AT OUR FOURTH ANNUAL ROUNDTABLE ON BANKING AND FINANCE, Utah
Business brought together a group of industry leaders to discuss such
issues as banks' roles in economic growth, the new face of the
banking industry and the prevention of identity theft. These leaders
forecast a generally positive outlook in departure from thoughts over
the last few years.
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Participants: Harris Simmons, CEO, Zions Bank; Dale Gunther,
President, People's Utah Bankcorp; Richard Beard, President, Bank
of American Fork; Jim Anderson, President, Bank of Utah; Rick Gross,
Senior VP, Key Bank; Kelly Mathews, Executive VP & Economist, Wells
Fargo; Clark DeWaal, Associate Professor, BYU; Carl Barton, Partner,
Holland and Hart; Greg Larson, Managing Director, Ridgeview Capital;
Jeff Thredgold, Economist, Zions Bank; Ed Leary, Commissioner, Utah
Financial Institutions; Scott Anderson, President, Zions Bank; John
Allen, President, Sun First Bank; Curtis Taylor, President, Heber Valley
National Bank; Craig Zollinger, President, Bank One; Howard Headlee,
President, Utah Banker's Association; Cece Mitchell, Regional
President, First Community Bank.
Special thanks to moderator Hal Heaton, finance professor at BYU,
and sponsors Holland and Hart.
LET'S START WITH CONSUMER CREDIT. NEWS BROADCASTS HAVE BEEN
TALKING ABOUT THE OVEREXTENDED CONSUMER. KELLY?
MATTHEWS: We had an interesting year in '04. Most of us a year
ago thought that if we were fortunate enough to have a rapid increase in
job growth that it would be accompanied by higher interest rates. But as
the year wore on, and certainly, there were some ups and downs, we
enjoyed the best of both worlds. That is, we had a much more rapid job
growth phenomenon than I had anticipated. But even with the Fed
tightening short-term interest rates, long-term interest rates generally
stayed low so the mortgage area and the automobile area continued to do
very, very well. So we saw the consumers continue to be able to
refinance and buy. We had a tremendous year in construction. Automobile
sales were very strong. How their margins were is maybe another
question, but the volume was very strong.
WHAT DO YOU FORESEE FOR 2005?
MATTHEWS: We are back to the same situation we were a year ago,
with the weak dollar--even if oil prices come down a little bit, which I
believe they will drop below 40 before they get up to 50. I think
that's a higher probability--that at least 50 basis points on the
ten-year treasury will occur, which would push mortgage rates up by a
similar amount. While that probably won't be enough to seriously
alter the construction environment, I anticipate we will see higher
interest rate environments this year.
THREDGOLD: It's important to note too, that while we had a
significant rebound in Utah employment, the quality of jobs that were
added was quite good. We are up about 32,000 jobs in the last 12 months,
nearly a three percent growth rate. But the majority of the gains were
in professional and business services and construction, to a lesser
extent in manufacturing, the legal sector, financial activities, health
care.
ANY OTHER COMMENTS ON THE CONSUMER SECTOR? OVEREXTENDED CONSUMERS
HAVE BEEN ABLE TO HANDLE THEMSELVES BY REFINANCING AND TAKING OUT MORE
AND MORE MORTGAGE DEBT. NO ONE IS CONCERNED ABOUT THAT?
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J. ANDERSON: I agree they are probably overextended and a
significant increase in interest rates will cause significant problems
in the consumer sector. They will continue to borrow.
MATTHEWS: Even though our bankruptcy rates and our delinquency and
foreclosure and residential real estate are among the highest in the
nation, we have made definite improvements. The increase in bankruptcy
is essentially nil, and we've improved about 50 basis points
reduction in both delinquency and foreclosure rates in residential real
estate. So, hopefully, the job growth increase will enable us to improve
in these qualitative measures of consumer financial health as we move on
through this year.
THREDGOLD: Some of the national media make a point that because the
refinancing boom is largely over, we are going to see a sharp slow-down
in consumer spending. Realistically, a lot of people have had two and
three chances to refinance mortgages, and in each case have cut their
monthly payments. So you get the one time stimulus from cashing out or
whatever it might be, but you get the ongoing reductions in monthly
payments, which help you for many, many years to come.
Some of the consumer credit numbers are a little distorted,
especially in the credit card area because many people are like me, they
charge everything they can to a credit card because of the incentive to
generate points or miles or whatever, and then pay them off at the end
of the month. So some of the credit card measures of debt are much more
distorted than they have originally been.
LEARY: The FDIC report that came out on the profile of Utah, they
indicated that Utah had the fifth highest deposit growth. Now, they
don't break it down to whether that was commercial deposits or
consumer deposits. But it's intriguing that even taking out the ILC deposit, Utah FDIC insured institutions were the fifth highest growing
in deposits over the year.
WHAT DO YOU ANTICIPATE ON THE COMMERCIAL SIDE THIS YEAR IN UTAH?
WILL THEY EXPAND? BORROW?
J. ANDERSON: We see a lot of our customers increasing their
purchases of fixed assets, buildings and equipment, that they have
postponed for three or four years. And we see a real increase in sales
and orders and revenues.
BEARD: We see strong growth in our portfolio, and we see it
continuing.
THREDGOLD: We've seen some very strong numbers on the office
side. The vacancy rate, and especially in the downtown district, Class A
space has declined fairly sharply. Net absorption, especially in the
second half of the year, was the strongest in about the past four years.
In addition to the rebuilding of the two downtown malls. Hamilton
Partners is probably likely to go ahead with their facility sometime in
the next 18 to 24 months on Main Street. I think you are seeing much
more optimism on the commercial side than you saw in the last three or
four years.
THE NATIONAL PRESS HAS MENTIONED THAT, AT LEAST ON THE S & P
500, BIG COMPANIES HAVE MORE CASH ON THEIR BALANCE SHEET THAN THEY HAVE
HAD IN A NUMBER OF YEARS AND THEY SEEM RELUCTANT TO SPEND IT. IS THAT
TRUE FOR UTAH OR DO YOU SEE A CHANGE IN ATTITUDE ABOUT WILLINGNESS TO
SPEND CASH ON THE COMMERCIAL SIDE?
MATTHEWS: I would agree that many businesses--maybe even the whole
sector in general--use the opportunity of the last three years to
strengthen their balance sheet, to restructure debt, to reduce debt
quite differently, perhaps, than the consumer sector. So there has been
a significant improvement in quality of balance sheet in the business
sector. They have to balance the ongoing necessity of continuing to
emphasize productivity and cost containment in that area, as well as
hoping that the circumstances are such that they can increase sales.
It's not exactly clear in every circumstance that if they build it
that volume is going to automatically be there. So they are still being
a little bit careful, but I think that the liquidity is there, and if it
becomes clear that there is enough demand to generate the increase in
top-line volume growth, they will meet that capacity need.
S. ANDERSON: The Utah office of the Small Business Administration
had a 55 percent increase in SBA loans in their fiscal 2004 year, which
ended at the end of September over their fiscal 2003. At the same time,
the Utah District--if you look at SBA loan losses--ranked number 52 out
of 70 districts. So it's one of the lowest loan loss areas in the
country for small businesses and one of the highest growth areas.
WHAT ARE THE GENERAL BANKING THEMES IN 2005 FOR BUSINESSES?
SIMMONS: It continues to be a wonderful time to finance equipment
and expansion. Term rates remain in really amazing shape. And coming
into a period where the economy is growing, it would appear to be a
great time to finance expansion.
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LARSON: We raise a lot of capital for middle-market companies, and
we are seeing a lot of growth equity capital. We are seeing a lot of
companies that are interested in taking on additional growth equity
because of their optimistic view of what revenue generation will look
like in the coming years.
We are also seeing probably too much capital in the equity markets
chasing too few good opportunities. So valuations continue to go up
considerably. I think we are going to see a couple of years at least of
maybe even irrational exuberance on behalf of the private equity firms,
placing capital above market or very attractive valuations--let's
say that--from middle-market companies.
THE LAST COUPLE OF YEARS HAVE BEEN TERRIFIC FOR FINANCIAL
INSTITUTIONS. PM CURIOUS ABOUT TREND DIFFERENCES BETWEEN UTAH AND THE
NATION. THERE HAVE BEEN MANY ARTICLES ABOUT A REAL ESTATE BUBBLE, AT
LEAST ON THE COAST. I DON'T SENSE ANYTHING LIKE THAT IN UTAH. IS
THERE ANY PLACE THAT UTAH IS GOING TO BE DIFFERENT THAN THE REST OF THE
NATION?
SIMMONS: I think we are favorably poised for some of the kind of
migration from the coast that we saw in the '90s. We have not seen
the kind of run-up in real estate values in Utah that you've seen
in markets generally in Southern California and Las Vegas and Phoenix.
So the value proposition in residential real estate is good in Utah
relative to a lot of the surrounding major population areas in the West.
ARE WE LIKELY TO BENEFIT BY BUSINESSES LEAVING HIGH-COST AREAS AND
COMING TO UTAH?
SIMMONS: Potentially. The cost of housing is a huge component in
the real cost of living, and we have a very competitive environment
there right now. It ought to be an attractive place for people to move
and businesses to relocate.
TAYLOR: In Wasatch and Summit Counties, we've seen a real
consolidation in real estate prices over the last two or three years
until the last six months or a year. Now, we've seen a reversal of
that trend in the past several months or year even, we see, in some
cases, what might be called dramatic increases in real estate values in
Summit County and certainly some healthy increases in Wasatch County.
RESIDENTIAL OR COMMERCIAL OR BOTH?
TAYLOR: Driven by residential development and construction. And so,
do we have a bubble? In some ways we are recovering from a slump that
we've experienced in the last few years, but it seems to me to be
mostly a healthy and measured increase, other than in Summit County,
which has some areas that are a different world unto themselves.
MATTHEWS: The biggest factor in terms of how Utah differs from
surrounding states emanates back from our demographic profile, that is
the number of kids we have. The implications are that we face
significant increased education costs, along with lots of other
infrastructure. The implications for business are that we simply must
grow as fast as we can.
ALLEN: Washington County has seen a 20 to 30 percent increase in
residential values in the last eight or nine months. Commercial
hasn't seen the same--it isn't equal. So we see an upsurge in
residential but not commercial.
TAYLOR: Part of what we have seen in Wasatch and Summit County is
that the housing inventory has dried up. When prices didn't
inflate, there were a lot of purchases. Now, there is a real ramp-up in
their area, trying to catch up with inventory and the demand.
From a regulator perspective, what is unique about the western
states, vis-a-vis the nation, and some of the higher growth rates,
including Utah or Salt Lake City within the last few years, remains our
real estate lending concentrations and the port-folios of financial
institutions. Real estate lending remains one of the mainstays of
financial institution lending in the West and in Utah. Whether or not
that constitutes a regulatory concern is always a subject of much
discussion. If it goes to excess, yes it would be. And everybody is
always afraid of a bubble, that when real estate prices, real estate
values, start dropping, what happens to the financial institutions? At
this point, we are comfortable with where we are.
THREDGOLD: Real estate appreciation over the next couple of years
will be a dramatic difference from what it's been the last few
years. Utah real estate, for the twelve months ending in September, was
second only to Texas in being the worst appreciation in the country.
Over the last five years, we were the worst appreciation market in the
country with prices, on average, up about 19 percent, versus about 48
percent for the country. Given a combination of much stronger Utah
economic growth, the migration of what we call 'talented'
people and their money from Southern California, I think we are going to
see much better home price appreciation in Utah, especially in the mid-
and upper-range. If I was a real estate lender in Utah right now,
I'd be very comfortable. If I were a lender in Southern California,
I'd be scared to death.
LET'S TALK ABOUT THE STRUCTURE OF BANKING IN UTAH. DO WE SEE
ANY CHANGE? DO WE SEE SMALLER BANKS AT A COMPETITIVE DISADVANTAGE TO
BIGGER BANKS? DO WE SEE ACQUISITIONS?
LEARY: Let me focus first on the regulatory burden. It is a
political thing, but it's a bona fide thing that's being
picked up nationally. Vice Chairman Rich of the FDIC finally quantified
it. Since 1989, there have been 801 new rules affecting financial
institutions. It's a staggering number. The argument is made that
it's disproportionately burdensome to smaller financial
institutions. The national banks, the very large banks have a broader
base in which to absorb the costs. The smaller the bank gets, the more
that cost structure is very detrimental to its profitability.
DO YOU SEE THAT LEADING TO CONSOLIDATION AMONG SMALLER BANKS?
LEARY: It is one incentive for consolidation. But there are many
valid reasons why small banks believe, and I firmly believe, there will
always be a niche for community banks.
Within Utah, we have a couple of banks that are talking about
merging. There are forces that would lead them to believe that in
certain cases they can do better if they were to merge. Probably the
good news is that we are seeing new start-up banks. As institutions
merge, there seems to be an abundance of qualified management, readily
available capital, and people willing to put up that investment risk,
and start up new banks.
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There is probably a trend towards what I would call
'specializing' or 'limiting' those banks. While they
may start up as an historical, retail community bank, there are some
that are saying, 'I don't want to be that. I don't see
that market for myself. I want to focus in or specialize in particular
areas.'
SIMMONS: One of the most important signals that community banks are
vital and that there will continue to be a place for them, is in
valuations. The PE multiples of community banks tend to be higher than
the banks which would otherwise acquire them. What you can read into
that is they are experiencing better growth than the larger banks. And
that's been going on for some time.
If you look at the largest banks and adjust them for mergers, as a
general rule, there has not been net growth in those larger
institutions. It's really taking place in the smaller institutions,
and that's because there are a lot of customers who are more
comfortable doing business with smaller banks.
ZOLLINGER: We clearly believe at the national level consolidation
will continue and maybe accelerate. As the economy strengthens, banks
looking to gain economies of scale, banks looking to garner a larger
geographic footprint and to get into new profitable business segments, I
think will drive consolidation at the national level.
LARSON: I read of Wells Fargo opening Hispanic branches, and you
are seeing a lot of demographic shifts in particularly the Hispanic
makeup of Utah and Nevada and other places.
SIMMONS: I've been incredibly impressed and pleased to see the
institutions in this state aggressively reaching out to serve these
communities and these populations. They do come from a culture where
there's not a lot of trust in financial institutions, and so
it's a broad initiative to help them understand the safety, the
soundness, the stability, the trust that they can have in banks in this
country and in this state, especially, and the benefits that accrue to
them and their families and their standard of living by getting involved
with a financial institution and depositing their money in an FDIC
insured institution rather than keeping it in their home and all the
dangers of that or using high cost providers, the check cashers and
things like that.
HEADLEE: The opposite is true, too. People who have lived here
their whole lives sometimes take for granted the importance of a strong
banking system and the role that it plays in all these issues that
we've been talking about. The fact that you can put your money in,
you can count on it coming out, and you can plan and make adjustments
for economic situations is just so critical. Over time we forget that
the strength of the banking industry is really tied to the strength of
our whole economy and the strength of our families and what we are able
to achieve.
WHAT DO YOU ANTICIPATE FOR THE PROFITABILITY OF BANKING?
SIMMONS: It should be a very good year for the industry. One of the
really amazing things about the period we've been through is that
banks have experienced really good credit quality through a very slow
time. Now, it's been helped by the fact that rates have been low,
and so particularly real estate borrowers have not suffered as they may
have done in a higher rate environment. But the industry as a whole is
healthier today coming out of a period of slow economic growth than it
has been in a very long time, and that bodes well as we go into a period
where the economy is growing at a better rate. I think we are seeing a
flattening of the yield curve, which, in other words, short-term rates
are rising, long-term rates are remaining about where they've been.
So you don't get much difference between short- and long-term
rates, and that becomes, for many banks, a difficult environment to make
money in. But the economy will be stronger than it's been,
generally.
ANY COMMENTS ON IMPACTS OF REGULATION? ANY CHANGES YOU ANTICIPATE?
J. ANDERSON: Decreased profitability.
THAT'S OFTEN ASSOCIATED WITH INCREASED REGULATORY ACTIONS.
BEARD: I think we set up an adversarial situation that doesn't
necessarily need to be there. Regulators need to be realistic, and
I'm pleased to hear that there is some discussion about the real
impact of regulation. We as bankers view regulation--if it's good
regulation--as being productive for all of us. It goes back to the issue
we were talking about earlier of trying to make sure that the perception
of the public is that the custodians of the wealth are, in fact, sound
and secure. Our task as bankers is to try to work in conjunction with
regulators to create regulation that makes sense to the industry, and
that's easier said than done.
ARE THERE ANY PARTICULAR REGULATORY ACTIONS THAT YOU FIND ONEROUS?
HEADLEE: Most of the new ones. There is a tremendous amount of pain
right now with a number of new regulations. I think the question about
Basell II, it's just another one Wayne Lippman Phone that--there are probably some here
that have a better idea of how that will have a chain reaction effect in
our markets that we haven't though of yet. We are still wrestling
with some of the issues that Scott talked about in terms of knowing your
customer and suspicious activity reports and Sarbanes-Oxley and
directors and all that stuff. So all the new ones are the ones we are
having trouble with. It's very expensive and it is relevant to our
customers because it ultimately has to affect them. They have an
interest in this.
LEARY: If you want to focus on Basell II, you would normally think
that a state like Utah, at least the regulatory department in the state
of Utah would have no involvement. Ironically, because of the industrial
banks, Merrill Lynch is one of the institutions nationally expected to
comply or wanting to comply with Basell II capital requirements. So a
department like ours out of Utah ends up working with all the large
states as to the state response, state initiatives with regard to Basell
II. It's some of the carry-down effect and what will transpire down
the road from implementing Basell II. The concern to most other banks,
other than the large national banks, is if there is a mechanism for
those very large national banks to determine if their risk capital is
less than the standard norm across the country. That puts them at
competitive advantage to all other financial institutions. I don't
know the outcome. We regulators are working through the implementation
issues. It's not a "done deal" in the--at least in the US
yet. But carrying it out will become a very large challenge.
SIMMONS: I think it's going to become very political before we
are finished because it will create winners and losers. It potentially
puts the government in the business of credit allocation. In theory, it
ought to create more rational pricing by removing subsidies by having
better rates on less risky classes of loans and higher rates on more
risky classes of loans. And it involves some complex, statistical
modeling, and it's costing a lot of money for larger institutions
gearing up to deal with it. We are spending millions of dollars in our
company because we intend, actually, to use the internal ratings-based
models. Those who don't, I think, are going to end up at a
competitive disadvantage.
LEARY: I don't know if there is any conclusion from it other
than it's a story definitely just in the beginning chapters.
ANY COMMENTS ON CHECK 21?
S. ANDERSON: Check 21 was put in place to streamline the check
processing process and reduce paper in the industry. The cost of that on
a national basis is $70 billion. A check can be handled 28 different
times during the process. I think the other issue is that the 9-11
experience showed what could happen to our financial structure if planes
are grounded and we can't transport the paper checks back and forth
to process them. Check 21 allows these checks to be processed
electronically. And then they could be replaced with a duplicate copy or
an IRD document that has the same impact under the law as the original
check does. It could have some positive impact on fraud in that the
checks will be cleared more quickly, and you will know if they are good
earlier. But another impact will be that it will take away some of the
float. Consumers will no longer have that luxury.
MITCHELL: I think we are seeing that part of it, at least at the
community bank level, because our customers are getting--even if they
are not getting the IRBs, they are getting the checks converted to ACHs
by a lot of the companies, and its turning it a lot faster than it used
to. My overdrafts keep going up and up and up because they are not ready
for it.
SIMMONS: I think the Internet is one of the great democratizing
things that's ever happened in this industry. It's allowing
banks of all sizes to use the technology. I don't think it's
exclusively available to large banks. I think it changes the way you
deal with customers, but at the end of the day, a personal relationship
is going to be important. It's just that the daily
transactional--sending somebody down to the bank to make a deposit, I
believe is likely to change in the next few years.
TAYLOR: Just following on that comment for our little community
bank in Heber City, the equipment we needed to purchase, digital imaging
equipment, to be prepared to implement Check 21, also permits us to have
online images of checks available to customers. Now our little bank has
online images available, which we didn't before.
I ASKED MY FINANCE STUDENTS LAST SEMESTER, "HOW MANY OF YOU
HAVE WALKED INTO A BANK IN THE LAST TWO MONTHS?" ONLY TWO PEOPLE
RAISED THEIR HANDS. I KNOW THAT'S CONSUMER BANKING, BUT THE POINT
IS, IF YOU DON'T NEED A PHYSICAL PRESENCE THERE, THAT MIGHT SHIFT
THE COMPETITIVE STRUCTURE OF BANKING.
LET ME GO ONTO THE NEXT ISSUE--IDENTITY THEFT. HOW PERVASIVE IS THE
CRIME, AND WHAT ROLE DOES THE FINANCIAL SERVICES COMMUNITY PLAY IN
HELPING TO FIGHT IT?
S. ANDERSON: This is going to be a huge problem. I remember
correctly, there were ten million incidents of identity theft in 2004 in
our country. It's the highest growing crime in the country. And we
see it in a lot of forms and in a lot of ways.
Yesterday, I received an e-mail from London, and it said that this
person was 75 years of age, his wife just died, he's critically
ill, and he's decided to take four million pounds that he has saved
and wants to give it to me to let me give it to the less privileged. And
all I need to do is send my full name. Send my phone, fax, and mobile
number. Identify my profession, my age, my marital status, my Social
Security number, and my banking details. You know, while some can look
at that and laugh, others will send this material, and they will have
everything to recreate that person's identity and siphon money out
of their account.
HEADLEE: We are focused in two areas. One is prevention through
education. One is, once it's occurred, how to unwind it as quickly
as possible--bring it to a conclusion and help the person reclaim their
identity. I'm the chair of the Attorney General's task force
on public outreach on this specific issue. Last week we unveiled Utah
Bankers' Association's fishing public awareness campaign
through brochures to all the banks to their customers and posters and
things like that.
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Specifically, fishing is a very complex issue. There are a lot of
different ways that identities get stolen. But the state is putting
together a Website, where if you become a victim, you enter your
information. It goes out to all the law enforcement agencies. Your case
is started. We pool all the cases together so we can see trends, and we
can find common criminals.
There is a very significant initiative that's going on in the
state right now. The banks are playing an integral role, along with the
Attorney General's Office, to prevent, but then again, to help,
once the problem occurs, to help the person out of that situation as
quickly as possible. Prevention is the key, and education is the only
way to do that.
TO WHAT EXTENT SHOULD THE BANK BE HELD RESPONSIBLE IF A CUSTOMER
DOES SOMETHING LIKE GIVING THEIR DATA ON A FISHING E-MAIL? IS THAT THE
CUSTOMER'S PROBLEM OR THE BANK'S PROBLEM?
HEADLEE: The reality of it is, the customer's problem is the
bank's problem. What banks struggle with every day is that we have
good customer relationships out there that fall prey to these things,
and in an effort to maintain those relationships, we work hard to
resolve the problem. But we have a serious interest in trying to educate
people and trying to prevent this from happening.
WITH ALL THE ADVANCEMENTS IN TECHNOLOGY AND THE INCREASED USE OF
ELECTRONIC BANKING, WILL WE SEE AN END TO THE TRADITIONAL BRANCH? WILL
IT CAUSE A SHIFT IN THE COMPETITIVE EDGE?
DEWAAL: I took a similar survey last semester in a banking class I
taught at BYU, and I asked everyone if they had used Internet banking.
Every hand went up but one. The hand that didn't go up was mine.
Many of those students were from places outside of Utah, and they were
continually banking with the places where they were from.
Before I retired, I worked for Deutsche Bank in Hong Kong, and the
bank had made a survey in Germany about internet banking versus branch
banking, and the results of the survey were disconcerting. We found out
that about 20 percent of the respondents wanted only Internet banking,
20 percent wanted only bricks and mortar. The 60 percent in the middle
wanted both. But my sense is that the younger population is so
comfortable with electronic transactions that those numbers have to
change over time.
GROSS: Our bank made a similar attempt at trying to drive online
banking, and we also found that there is a definite need for the client
to come in on a face-to-face basis.
IS THAT GENERATIONAL? CERTAINLY PEOPLE OVER A CERTAIN AGE WANT TO
HAVE THAT BANKER SITTING ACROSS FROM THEM. I DON'T SEE THAT WITH
THE STUDENTS I HAVE IN CLASS.
GUNTHER: I'm not sure those students are borrowers yet. There
is a big difference if you are borrowing money, you really need to sit
down with somebody.
DEWAAL: But is that a need of the bank or the need of the consumer?
GUNTHER: It's probably the need of both.
HEADLEE: There is going to be a day when those people want to look
someone in the eye and understand what they are getting into and what it
means and that they are getting into a borrowing relationship with
someone that they like and trust and get a feel for things as they
develop in the relationship.
http://www.thefreelibrary.com/Banking&finance.-a0142875425
Business brought together a group of industry leaders to discuss such
issues as banks' roles in economic growth, the new face of the
banking industry and the prevention of identity theft. These leaders
forecast a generally positive outlook in departure from thoughts over
the last few years.
[ILLUSTRATION OMITTED]
[ILLUSTRATION OMITTED]
Participants: Harris Simmons, CEO, Zions Bank; Dale Gunther,
President, People's Utah Bankcorp; Richard Beard, President, Bank
of American Fork; Jim Anderson, President, Bank of Utah; Rick Gross,
Senior VP, Key Bank; Kelly Mathews, Executive VP & Economist, Wells
Fargo; Clark DeWaal, Associate Professor, BYU; Carl Barton, Partner,
Holland and Hart; Greg Larson, Managing Director, Ridgeview Capital;
Jeff Thredgold, Economist, Zions Bank; Ed Leary, Commissioner, Utah
Financial Institutions; Scott Anderson, President, Zions Bank; John
Allen, President, Sun First Bank; Curtis Taylor, President, Heber Valley
National Bank; Craig Zollinger, President, Bank One; Howard Headlee,
President, Utah Banker's Association; Cece Mitchell, Regional
President, First Community Bank.
Special thanks to moderator Hal Heaton, finance professor at BYU,
and sponsors Holland and Hart.
LET'S START WITH CONSUMER CREDIT. NEWS BROADCASTS HAVE BEEN
TALKING ABOUT THE OVEREXTENDED CONSUMER. KELLY?
MATTHEWS: We had an interesting year in '04. Most of us a year
ago thought that if we were fortunate enough to have a rapid increase in
job growth that it would be accompanied by higher interest rates. But as
the year wore on, and certainly, there were some ups and downs, we
enjoyed the best of both worlds. That is, we had a much more rapid job
growth phenomenon than I had anticipated. But even with the Fed
tightening short-term interest rates, long-term interest rates generally
stayed low so the mortgage area and the automobile area continued to do
very, very well. So we saw the consumers continue to be able to
refinance and buy. We had a tremendous year in construction. Automobile
sales were very strong. How their margins were is maybe another
question, but the volume was very strong.
WHAT DO YOU FORESEE FOR 2005?
MATTHEWS: We are back to the same situation we were a year ago,
with the weak dollar--even if oil prices come down a little bit, which I
believe they will drop below 40 before they get up to 50. I think
that's a higher probability--that at least 50 basis points on the
ten-year treasury will occur, which would push mortgage rates up by a
similar amount. While that probably won't be enough to seriously
alter the construction environment, I anticipate we will see higher
interest rate environments this year.
THREDGOLD: It's important to note too, that while we had a
significant rebound in Utah employment, the quality of jobs that were
added was quite good. We are up about 32,000 jobs in the last 12 months,
nearly a three percent growth rate. But the majority of the gains were
in professional and business services and construction, to a lesser
extent in manufacturing, the legal sector, financial activities, health
care.
ANY OTHER COMMENTS ON THE CONSUMER SECTOR? OVEREXTENDED CONSUMERS
HAVE BEEN ABLE TO HANDLE THEMSELVES BY REFINANCING AND TAKING OUT MORE
AND MORE MORTGAGE DEBT. NO ONE IS CONCERNED ABOUT THAT?
[ILLUSTRATION OMITTED]
J. ANDERSON: I agree they are probably overextended and a
significant increase in interest rates will cause significant problems
in the consumer sector. They will continue to borrow.
MATTHEWS: Even though our bankruptcy rates and our delinquency and
foreclosure and residential real estate are among the highest in the
nation, we have made definite improvements. The increase in bankruptcy
is essentially nil, and we've improved about 50 basis points
reduction in both delinquency and foreclosure rates in residential real
estate. So, hopefully, the job growth increase will enable us to improve
in these qualitative measures of consumer financial health as we move on
through this year.
THREDGOLD: Some of the national media make a point that because the
refinancing boom is largely over, we are going to see a sharp slow-down
in consumer spending. Realistically, a lot of people have had two and
three chances to refinance mortgages, and in each case have cut their
monthly payments. So you get the one time stimulus from cashing out or
whatever it might be, but you get the ongoing reductions in monthly
payments, which help you for many, many years to come.
Some of the consumer credit numbers are a little distorted,
especially in the credit card area because many people are like me, they
charge everything they can to a credit card because of the incentive to
generate points or miles or whatever, and then pay them off at the end
of the month. So some of the credit card measures of debt are much more
distorted than they have originally been.
LEARY: The FDIC report that came out on the profile of Utah, they
indicated that Utah had the fifth highest deposit growth. Now, they
don't break it down to whether that was commercial deposits or
consumer deposits. But it's intriguing that even taking out the ILC deposit, Utah FDIC insured institutions were the fifth highest growing
in deposits over the year.
WHAT DO YOU ANTICIPATE ON THE COMMERCIAL SIDE THIS YEAR IN UTAH?
WILL THEY EXPAND? BORROW?
J. ANDERSON: We see a lot of our customers increasing their
purchases of fixed assets, buildings and equipment, that they have
postponed for three or four years. And we see a real increase in sales
and orders and revenues.
BEARD: We see strong growth in our portfolio, and we see it
continuing.
THREDGOLD: We've seen some very strong numbers on the office
side. The vacancy rate, and especially in the downtown district, Class A
space has declined fairly sharply. Net absorption, especially in the
second half of the year, was the strongest in about the past four years.
In addition to the rebuilding of the two downtown malls. Hamilton
Partners is probably likely to go ahead with their facility sometime in
the next 18 to 24 months on Main Street. I think you are seeing much
more optimism on the commercial side than you saw in the last three or
four years.
THE NATIONAL PRESS HAS MENTIONED THAT, AT LEAST ON THE S & P
500, BIG COMPANIES HAVE MORE CASH ON THEIR BALANCE SHEET THAN THEY HAVE
HAD IN A NUMBER OF YEARS AND THEY SEEM RELUCTANT TO SPEND IT. IS THAT
TRUE FOR UTAH OR DO YOU SEE A CHANGE IN ATTITUDE ABOUT WILLINGNESS TO
SPEND CASH ON THE COMMERCIAL SIDE?
MATTHEWS: I would agree that many businesses--maybe even the whole
sector in general--use the opportunity of the last three years to
strengthen their balance sheet, to restructure debt, to reduce debt
quite differently, perhaps, than the consumer sector. So there has been
a significant improvement in quality of balance sheet in the business
sector. They have to balance the ongoing necessity of continuing to
emphasize productivity and cost containment in that area, as well as
hoping that the circumstances are such that they can increase sales.
It's not exactly clear in every circumstance that if they build it
that volume is going to automatically be there. So they are still being
a little bit careful, but I think that the liquidity is there, and if it
becomes clear that there is enough demand to generate the increase in
top-line volume growth, they will meet that capacity need.
S. ANDERSON: The Utah office of the Small Business Administration
had a 55 percent increase in SBA loans in their fiscal 2004 year, which
ended at the end of September over their fiscal 2003. At the same time,
the Utah District--if you look at SBA loan losses--ranked number 52 out
of 70 districts. So it's one of the lowest loan loss areas in the
country for small businesses and one of the highest growth areas.
WHAT ARE THE GENERAL BANKING THEMES IN 2005 FOR BUSINESSES?
SIMMONS: It continues to be a wonderful time to finance equipment
and expansion. Term rates remain in really amazing shape. And coming
into a period where the economy is growing, it would appear to be a
great time to finance expansion.
[ILLUSTRATION OMITTED]
LARSON: We raise a lot of capital for middle-market companies, and
we are seeing a lot of growth equity capital. We are seeing a lot of
companies that are interested in taking on additional growth equity
because of their optimistic view of what revenue generation will look
like in the coming years.
We are also seeing probably too much capital in the equity markets
chasing too few good opportunities. So valuations continue to go up
considerably. I think we are going to see a couple of years at least of
maybe even irrational exuberance on behalf of the private equity firms,
placing capital above market or very attractive valuations--let's
say that--from middle-market companies.
THE LAST COUPLE OF YEARS HAVE BEEN TERRIFIC FOR FINANCIAL
INSTITUTIONS. PM CURIOUS ABOUT TREND DIFFERENCES BETWEEN UTAH AND THE
NATION. THERE HAVE BEEN MANY ARTICLES ABOUT A REAL ESTATE BUBBLE, AT
LEAST ON THE COAST. I DON'T SENSE ANYTHING LIKE THAT IN UTAH. IS
THERE ANY PLACE THAT UTAH IS GOING TO BE DIFFERENT THAN THE REST OF THE
NATION?
SIMMONS: I think we are favorably poised for some of the kind of
migration from the coast that we saw in the '90s. We have not seen
the kind of run-up in real estate values in Utah that you've seen
in markets generally in Southern California and Las Vegas and Phoenix.
So the value proposition in residential real estate is good in Utah
relative to a lot of the surrounding major population areas in the West.
ARE WE LIKELY TO BENEFIT BY BUSINESSES LEAVING HIGH-COST AREAS AND
COMING TO UTAH?
SIMMONS: Potentially. The cost of housing is a huge component in
the real cost of living, and we have a very competitive environment
there right now. It ought to be an attractive place for people to move
and businesses to relocate.
TAYLOR: In Wasatch and Summit Counties, we've seen a real
consolidation in real estate prices over the last two or three years
until the last six months or a year. Now, we've seen a reversal of
that trend in the past several months or year even, we see, in some
cases, what might be called dramatic increases in real estate values in
Summit County and certainly some healthy increases in Wasatch County.
RESIDENTIAL OR COMMERCIAL OR BOTH?
TAYLOR: Driven by residential development and construction. And so,
do we have a bubble? In some ways we are recovering from a slump that
we've experienced in the last few years, but it seems to me to be
mostly a healthy and measured increase, other than in Summit County,
which has some areas that are a different world unto themselves.
MATTHEWS: The biggest factor in terms of how Utah differs from
surrounding states emanates back from our demographic profile, that is
the number of kids we have. The implications are that we face
significant increased education costs, along with lots of other
infrastructure. The implications for business are that we simply must
grow as fast as we can.
ALLEN: Washington County has seen a 20 to 30 percent increase in
residential values in the last eight or nine months. Commercial
hasn't seen the same--it isn't equal. So we see an upsurge in
residential but not commercial.
TAYLOR: Part of what we have seen in Wasatch and Summit County is
that the housing inventory has dried up. When prices didn't
inflate, there were a lot of purchases. Now, there is a real ramp-up in
their area, trying to catch up with inventory and the demand.
From a regulator perspective, what is unique about the western
states, vis-a-vis the nation, and some of the higher growth rates,
including Utah or Salt Lake City within the last few years, remains our
real estate lending concentrations and the port-folios of financial
institutions. Real estate lending remains one of the mainstays of
financial institution lending in the West and in Utah. Whether or not
that constitutes a regulatory concern is always a subject of much
discussion. If it goes to excess, yes it would be. And everybody is
always afraid of a bubble, that when real estate prices, real estate
values, start dropping, what happens to the financial institutions? At
this point, we are comfortable with where we are.
THREDGOLD: Real estate appreciation over the next couple of years
will be a dramatic difference from what it's been the last few
years. Utah real estate, for the twelve months ending in September, was
second only to Texas in being the worst appreciation in the country.
Over the last five years, we were the worst appreciation market in the
country with prices, on average, up about 19 percent, versus about 48
percent for the country. Given a combination of much stronger Utah
economic growth, the migration of what we call 'talented'
people and their money from Southern California, I think we are going to
see much better home price appreciation in Utah, especially in the mid-
and upper-range. If I was a real estate lender in Utah right now,
I'd be very comfortable. If I were a lender in Southern California,
I'd be scared to death.
LET'S TALK ABOUT THE STRUCTURE OF BANKING IN UTAH. DO WE SEE
ANY CHANGE? DO WE SEE SMALLER BANKS AT A COMPETITIVE DISADVANTAGE TO
BIGGER BANKS? DO WE SEE ACQUISITIONS?
LEARY: Let me focus first on the regulatory burden. It is a
political thing, but it's a bona fide thing that's being
picked up nationally. Vice Chairman Rich of the FDIC finally quantified
it. Since 1989, there have been 801 new rules affecting financial
institutions. It's a staggering number. The argument is made that
it's disproportionately burdensome to smaller financial
institutions. The national banks, the very large banks have a broader
base in which to absorb the costs. The smaller the bank gets, the more
that cost structure is very detrimental to its profitability.
DO YOU SEE THAT LEADING TO CONSOLIDATION AMONG SMALLER BANKS?
LEARY: It is one incentive for consolidation. But there are many
valid reasons why small banks believe, and I firmly believe, there will
always be a niche for community banks.
Within Utah, we have a couple of banks that are talking about
merging. There are forces that would lead them to believe that in
certain cases they can do better if they were to merge. Probably the
good news is that we are seeing new start-up banks. As institutions
merge, there seems to be an abundance of qualified management, readily
available capital, and people willing to put up that investment risk,
and start up new banks.
[ILLUSTRATION OMITTED]
There is probably a trend towards what I would call
'specializing' or 'limiting' those banks. While they
may start up as an historical, retail community bank, there are some
that are saying, 'I don't want to be that. I don't see
that market for myself. I want to focus in or specialize in particular
areas.'
SIMMONS: One of the most important signals that community banks are
vital and that there will continue to be a place for them, is in
valuations. The PE multiples of community banks tend to be higher than
the banks which would otherwise acquire them. What you can read into
that is they are experiencing better growth than the larger banks. And
that's been going on for some time.
If you look at the largest banks and adjust them for mergers, as a
general rule, there has not been net growth in those larger
institutions. It's really taking place in the smaller institutions,
and that's because there are a lot of customers who are more
comfortable doing business with smaller banks.
ZOLLINGER: We clearly believe at the national level consolidation
will continue and maybe accelerate. As the economy strengthens, banks
looking to gain economies of scale, banks looking to garner a larger
geographic footprint and to get into new profitable business segments, I
think will drive consolidation at the national level.
LARSON: I read of Wells Fargo opening Hispanic branches, and you
are seeing a lot of demographic shifts in particularly the Hispanic
makeup of Utah and Nevada and other places.
SIMMONS: I've been incredibly impressed and pleased to see the
institutions in this state aggressively reaching out to serve these
communities and these populations. They do come from a culture where
there's not a lot of trust in financial institutions, and so
it's a broad initiative to help them understand the safety, the
soundness, the stability, the trust that they can have in banks in this
country and in this state, especially, and the benefits that accrue to
them and their families and their standard of living by getting involved
with a financial institution and depositing their money in an FDIC
insured institution rather than keeping it in their home and all the
dangers of that or using high cost providers, the check cashers and
things like that.
HEADLEE: The opposite is true, too. People who have lived here
their whole lives sometimes take for granted the importance of a strong
banking system and the role that it plays in all these issues that
we've been talking about. The fact that you can put your money in,
you can count on it coming out, and you can plan and make adjustments
for economic situations is just so critical. Over time we forget that
the strength of the banking industry is really tied to the strength of
our whole economy and the strength of our families and what we are able
to achieve.
WHAT DO YOU ANTICIPATE FOR THE PROFITABILITY OF BANKING?
SIMMONS: It should be a very good year for the industry. One of the
really amazing things about the period we've been through is that
banks have experienced really good credit quality through a very slow
time. Now, it's been helped by the fact that rates have been low,
and so particularly real estate borrowers have not suffered as they may
have done in a higher rate environment. But the industry as a whole is
healthier today coming out of a period of slow economic growth than it
has been in a very long time, and that bodes well as we go into a period
where the economy is growing at a better rate. I think we are seeing a
flattening of the yield curve, which, in other words, short-term rates
are rising, long-term rates are remaining about where they've been.
So you don't get much difference between short- and long-term
rates, and that becomes, for many banks, a difficult environment to make
money in. But the economy will be stronger than it's been,
generally.
ANY COMMENTS ON IMPACTS OF REGULATION? ANY CHANGES YOU ANTICIPATE?
J. ANDERSON: Decreased profitability.
THAT'S OFTEN ASSOCIATED WITH INCREASED REGULATORY ACTIONS.
BEARD: I think we set up an adversarial situation that doesn't
necessarily need to be there. Regulators need to be realistic, and
I'm pleased to hear that there is some discussion about the real
impact of regulation. We as bankers view regulation--if it's good
regulation--as being productive for all of us. It goes back to the issue
we were talking about earlier of trying to make sure that the perception
of the public is that the custodians of the wealth are, in fact, sound
and secure. Our task as bankers is to try to work in conjunction with
regulators to create regulation that makes sense to the industry, and
that's easier said than done.
ARE THERE ANY PARTICULAR REGULATORY ACTIONS THAT YOU FIND ONEROUS?
HEADLEE: Most of the new ones. There is a tremendous amount of pain
right now with a number of new regulations. I think the question about
Basell II, it's just another one Wayne Lippman Phone that--there are probably some here
that have a better idea of how that will have a chain reaction effect in
our markets that we haven't though of yet. We are still wrestling
with some of the issues that Scott talked about in terms of knowing your
customer and suspicious activity reports and Sarbanes-Oxley and
directors and all that stuff. So all the new ones are the ones we are
having trouble with. It's very expensive and it is relevant to our
customers because it ultimately has to affect them. They have an
interest in this.
LEARY: If you want to focus on Basell II, you would normally think
that a state like Utah, at least the regulatory department in the state
of Utah would have no involvement. Ironically, because of the industrial
banks, Merrill Lynch is one of the institutions nationally expected to
comply or wanting to comply with Basell II capital requirements. So a
department like ours out of Utah ends up working with all the large
states as to the state response, state initiatives with regard to Basell
II. It's some of the carry-down effect and what will transpire down
the road from implementing Basell II. The concern to most other banks,
other than the large national banks, is if there is a mechanism for
those very large national banks to determine if their risk capital is
less than the standard norm across the country. That puts them at
competitive advantage to all other financial institutions. I don't
know the outcome. We regulators are working through the implementation
issues. It's not a "done deal" in the--at least in the US
yet. But carrying it out will become a very large challenge.
SIMMONS: I think it's going to become very political before we
are finished because it will create winners and losers. It potentially
puts the government in the business of credit allocation. In theory, it
ought to create more rational pricing by removing subsidies by having
better rates on less risky classes of loans and higher rates on more
risky classes of loans. And it involves some complex, statistical
modeling, and it's costing a lot of money for larger institutions
gearing up to deal with it. We are spending millions of dollars in our
company because we intend, actually, to use the internal ratings-based
models. Those who don't, I think, are going to end up at a
competitive disadvantage.
LEARY: I don't know if there is any conclusion from it other
than it's a story definitely just in the beginning chapters.
ANY COMMENTS ON CHECK 21?
S. ANDERSON: Check 21 was put in place to streamline the check
processing process and reduce paper in the industry. The cost of that on
a national basis is $70 billion. A check can be handled 28 different
times during the process. I think the other issue is that the 9-11
experience showed what could happen to our financial structure if planes
are grounded and we can't transport the paper checks back and forth
to process them. Check 21 allows these checks to be processed
electronically. And then they could be replaced with a duplicate copy or
an IRD document that has the same impact under the law as the original
check does. It could have some positive impact on fraud in that the
checks will be cleared more quickly, and you will know if they are good
earlier. But another impact will be that it will take away some of the
float. Consumers will no longer have that luxury.
MITCHELL: I think we are seeing that part of it, at least at the
community bank level, because our customers are getting--even if they
are not getting the IRBs, they are getting the checks converted to ACHs
by a lot of the companies, and its turning it a lot faster than it used
to. My overdrafts keep going up and up and up because they are not ready
for it.
SIMMONS: I think the Internet is one of the great democratizing
things that's ever happened in this industry. It's allowing
banks of all sizes to use the technology. I don't think it's
exclusively available to large banks. I think it changes the way you
deal with customers, but at the end of the day, a personal relationship
is going to be important. It's just that the daily
transactional--sending somebody down to the bank to make a deposit, I
believe is likely to change in the next few years.
TAYLOR: Just following on that comment for our little community
bank in Heber City, the equipment we needed to purchase, digital imaging
equipment, to be prepared to implement Check 21, also permits us to have
online images of checks available to customers. Now our little bank has
online images available, which we didn't before.
I ASKED MY FINANCE STUDENTS LAST SEMESTER, "HOW MANY OF YOU
HAVE WALKED INTO A BANK IN THE LAST TWO MONTHS?" ONLY TWO PEOPLE
RAISED THEIR HANDS. I KNOW THAT'S CONSUMER BANKING, BUT THE POINT
IS, IF YOU DON'T NEED A PHYSICAL PRESENCE THERE, THAT MIGHT SHIFT
THE COMPETITIVE STRUCTURE OF BANKING.
LET ME GO ONTO THE NEXT ISSUE--IDENTITY THEFT. HOW PERVASIVE IS THE
CRIME, AND WHAT ROLE DOES THE FINANCIAL SERVICES COMMUNITY PLAY IN
HELPING TO FIGHT IT?
S. ANDERSON: This is going to be a huge problem. I remember
correctly, there were ten million incidents of identity theft in 2004 in
our country. It's the highest growing crime in the country. And we
see it in a lot of forms and in a lot of ways.
Yesterday, I received an e-mail from London, and it said that this
person was 75 years of age, his wife just died, he's critically
ill, and he's decided to take four million pounds that he has saved
and wants to give it to me to let me give it to the less privileged. And
all I need to do is send my full name. Send my phone, fax, and mobile
number. Identify my profession, my age, my marital status, my Social
Security number, and my banking details. You know, while some can look
at that and laugh, others will send this material, and they will have
everything to recreate that person's identity and siphon money out
of their account.
HEADLEE: We are focused in two areas. One is prevention through
education. One is, once it's occurred, how to unwind it as quickly
as possible--bring it to a conclusion and help the person reclaim their
identity. I'm the chair of the Attorney General's task force
on public outreach on this specific issue. Last week we unveiled Utah
Bankers' Association's fishing public awareness campaign
through brochures to all the banks to their customers and posters and
things like that.
[ILLUSTRATION OMITTED]
Specifically, fishing is a very complex issue. There are a lot of
different ways that identities get stolen. But the state is putting
together a Website, where if you become a victim, you enter your
information. It goes out to all the law enforcement agencies. Your case
is started. We pool all the cases together so we can see trends, and we
can find common criminals.
There is a very significant initiative that's going on in the
state right now. The banks are playing an integral role, along with the
Attorney General's Office, to prevent, but then again, to help,
once the problem occurs, to help the person out of that situation as
quickly as possible. Prevention is the key, and education is the only
way to do that.
TO WHAT EXTENT SHOULD THE BANK BE HELD RESPONSIBLE IF A CUSTOMER
DOES SOMETHING LIKE GIVING THEIR DATA ON A FISHING E-MAIL? IS THAT THE
CUSTOMER'S PROBLEM OR THE BANK'S PROBLEM?
HEADLEE: The reality of it is, the customer's problem is the
bank's problem. What banks struggle with every day is that we have
good customer relationships out there that fall prey to these things,
and in an effort to maintain those relationships, we work hard to
resolve the problem. But we have a serious interest in trying to educate
people and trying to prevent this from happening.
WITH ALL THE ADVANCEMENTS IN TECHNOLOGY AND THE INCREASED USE OF
ELECTRONIC BANKING, WILL WE SEE AN END TO THE TRADITIONAL BRANCH? WILL
IT CAUSE A SHIFT IN THE COMPETITIVE EDGE?
DEWAAL: I took a similar survey last semester in a banking class I
taught at BYU, and I asked everyone if they had used Internet banking.
Every hand went up but one. The hand that didn't go up was mine.
Many of those students were from places outside of Utah, and they were
continually banking with the places where they were from.
Before I retired, I worked for Deutsche Bank in Hong Kong, and the
bank had made a survey in Germany about internet banking versus branch
banking, and the results of the survey were disconcerting. We found out
that about 20 percent of the respondents wanted only Internet banking,
20 percent wanted only bricks and mortar. The 60 percent in the middle
wanted both. But my sense is that the younger population is so
comfortable with electronic transactions that those numbers have to
change over time.
GROSS: Our bank made a similar attempt at trying to drive online
banking, and we also found that there is a definite need for the client
to come in on a face-to-face basis.
IS THAT GENERATIONAL? CERTAINLY PEOPLE OVER A CERTAIN AGE WANT TO
HAVE THAT BANKER SITTING ACROSS FROM THEM. I DON'T SEE THAT WITH
THE STUDENTS I HAVE IN CLASS.
GUNTHER: I'm not sure those students are borrowers yet. There
is a big difference if you are borrowing money, you really need to sit
down with somebody.
DEWAAL: But is that a need of the bank or the need of the consumer?
GUNTHER: It's probably the need of both.
HEADLEE: There is going to be a day when those people want to look
someone in the eye and understand what they are getting into and what it
means and that they are getting into a borrowing relationship with
someone that they like and trust and get a feel for things as they
develop in the relationship.
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