Are Financial Institutions Holding onto Their Cash?
Not according to the execs we asked—five answered that question and more
As Jim Hartlieb, senior vice president at First Business Bank explains, “[Financial institutions] have to lend money to make money. We pay interest on our clients’ deposit accounts and loan the money out at a slightly higher rate. It wouldn’t make financial sense to just hold on to the cash. As a result, we’re actively seeking ways to lend money to businesses in our market area.”
Madison Magazine (MM): What can you tell potential borrowers about how you make loan decisions?
Jim Hartlieb (JH): Our client base is comprised primarily of small to midsized businesses. Because of our strong relationships with these clients, we can bring predictability to the loan process by understanding their needs and by their understanding of our process. Our goal has been to stay consistent—not conservative—with our underwriting process so clients can react quickly when they need to.
When they have a new project, they know what information they need to prepare before coming in with a loan request. As a result of our approach and the improving economy, we’ve made more loans this year than in the last three or four years.
Kim Sponem (KS), president/CEO, Summit Credit Union: We never stopped lending—small-business owners and consumers have always been able to obtain new loans from us—in fact, we recently received an auto-lending award.
We’re the top mortgage lender in Dane County, and there continues to be a big demand for refinancing. Home purchases are really picking up, too, which is exciting. We just computed $1.9 million of member savings on first mortgages because of our lower rates and fees.
We’re also seeing a big increase in Small Business Administration (SBA) lending and we’re helping a lot of small-business members get off the ground with those. We received an SBA lender of the year award for credit unions.
Greg Dombrowski (GD), regional president, Johnson Bank, Madison: If a bank sits on cash, it’s earning a return of about 0.1 percent. There is no economic incentive to sit on cash balances and over the last two years, there’s been a very strong push to get cash working by lending into the communities we serve.
In the mid-2000s, we saw a real loosening of credit standards across the industry. Deals were approved that would not have seen the light of day 15 or 20 years earlier. So if that’s your point of reference, then yes, it is a little different now. We’re back to a more traditional view of how banks approach lending. Banks operate on a very thin margin, meaning loans have to be very low-risk endeavors where there’s a high probability of repayment. Bank financing provides the working capital component for businesses to thrive; it’s not a substitute for appropriate levels of equity capital.
We work with our clients to help understand and tell their stories. If you’ve run your business prudently, now is a good time to be borrowing.
Doug Nelson (DN), regional president, BMO Harris Bank: Financial institutions want to lend to creditworthy borrowers. Given the improved economy and increased liquidity—deleveraging that has occurred—both businesses and consumers have better financial profiles and it’s getting easier to qualify.
Banks absolutely want to extend credit and we are constantly looking for new customers we can help. Each situation is unique, but that’s why we have local teams in place working individually with potential customers.
Ultimately borrowers need to satisfactorily demonstrate that their track records and future outlook suggest a very strong likelihood to repay the loan. We have an ongoing dialogue with existing clients, so we have that information. New clients should come fully prepared with financial reports so we can quickly consider their entire records and see how we can address their needs.
Tom Wilkinson (TW), CEO, Wisconsin Bank & Trust: Money is available and we want to make loans. I can’t speak for other financial institutions, but everyone I’ve talked to says we need to get money out into the community.
Consumers especially want mortgage loans, but with the regulatory environment, we’re required to collect a mountain of information from several sources if we want to sell the loans later to Fannie Mae or Freddie Mac. Still, last year we had over $100 million in Wisconsin mortgage loans and we’re looking at adding 20-plus staff.
Usually people are primarily looking for first mortgages, or home equity lines of credit (HELOC), but now about 75 percent of home loans are refinances. We think as the economy continues to improve and there’s more clarity about taxes and health care the purchase business will take center stage—there’s a pent-up demand and people will get off the fence and take advantage of the very low rates and home valuations.
Kevin Tenpas (KT), president, Wisconsin Bank & Trust: On the commercial side, banks are more than willing to lend as long as they can identify the repayment source. In practice, unless the business is in trouble business owners can get money. If you look at SBA loans nationwide, the numbers are up significantly since last year.
Our loans are up on the agricultural as well as the commercial side—year-to-date they’re up about $25 million over last year, or 10 to 15 percent.
MM: What trends are you observing that affect your financial institution’s strategies? How are you addressing those trends?
KT: With businesses, over the last three years we’ve seen record loan growth. We took advantage of big banks tightening their criteria and added
a number of customers.
Now we’re seeing big banks get more aggressive in terms of their lending approach. Personal and business deposits have grown, so big banks are looking to redeploy their assets and put them to work in higher-rate loans rather than securities.
We like to say we have a “big bank punch with a little bank touch.” We operate as a standalone bank, but our parent company, Heartland Financial USA—and its balance sheet—is behind us. We can do all the loans big banks can, but we have the flexibility and service of a community bank.
We’re really excited about acquiring First National Bank in Platteville. It brings us talented commercial and agricultural staff—a big growth area. The bank is known for specialty lending services: SBA, USDA and Farm Service Agency (FSA) commercial loans. We like to have all arrows in our quiver for the benefit of customers.
TW: On the consumer side we just introduced a debit card where we make a contribution directly to cancer research with every purchase. That’s very important to us and customers are very accepting of the product. We’re also developing a rewards checking account. If you have direct deposit, eStatements and use your debit card a certain number of times each month, you can earn 2 percent up to $20,000. In this low-rate market 2 percent is huge.
DN: The economy is continuing its slow recovery, and all financial institutions are required to be compliant with an increasing number of regulations and possess adequate capital. Fortunately, our capital ratios and risk-management approach allow us to be recognized as one of the strongest, safest banks in North America.
With our merger, we’ve completed our integration of U.S. networks and are now one brand across the country. All customers can access our complete suite of products and services at over 600 locations. Now we can continue to focus on growth, adding depth to our existing customer relationships, while also increasing our pace of customer acquisitions.
With cyber attacks on the rise, we’re spending more time and money to educate customers about the associated risks and to make sure our policies and systems protect against them.
We’re the sixth-largest agricultural lender in the country. This year we came out with innovative drought-relief solutions that allow customers to restructure their loans and/or qualify for additional funding to get through until the outlook is better. Many have crop insurance, but they don’t get the funds until maybe as late as next spring.
Especially in today’s environment, our philosophy of giving back to the community is critical. We have a deep commitment to the communities where our employees work and live. It’s something we’ll be equally focused on as we move forward with our unified brand.
GD: Mortgage lending continues to be affected by the rollout of the Dodd Frank Act. Before, we had room to move in pricing if the borrower had a relationship with us and we knew the financial situation. Now we can’t do that. It limits the creativity we have to build products for the marketplace.
The legislative gridlock as it relates to estate taxes and others also presents a challenge. Unless [Congress] takes action, several tax decreases will expire at year-end. It makes it challenging for businesses and consumers alike to plan financially.
That said, one of the biggest advantages our business clients enjoy is our integration of services. We have a team of about 25 individuals that provide investment management, including Certified Financial Planners®, accountants and attorneys on staff. While we don’t offer legal or accounting advice, we can help clients understand issues that might arise with estate planning, and how that may play into their business
or personal vision.
One of our innovative investment offerings targets people who have
significant retirement plan balances at their current employer. We now have the technological capability to manage these assets along with a client’s IRAs and after-tax holdings, effectively integrating them into an overall investment plan. This gives our clients two key advantages: first, they can rest easy knowing that we’re actively managing their entire portfolio, using the best choices in their company plan in a personalized strategy, and second, we can create more tax efficiency by overweighting appreciating assets in their after-tax accounts, while overweighting income assets in their tax-deferred accounts.
KS: People continue to save more. Even though rates are historically low, they want to use our products to help them save and prepare for the future. They’re thinking about their long-range goals and how to meet them. We’ve been talking to a lot of members and helping them plan.
We’ve also seen a need for more financial education and have implemented programs to provide that. We want to proactively help people understand finances, improve their financial lives, and be in control.
Our “Project Money” program started in 2009, with four families working hard to reduce debt and increase savings. In three years the four families have increased savings by $50,000 and decreased debt by over $100,000. They tell us the program has changed their lives. Every year more people follow the families’ blogs to get insights on what’s working for them and then they work with our branch staff to set up their own goals and plans.
We also have the “Red Shoes” financial wellness program, focused primarily on women. We have 100 women piloting it, using a step-by-step workbook, online tools, exclusive events, and one-on-one coaching to get to their first $1 million.
And we’re creating an online consumer advocacy and educational resource called Foolproof, with articles, videos, news, and modules for consumers age 13 and up. We’ll use it in classrooms and work with parents to educate their children.
JH: The economic downturn that began in 2007 forced companies to work smarter and more efficiently to survive and thrive. It’s been impressive to see how these strategic initiatives have paid off with improvement in earnings and cash flow over the last few years. Over 90 percent of businesses in the country fall in the small to midsized category, and as this group’s earnings improve, so does the economy.
We have such strong client relationships that we’ve been able to take part in some of their strategy sessions. Businesses have made many tough decisions and it’s been fun and energizing to see their success just a couple years down the road. They’re stronger and better than ever and it’s an impressive thing to watch. Especially as this sector is the backbone of the U.S. economy.
An unfortunate growing trend in banking is the level of deposit fraud in the marketplace. Criminals have learned new ways to commit fraud—it could be something as simple as finding a company’s old check stock in the trash to obtain its account and routing numbers, and making checks on their computers. We’ve also seen these criminals plant a virus on a computer to get the person’s information and then attempt to move funds to their own accounts.
Fortunately the banking industry has developed a full array of tools to limit these risks. Something as simple as an ACH/EFT (electronic funds transfer) block or filter on accounts is invaluable. The client specifies that only certain people, vendors for example, can electronically debit the account and withdraw money. Anyone else will get rejected and the client gets a notice. Another valuable tool is Positive Pay. This service allow the client to tell the bank what checks have been written, to whom and the amounts. When the checks come in for payment, if any of those things don’t match up, the check isn’t paid.
When it comes to bank fraud, what many people are unaware of is that businesses have less time than a consumer does if they want to recoup their money. Generally speaking, businesses have 24 hours while consumers have 30 days. This fact, along with the growing trend, makes it all the more important to consult with your bank about how to prevent fraud.
If a company doesn’t want to install these new services, they can always do it the old-fashioned way and verify their account activity on a daily basis via online banking. If the company or individual sees any activity that looks suspicious, they should contact the bank immediately.