Local bankers take a look at the year ahead

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Here’s a look at what economists and bankers foresee for 2010.

Equity markets and investing

Slowly the economy will improve. But meanwhile, opportunities are already available for investors.

“We’re expecting positive gross domestic product growth in 2010 — maybe in the 2.5 percent range,” said Jeff Savage, senior director of investments for Wells Fargo Private Bank.

“But we expect unemployment to get higher in the 10 percent range for the first half of the year, and then decline in the last half of the year.”

Several leading economic indicators turned positive during the last half of 2009, including the stock market. But unemployment is a lagging indicator of a recovering economy.

“People need to have a very good grasp on the amount and kinds of risk they have in their portfolios. Investors need to be in real estate investment trusts and commodities during 2010 — not just gold and oil, but all of the metals, energy and agriculture,” Savage said.

“About $3.5 trillion is on the sidelines, or in cash and money market funds. But people need to get that money back in and working for them.”

This has been the worst decade since the 1800s in the U.S. equity market.

“So if you can stomach it at time like this, it’s very advantageous to be in the market now — because in the next few years it will revert. As of November 2009, the Dow Jones Industrial Average was about 4,000 points down from its high (during July 2007),” Savage said.

Investors should be in four asset classes: stocks, national and international and developing and emerging; bonds; alternative/complementary funds; and real estate.

Historically, the stock market makes substantial gains after a precipitous decline.

Investors have experienced “some mental relief, if you will, with the way the market has recovered,” Savage said. Psychology is “fragile. If something happens to the market, people will revert quickly to pessimism. But this is one of the best times to invest.”

SBA loans and small businesses

“The impact of the recession will continue to be reflected on small business financial statements well into 2011,” said Greg Clarkson, Small Business Administration division manager for BBVA Compass.

And small business confidence, of course, relies on having sufficient revenue to support projected growth.

For the two months ending Nov. 30, 2009, SBA 7(a) loan approvals totaled 10,296 applicants for $2.86 billion — an increase of 4,241 applicants, 70 percent, and $1.62 billion, 130 percent, over the same period during 2008.

“Small business owners need to be pro-active in developing a relationship with a bank that understands small business and the nuances of their business model and has a product mix that meets their needs,” Clarkson said.

“Small business owners need options — and to properly assess those options, they need a relationship. These are challenging times.

“We as lenders can’t just sit back and focus on having small business owners come in and ask us what we have to offer. We have to proactively be in the market and show them what we have to offer,” Clarkson said.

Economic and entrepreneurial future

The City of Colorado Springs has a “big financial problem,” said Daphne Greenwood, professor of economics at the University of Colorado at Colorado Springs. And giving “big subsidies” to the United States Olympic Committee and other organizations is not popular with voters and the constituency.

“It’s amazing to me that in a city that’s not that big that citizens don’t have any input — challenging that culture will be difficult,” Greenwood said.

2010 will be a tough year with all the budget cuts.

And for long-term economic development, “less and less can you depend on bringing in large companies (to create) jobs” and drive the local economy,” she said. “More and more, the mid-size communities that are thriving have many small businesses that are rooted in the community and started by locals. But this depends on a local culture that encourages creativity and innovation.”

But part of the problem is a lack of venture capital, which has plagued the Springs for years.

“We need to make the community a kind of quality place where venture capitalists want to live,” Greenwood said.

This requires more and varied “cultural activities, diversity and quirkiness,” but it has to derive from private sector economic development — not government stimulus or programs.

Another factor which influences small business start-up culture is the people who live in the community.

Innovation and creativity starts with the culture of local schools and school boards, she said, and how much students are encouragement to think for themselves — “rather than teaching them to the test or to conform to the norm.

“We need to encourage students to follow their star and dare to be different,” Greenwood said. “There is a correspondence between tolerating diversity, cultures and ethnicities and having young people who go on to invent new things or try a new marketing strategy — because artistically and scientifically they’ve been allowed and encouraged to think outside the box.”

And changing the economic and creative culture is not about more rules and regulations.

There’s “no law you can pass — no law you can throw at it. It ought to become part of the conversation for the Chamber of Commerce, every school board, the Economic Development Corporation — and all the organizations that want the community to thrive,” Greenwood said. “Before any decision is made, (they should) ask — is this moving our community toward creativity and diversity?”

Credit union industry

Like other sectors of the financial industry, the credit union sector has also been under stress.

“The industry’s not out of the woods, yet,” said Bruce Gillooly, vice president of corporate communications for Security Service Federal Credit Union. “But we’re seeing some signs of future potential. The credit union industry as a whole reacted well to the financial meltdown. We were quick to bail ourselves out and police ourselves.”

But the government is in a “regulatory mood.” Credit unions comprise only 6 percent of the financial industry, Gillooly said, and heavy regulation can overburden the industry. “Much like our counterparts in the banking industry, it’s harder (and more expensive) for the smaller institutions to hire compliance experts to comply with increased and complex regulations.”

And credit union members still want safety and soundness, access to convenient and inexpensive credit, and products and services that are useful to them.

“We’re confident we can work with legislators to protect consumers and provide the services they need. Colorado delegates in Washington D.C. have been supportive and understand the value of credit unions to their constituents,” Gillooly said. “2010 has the potential to be the bridge to a prosperous future.”

Financial institutions and hiring

A Grant Thornton LLP survey of banking and financial institution comptrollers and chief financial officers showed that only 20 percent plan to increase hiring during the first half of 2010, and 55 percent plan to reduce bonuses. Not surprisingly, banking/financial institution CFOs are more pessimistic than those in other industries.

And during the next six months, 22 percent will reduce 401 (k) matches, 43 percent will reduce stock options and other forms of equity-based compensation, and 31 percent will reduce health care benefits.

Banks and regulation

Banks are slowly addressing some of the internal issues they have, said Don Childears, president of the Colorado Bankers Association. “And we’ll probably be coping with a new layer of regulations from Washington, which will unfortunately deter lending even further.

“Congress says ‘lend,’ and the regulators say ‘don’t you dare take that risk.’ But (further) regulations are only necessary for those entities that brought about the meltdown 16 months ago — lenders that were not regulated or only lightly regulated. But the reaction is to regulate institutions (across the board).”

Regulators are trying “to issue as many speeding tickets as possible,” said John Carter, vice president, of Bankers’ Bank of the West. “Banks are being criticized for not providing credit, but they’re being prudent. Financial institutions are stewards of the deposits of customers — so they have higher standards. It doesn’t make sense for people to expect them to lend (frivolously). They have to make sure credit extensions are both productive and protected,” Carter said.

“On the bright side, there are some very healthy banks in Colorado. And some of the community banks are (filling the gap) for national banks. So that does provide some resilience going forward.”

But since banks had to pre-pay three years’ worth of Federal Deposit Insurance Corporation insurance during the fourth quarter of 2009, that has an immediate “liquidity impact and constrains their ability to use those funds for other purposes,” Carter said.