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Podcast: Prosperity Bank Managing Director Richard Ramey

In this podcast with RCC President Bill Sproull, Richard talks about the state of banking during COVID, how it reflects the history of NTX banking since the 80s, how markets are doing now (like real estate/commercial) and his own career in banking.

Time: 23 minutes
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This is Bill Sproull, the President, CEO of the Richardson Chamber of Commerce, and I'm doing a podcast today with Richard Ramey, commercial lender with Prosperity bank, and former chairman of the Richardson Chamber. Welcome, Richard.

Ramey: Good afternoon.

Sproull: Richard, we want to talk about the banking industry. And you've been in that a long time. How did you get into banking?

Ramey:  Back in the early 80s, this is my 43rd year in banking. But when I looked at changing careers back in the 70s, I was looking at different industries. And I looked at banking as being a reputable industry, and one that had cross ties with all kinds of industries, all different management styles, and a way to help people fulfill their dreams. And so I looked at that and said, Yeah, banking is a pretty good avenue to accomplish all of this.

Sproull; What have you been doing?

Ramey: I started my career with Conoco oil company out in West Texas. And spent about three years with them and decided I needed to make a career change and went back to Texas A&M for my MBA with the intention of going into banking. And I did do a TA position at A&M  with two professors who specialized in the banking industry.

Sproull: So what was your undergrad degree in?

Ramey Marketing management,  my MBA was in finance and accounting.

Sproull: Gotcha. You've been in banking for three years always as a commercial lender, or did you do personal banking

Ramey: It's always been on the commercial side.

Sproull: What are some of the big changes that you've witnessed in the years you've been in banking?

Ramey: The major changes were naturally through the the recessions, but no more than the 1980s when the 1986 tax law changed, and it changed banking for seven years. And as you might remember, the real estate market took a huge hit, the economy took a huge hit. It was about seven years from 1986 to 1993, before we got back to some sort of normalcy. We also had that when we had the 2001 recession, and we had the 2009 and 10 recession, so each recession and different aspects to it, but the largest change came from the 80s. That changed banking dramatically, not only the way we thought about the litigious society we became, but we really lost nearly one generation of bankers, because there's probably 50% of the bankers that I knew got out of banking.

Sproull: Wow, that's a lot. So I assume that has banking as the way that you conduct banking on a commercial basis changed during that period of time?

Ramey:  dramatically. Again, going back to the 80s before the 80s era 86 and 93 era banking was done very little paperwork, very few pieces of paper Post 80s, you had dramatic changes in the amount of paperwork and and the definitions and the clauses and the complexity of the commercial aspects. Because of all of the court cases and precedences were set, then documentation became a lot more complex. And it has continued to get more and more complex over the years.

Sproull: What about the way that you interact with your customers? How's that changed?

Ramey: That has changed is because of the 80s. And the recessionary times that we've gone through each time we have a a big recession. We have a lot of new questions, a lot of new credit underwriting that goes on, similar to today's situation with the COVID where we stay in now most banks credit policies. C's have tightened up because of the unknown. What we know, in 2019, through the first quarter of 2020, is really out the door. And it's in an unprecedented time that we can see the first quarter of the COVID era being, April 1 through June 30, to see how that has affected certain industries and certain companies. Most companies have been affected negatively. However, we do have some companies and industries that have been affected very positively. So it's a new era for all of us, trying to predict where we will be in the next year, two years, three years is really anybody's guess, at this particular point in time. And, of course, there were a lot of changes to the banking industry, as a result of the financial crisis in the Great Recession, stress tests, you had a lot of investment banks that can converted the water

Sproull  5:00  
Basically converted to national chartered banks. did that affect your industry a lot?

Ramey 5:06  
It did, because we had the the Dodd Frank act that came in and had put a lot of regulations on the banks, which is really interesting because most of the problems that we had, were not in the conventional banking system. It was more in the derivative programs that the large banks and the security industry that the large banks were involved in, took out most of the losses. However, when the Dodd Frank Act was passed, it basically put banking or all financial institutions in one realm. And there was a lot of new regulations that came down the pike that affected not only the way we did business, and how we conducted our business with customers, but it also increase the cost factor dramatically for the banks for the regulatory process and reporting that they have to do to the regulatory agencies now, somewhat the same way that Sarbanes Oxley increased the cost of compliance on companies.

So how would you describe the health of the banking industry, particularly here in North Texas today?

Ramey: Actually, I think the the health of the industry right now is really good. You can't tell it with the stock prices. If you look at the stock prices in the last quarter, all bank stocks are substantially down from where they were at the beginning of March, primarily because of the unknown aspect of how the COVID situation is going to affect companies across the board. We all know and most banks have taken larger loan loss reserves in the last quarter. We anticipate going further in the year because of potential losses that will happen in our economy, not only in Texas, but nationwide. I do think Texas will fare much better as we have in most recessionary situations. But we are going to have losses. We don't see them right now, because of the stimulus programs that we have had enacted in from Congress and the dollars that have been poured into the economy. But eventually that is going to wear out and go away. And a lot of the companies that are struggling are not going to have any other avenues out there. So we do anticipate there's going to be more losses in the industry over the next 12 months. I do anticipate that some banks will go under. I don't see any banks going under at this particular point in time. I'm sure there, there may be some across the country.

Again, most Texas banks should look good. Most banks have increased their reserves to guard against that. They've taken the precautions already, and have planned that for the rest of the year. So no, I don't see any banks failing because of that.

Sproull:  It seems like for a while there seemed like there was a new bank popping up on the corner every day, and a lot of new entrants into the marketplace. Is that still happening? Or is that slowed down?

Ramey: It has slow down substantially for several, several reasons. One, it takes a lot more equity to get a bank charter these days. And don't quote me on this, but I think the regulatory is somewhere between 15 and 20 million. But in my opinion, you really need between 40 and $50 million of bank equity to start a bank to just have the wherewithal to compete out in today's market place. When you start a bank, you've got one location and it's really difficult to compete in today's environment. Most people that are wanting to get into the banking industry these days are going out and purchasing a maybe a small rule bank or that has several locations has good deposits, but in rural areas, the loan demand is a lot less, and they will move the headquarters to a metropolitan area, and they will start building from there so that you have a base of operations to start with. Starting from scratch in today's environment is very, very difficult.

Sproull: There have been some mergers notably your bank, your Legacy Texas bank, which you've been with for many years but now with Prosperity Bank.

Ramey: Correct. This was for several reasons. One, it made very strong financial sense from where we were. Legacy was very Loan-oriented very heavily loaned up. Prosperity has a larger footprint throughout the state and had a lower loan to deposit ratio. And when you merge the two, the economic benefit was an immediate uptake for both companies. So the aspect was really, really good for both entities. You know, Legacy was right at $10 billion.

Ramey 10:27  
And we were on the verge of again, going into the next quadrant of regulation under the Dodd Frank act, and where we were going to have to start reporting more. It was going to cost us I believe, somewhere between four and $5 million a year for additional compliance people reports, systems, in order to start reporting from the 10 billion to the on up after the cut off there. We ended up merging with Prosperity which was 22 billion. So we made a $32 billion bank. We're at $33 billion right now. And we merged in November 1, 2019. So we've not quite made it a year yet.
From that aspect, it was very good. It also gave us a footprint throughout the state of Texas and Oklahoma City and Tulsa. Itt gave us a much bigger footprint to follow our customers around the state and other areas. It didn't take us into the next regulatory, so it didn't cost them any additional money yet, either.
It's a difficult time. We are still looking for acquisitions. And I know that our management team is always looking for opportunities. They always have two or three deals that they're looking at. But according to our chairman on our last analyst call and report, the prices right now are a little bit higher than what they what they should be in this market. So it's hard to buy a bank at this particular point in time. However, we are still looking and our bank has made 43 acquisitions since its inception in 1986. So they will continue to look for acquisitions.

Sproull: Gotcha. So, Richard with the you know, the pandemic underway. You obviously like other bankers spent a lot of time processing PPP loans. I know you were working nights and weekends and processing a huge volume. What's going to happen when a lot of those loans run their course? 

Ramey  13:00  
We believe that the great majority, if not all, will be forgiven, particularly when they change the reporting from eight weeks to 24 weeks and they change the requirements.from 75% of payroll down to 60% payroll, and the other 40% can be operating expenses of various kinds. Eight weeks was very hard for companies to get people back to work. It is still very difficult even at 24 weeks to get people back to work for a number of different reasons. We believe that the majority of our clients will have it forgiven. There is talk in Congress about certain loans of it's been rumored of $150,000 or less, would be an automatic forgiven and not much paperwork needed. That could come down. That may not happen. But right now, we did roughly 11,007 loans for about $1.5 billion and our average loan was around $120K-$224,000. 

I was really thinking in a way about what happened to the companies who receive those loans, when that money runs out whether it's forgiven or not, are they suddenly back into a precarious situation?

Ramey: Some of them? Yes, some of them? No, some of them use it. And it bridges the gap because a lot of immediate revenue drops hit companies, and so was able to keep their good long-term employees in place. Because as you well know, the most cost of any company is their employees. And when you have to layoff or furlough, people that have skills that you've trained, then it's costing you a great deal of money if you have to hire somebody else and retrain them over the years. So if you can keep your your stellar employees, it's much better off. Some of the companies have learned how to reconfigure their companies in the COVID world and to manage it in a much more efficient manner. They will continue to survive as they always have to have companies that don't know how to manage through crisis when the money runs out, they there's no other stimulus program out there, it's going to be very difficult for them to go forward. You might see a lot of opportunities of smaller banks or smaller companies being acquired by some larger companies, but you will see some companies that will not be able to make it after all this runs out. 

Sproull:   So if you're sitting on a strong balance sheet might find some good buying opportunities, depending upon your industry and where you're at in the next four to six months.

Ramey:  Correct. The market for commercial real estate and commercial real estate lending are very different aspects of it. The homebuilding aspect of it is extremely strong right now. The builders are building as fast as they can so that market is doing extremely well. The rental market is still very strong out there. Your single family residential rental market, your multifamily residential market is out there. I think it's going to get a little bit more difficult on the multifamily. Over the next two years, we have still a lot of projects that are still coming online at the at the rate that they're brought online for rental rates is going to be very hard for a lot of people to afford those in the A properties. I think you'll have a lot of B properties. I think there's aspect of the acquiring a B and C type property, rehabbing it putting value add back to it and leasing it out. It's the same thing in the class A office space. My opinion is that you'll see a lot of class A office space that will start to become empty or a lot of subletting out there. Companies will do a couple of things. One, they'll look at reducing their footage. This is from an economic standpoint and from the fact that they will learn a lot of people, a lot of their employees are able to be working from home and be efficient. Not everybody, but there will be half that will there will be have that opportunity. So they won't need as much space and your B/C property, I think will still continue to be well least up because of the price point that they're at class, a office space to class, a retail space, I think is going to be the toughest areas that are going to be hardest hit in the next two years.

Sproull Yeah, certainly. Do you see any lasting impacts to the banking industry in the way that you bank because of the pandemic?

Ramey We will we as the banking industry will get through where we are. There'll be some reflections in the next 12 to 24 months. And there will be protocols and procedures put in place to help protect any downside that we might have something like this in the future. We all will try to learn from the mistakes and put in procedures not to have that happen again. And if the industry can do it is the best way, if we can keep government out of it, it's even better.

Sproull: Well, certainly nobody could be blamed for not seeing the pandemic coming. But it served as seemed to me that a strong balance sheet is a good thing to have in good times or bad times.

Ramey: very much. So it's you have to have to have a good balance sheet and have to have liquidity at all times to foster any kind of downturn. We all know that every every industry, every economic growth area has a cycle. You know, historically, it's been about every seven to nine years. This last one has lasted a little bit longer, but there's always a cycle, the cycle can last, you know, 18 months to like in the 80s. It lasted seven years. It was a tough time, in any business and in the banking industry during those times.

Ramey    19:00  
So you always have the cycles, and you're always going to have the cycles. And you're going to have to be able to work through them and learn from the mistakes so that you can be better next time.

Sproull   What do you think's going to happen with interest rates? Do you anticipate that they're going to stay low for an extended period of time?

Personally, I see these rates staying low, at least through the end of next year. We've got to get through the pandemic. We've got to get companies and the economy back on track. I don't think that's going to completely happen until we have a strong virus protection bio out there, and we get people inoculated, so that we can curb the pandemic.
Once once we get that, then we can rebuild. My personal prediction is that it's going to take us at least two more years to get back to some sort of normalcy, whatever the new normal is. And so it is going to be, you know, a tough two years.

We will get through that. Are you encouraged by what you see here in Richardson, as far as you know, our companies and businesses?

Ramey    20:00  
 For the most part, I think Richardson is in a really good spot. We have some strong companies, from your small entrepreneurs to your, Fortune 500 companies out there. And we've got a good strong diversified base out there. We're not linked to any particular industry. We used to be very heavily involved in the tech industry, and it affected us in the 2001 era. Houston still has a big industry in the energy sector, which is which is hurting at this particular point in time. But overall, Texas is very diversified. I think Dallas Fort Worth is the most diversified economy in Texas, which puts us in a very good position to go forward. 

Ramey    21:00  
Words of advice to business people who are out there listening to this podcast, I would say to get with  your advisors, your banker, your CPA, your attorney, utilize the sources available to you pick their brains. I've had clients in the past that would, get their banker CPA and attorney together on a once or twice a year basis and brainstorm as to what they see what's going on and help them plan. You always a good entrepreneur, owner of a company will be looking forward. It's like a chess match. They're three or four steps ahead of the guy that's playing the next move. If you're just planning the next move and you're being reactive, it's going to be a very, very tough road for you.

Sproull: Very good advice. You know, it's always good to rely upon those people who are there to help you in the first place.

Ramey  22:04  
The last thing I'd say is, you know, use the chamber, as you said, as a past chair of the chamber, still still involved in the chamber, believe in the chamber, and we have a lot of resources and a lot of opportunities for the companies to take advantage of if they would.

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