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March 1, 2012
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Partly Sunny, But Keep An Eye On Those Clouds

Banks and businesses have improved balance sheets and see 2012 building on improvements seen in 2011

By Lane Report Staff

Kentucky bankers and investment advisers generally see 2012 as a year of continuing slow improvement in the economy. Many companies have improved their balance sheets, and some are building significant reserves. But bankers are working harder for their net margins in today’s tougher regulatory environment. Customer service is viewed increasingly as a primary competitive battlefield.

The general buzz being heard from customers and the business community is becoming increasingly positive but still tentative. The dark days of 2008 and 2009 left a deeply cautious mood. Meanwhile, the tenuous state of the European economy, concerns about federal government finances and a possible spike in oil prices that could dampen or reverse U.S. job growth are worrisome clouds that continue to linger on the horizon.

Wealth managers expect equities markets to rise modestly in 2012, and believe homework in selecting individual companies to invest in could be well rewarded. Bond market profits, however, will be rarer.


“When we look back at 2011, we started to see some confidence building in the economy. We view 2012 as a year with similar economic results but with greater confidence in the future. Growth may be restrained as households continue to rebuild their balance sheets, but the renewed faith in the economy will support better investment trends. Kentucky will participate in the improving national picture. With our strong manufacturing base, the commonwealth also stands to benefit disproportionately from the recent trends of “reshoring,” the return of manufacturing jobs to the United States from production previously outsourced abroad.”
“Chase continues to see very positive growth in the fundamental measures we track. In 2011, U.S. deposits were up $25 billion, and we added 200-plus branches and 3,800 new bankers. Our commercial banking achieved record revenues of $6.4 billion and net income of $2.4 billion. Chase had a seventh consecutive quarter of growth in loans to mid-sized businesses and more loan demand from small business, which should help job growth. Credit quality continued to be strong. Continued jobs improvement will help stabilize the housing market; in December, the Kentucky unemployment rate dropped to a threeyear low of 9.1 percent. Household formation has been half its normal level since the Great Recession, but economists say it will come back with job creation. Housing is very affordable as prices and mortgage rates have fallen, and growth in population and employment should help stimulate demand.”
“The corporations we deal with in Kentucky have built cash over the last three years or so, and are anxious to employ that money. We’re starting to see them do that now, making investments in additional equipment, inventory and some personnel. There will be Kentucky more loan demand and region lending by banks. Banks BB&T also have built capital and have recapitalized over the last three years and are looking for revenue in the form of loans, their No. 1 revenue source. It’s encouraging.”
“U.S. Bank achieved loan growth this past year in all sectors: commercial, small business and consumer. We continue to see businesses and individuals select financial companies that have a strong balance sheet, offer value pricing, an array of capabilities and various delivery channels such as Internet and mobile banking. This ‘flight to quality’ has benefited U.S. Bank. Prospects for 2012 call for continued steady improvement in the economy with interest rates remaining low, and housing and unemployment improving slowly. Many individuals seem to be on the sidelines right now, waiting to see the outcome of the federal election and the direction our government is going to take on taxes, regulatory oversight, deficit and other critical issues.”
“We see improvement in national and local economic conditions. However, some business sectors, particularly coal and natural gas, are negatively impacted by low demand, low prices and the regulatory environment. As with the downturn, economic improvement varies by community, as it does by state. Kentucky is weathering weak conditions betterthan many states. Increased employment, small-business activity and improved consumer confidence are necessary to again have a vibrant economy. Diversity of the economic base of the geographic areas Community Trust serves in Kentucky, West Virginia and Tennessee has allowed us to continue our history of profitability. We exceed peer institutions in earnings while providing a strong dividend to shareholders. This financial strength is allowing us to seize opportunities as the economy continues its recovery.”
“For 2012, the banking industry faces formidable challenges. Regulatory burdens, while wellintended, severely restrict the industry’s ability to serve customers. Slow economic growth, reduced loan demand, low interest rates, volatile markets and restrictive regulations all play a part in the challenge for bankers. Soundness and solvency, balanced with generating returns, are the industry’s new imperatives. This challenging environment makes it difficult for the smallest banks to profitably compete. We believe Republic’s size and strong capital base well positions us to help our customers and communities through still difficult times. The industry as a whole needs to return to the basics: putting the needs of the customers and the communities we serve first.”
“As community bankers, Traditional Bank has managed through difficult economic times and continues to lend money to businesses and consumers in all our markets. We see economic conditions improving. We continue to take our customer relationships very seriously and strive to know our customers on a personal level so we can help maximize their growth potential. As an SBA preferred lender, we are able to provide quicker responses to our clients, which allows them to focus on the more important task of growing their business.”
“After a four-year contraction, there seems to be a light at the end of the tunnel – the tunnel being 2012. Jobs have begun a slight rebound and limited economic growth is surfacing. Unlike previous recoveries, this one will be slow yet hopefully steady. Several problems still could impact the recovery: European debt, oil price instability, job creation and our own federal government debt. Any of these factors heading south could adversely affect the recovery. Each relates back to our state economy, but the most significant factor for Kentucky is jobs. Whitaker Bank positioned prior to the downturn as a safe, sound institution, and financial performance has been good. In 2011, we took advantage of technologies to improve cost effectiveness and meet today’s consumers’ needs.”
“Kentucky’s economy has begun to recover slowly from the recession that gripped our nation. Employment has not improved to any great extent because companies are maximizing existing workforce productivity. Unemployment has declined but remains in double digits in many areas of the state. Consumer spending has been slow to recover, but home sales are crawling upward finally. Interest rates should remain at current levels at least through the end of 2012, which may help housing more. The banking industry, and community banks in particular, are working daily with consumer and business customers to examine opportunities that will lead to a more positive economic environment for all our citizens. To this point, loan demand has been very soft, along with consumer confidence. We hear more positive signals from local business owners, but it remains to be seen if 2012 will be the ‘comeback year.’”
“Financial institutions of the FDIC Western Kentucky district rank in the top 10 percent among performing banks in the nation. This community bank core consists of business conservatives who thrive in a solid agriculture and small-business economic region. Western Kentucky’s diverse economy of has seen fewer woes than the rest of the nation, and our regional economy has generally performed better. Construction is slow but performing reasonably fair; companies trimmed overhead early in the recession. The outlook for the financial institutions in western Kentucky is good with very few problem banks. Competition is brisk; large regional banks are working to regain market share lost by credit curtailment. Return on equity performance will be reasonably fair the next few years as interest margins continue to be squeezed.”
“I am frequently asked about ‘the future of banking in our community market,’ which isn’t easy to answer. My reply is that we woke up one morning, looked in the mirror and didn’t like what we saw; we can’t predict the future, but we can learn from the past. Community banks are stronger today because of the challenges we’ve overcome and continue to work through. The regulatory environment is one of the most significant challenges facing community banks, which are working to ensure regulatory compliance is embedded in daily processes. Forcht Bank is getting back to the basics, starting with our customers. Because banks offer very similar products and services, how we deliver them makes a difference. Our mission is to understand our customers, team members and community markets to ensure we consistently exceed expectations.”
“Financial markets have recovered dramatically from their lows during the crisis, although clearly there are still strains on our economy resulting from high unemployment and continuing housing difficulties. We continue to expect modest returns from the domestic equity markets the next few years; bond investors will struggle to find adequate yields. The finance industry has contracted and consolidated dramatically; most institutions raised capital and deleveraged their balance sheets as much as possible. This trend is likely to continue (perhaps mandated by regulators) for some time. Investment advisors adept at serious analysis of companies may have interesting opportunities in the next several years as the fallout continues. Independent advisers’ growth seems likely as investors seek help structuring portfolios to best withstand the headwinds that we face.”
“Admittedly, the U.S. economy endured a tremendous setback with the financial apocalypse of 2008, but we have shown consistent signs of recovery in 2011 and early in 2012. I expect corporate earnings will grow a modest amount this year. Balance sheets are actually quite strong as companies have generated significant cash and deleveraged. The Federal Reserve has stated it is committed to keeping interest rates at a low level. This means investors who invest in quality companies will be rewarded for the risk they have taken.”
“With interest rates remaining low for the near future, we will have to work hard to keep our net margins. People are refinancing loans to take advantage of a lower rate; the cost of compliance will increase our expenses. My prediction for our bank remains strong. We must be proactive to ask for business. Kentucky banks are strong and will continue to do well. We all must understand that we are in retail and must keep the customer happy.”
“Our 2012 outlook is positive. We believe markets should continue to improve, driven by growing private-sector employment and corporate earnings. International unrest, budget deficits and rising interest rates are our primary concerns. We are excited about our local market share growth. Our goal is to become the destination of choice for Kentucky’s most sophisticated clients and advisers.”
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Partly Sunny, But Keep An Eye On Those Clouds
Banks and businesses have improved balance sheets and see 2012 building on improvements seen in 2011

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