Our Way Through


How government-guaranteed loans helped our Utah community bank through the Wall Street financial crisis

By Bruce T. Jensen

Every community banker working in our industry during the last Wall Street financial crisis has a vivid memory of that tense and difficult period. When our community bank first opened its doors for business in 2008, the U.S. Census Bureau had recently recognized our community of St. George, Utah, as the fastest-growing metro area in the nation from 2000 to 2006. With a booming economy, surely the timing for a new St. George bank was perfect we thought. Just a few months later, however, the crisis abruptly reversed our community’s fortunes.

Two banks operating in St. George, a diverse community that has drawn many retiring couples as residents, eventually failed.

A third local bank became so weakened that it was eventually acquired last year. As a real estate-based economy, our area’s wealth base was decimated by the housing-driven recession, and finding qualified borrowers and commercial projects of any kind became extremely difficult for all banks in the area. 

Furthermore, regulators unilaterally imposed strict loan-growth limitations on all de novo banks such as ours and effectively forbade the launch of new initiatives—for seven years! That limited our options to maneuver and generate income just when we most needed both.

Finding our community bank in a difficult position, Town & Country’s board and management team faced a tough decision. Like all new banks during their first two to three years in business, Town & Country was unprofitable because we didn’t yet have a critical mass of customers to offset the required upfront costs of payroll, data processing, premises and other operating costs. So one option for our bank, like many other de novo banks, was to roll over and sell to another financial institution—at a big “haircut” to our shareholders. Another option was to plod along within our mandatory, slow loan-growth requirements that our regulators imposed, which would have essentially postponed any significant profitability we could have achieved until the end of our seven-year de novo start.

Because of the powerful “universal banking” model and differentiated brand Town & Country Bank had established, I knew our bank would be able to attract considerable clientele when the economy turned around. Until then, we just had to find a way to address the needs of our shareholders while staying within the narrow loan-growth range mandated by regulators.

A way was found!

I remembered how Town & Country Bank’s loan officers had generated a few Small Business Administration and U.S Department of Agriculture loans.  When examiners told our bank to rein in lending and curb growth during the recession, the guaranteed portions of our SBA and USDA credits (typically covering 75 to 80 percent of these total loan balances) were sold into the secondary market to reduce our bank’s loan balances. When these loans were sold, the proceeds provided huge premiums of 10 to 14 percent. That’s because there is a perpetual market for guaranteed, risk-free loans.

A lightbulb flashed on. I realized that our community bank could strategically ramp up its originations of SBA- and USDA-guaranteed loans and book considerable gains each quarter when we sold them into the secondary market. In this way, our bank could jump-start earnings to the delight of shareholders while keeping total loan growth within the rigid limits set by regulators. 

Even today, Town & Country’s SBA and USDA loan strategy continues to be a huge success. It was a major factor in our bank’s top-performing profitability in 2014, which included posting a return on average assets of 1.67 percent and a return of average equity of 15.26 percent. What’s more, the guaranteed portions of SBA and USDA loans do not count toward our community bank’s small legal lending limit. Therefore, instead of making a maximum loan of $1.3 million, our lenders can provide up to $5 million within a guaranteed loan structure, thereby allowing our bank to earn more interest income until the loans mature or are sold.

Although premiums vary and rates have tapered off to some degree, SBA and USDA lending is likely to contribute to our bank’s earnings for the foreseeable future. In fact, as Town & Country has recently emerged from the seven-year de novo growth limitations, we are hiring more guaranteed-loan specialists to boost our loan totals and to put away more SBA and USDA loans into a metaphorical “closet” until we want to sell them. 

In this way, our bank’s “Closet Strategy” will generate more interest income while loans remain in the closet, and provide greater ability to regulate our quarterly net income by allowing our bank to choose the number of loans it can pull from the closet to sell.

Government-guaranteed lending programs helped our community bank through those severe days of the financial crisis. Now they’re helping our bank achieve ongoing earnings that bring a smile to our shareholders.

Bruce T. Jensen (bjensen@tcbankutah.com) is president and CEO of Town & Country Bank in St. George, Utah.