dental practices; they’ve finally turned the corner where the doctor, CEO, or founder is ready to hand it off to their kids. That’s been interesting to watch.
I find the growth somewhat staggering; I don’t think a week goes by that we haven’t picked up two, three, ten new clients. That didn’t happen some years ago. It’s an exciting time, and there are a lot of challenges that our community will face, just like driving downtown. It will be an interesting next few years to see how this all shakes out.
Next Breakfast Series: April 3, 2018
Agriculture in Idaho
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