A Publication of WTVP

Ron Pikus, President and Chief Operating Officer of River Valley Savings Bank is a CPA and has a graduate degree in finance to go along with 21 years of experience in the thrift and mortgage banking industry.

Oddly enough, his introduction to Peoria took place when he was working outside the financial industry for a Chicago company that did business with Caterpillar. At that time, he had little idea that he would one day head a major financial institution with headquarters in Peoria.

River Valley Savings Bank was formed in 1986 when two of three River Valley owners – former Chicago commercial real estate entrepreneur Howard Ross and – purchased a $50 million savings and loan in the Rock Falls-Sterling area. Seeing what was happening in the thrift industry, they began seeking FSLIC-sponsored deals to build a larger savings and loans network. It was at this time that Steve Bangert (currently vice chairman and chief executive officer) joined the group as the third owner. Four Peoria area savings and loans who were seeking merger partners were merged into River Valley Savings Bank in federally-assisted deals: Home Federal Savings and Loan, Mutual Savings and Loan of Canton, Galva Federal Savings and Loan and Peoria Savings and Loan.

River Valley Savings Bank was, in the late eighties, the only profitable thrift in Peoria. How were you able to work so successfully in some difficult days for the entire industry?

We didn’t exist through the turbulent times. We came together with a clean sheet of paper and went about the business of building the savings and loan network we have today, primarily as a residential lender. We don’t do commercial real estate loans; we don’t do business loans; we really haven’t been all that aggressive as a consumer leader. We saw the niche for us to fill was that of a secondary market-oriented, first mortgage lender.

When we came in, we were the first group to acquire those institutions that were insolvent or nearly insolvent. There were some other institutions that were somewhat on the brink whose situations hadn’t been resolved yet, for example Security Savings. The writing was probably on the wall for Talman at that time. United Federal was looking for a merger partner. At the time those situations were still being resolved, we were staring fresh with a new balance sheet. Our business was to be a residential lender, and Peoria was a great market for that – a very competitive market but a great market. The housing market in Peoria was going very strong, contrary to what was happening in other parts of the country. As a result, we came in the right market at the right time, taking advantage of the opportunities that were here to be a solvent lender in a market that had some pretty shaky players.

In your opinion, what were the key reasons for the savings and loan crisis?

While deregulation was the final element of the critical mass that brought the industry to its knees, that wasn’t the problem. You have to go back and look at the history of the business and see how it got to the 1980s when it started to come apart. Thrifts, unlike commercial banks, were started pretty much as “mom and pop” operations. They were small and didn’t require a lot of capital to form an institution. They were ordinarily formed on a local basis, not regional, by people who put their savings together. They would finance a loan for a particular party; when it was paid back they regenerated those funds and so forth. They also stuck with a mutual format; there were no stockholders; everyone who was a depositor owned the institution. That later became a problem. Regulation of financial services beginning during the depression was not much of a problem. After the way, business just boomed as the economy was going great. During this time, S&Ls became the primary provider of residential lending. Yet, if you look at the structure of business, despite the act that institutions grew assets, management philosophies and approach toward the business stayed the same. It was still pretty much a small business mentality. Because people tended to join businesses and stay with them through their entire career, it seemed that the thrift business had a difficult time attracting the type of management talent it would need to stay competitive.

As time when on financial services became more sophisticated, but the thrift business, because it was regulated, stayed to what it knew – the lending business. Thrifts were regulated at what they could par in terms of interest rates; they were regulated in what they could put the money out for; and they were regulated in terms of the products they could offer. As a result, the joke was, “You take it in at three, you lend it out at six, and by three o’clock you’re on the golf course. The business was, for the most part, a daily simple business until, as time went on, the financial services opportunities became more complex.

Soon, however, the mutual money market funds became a vehicle; the Wall Street investment firms came up with alternative investment opportunities as people became more creative. As a result we saw the money go out of the thrifts and into these other markets. There was a clamor for some kind of action. Subsequently the regulators deregulated the liability side of the balance sheet, letting thrifts pat whatever they needed to pay for money, without deregulating the asset side of the balance sheet. I think a lot of people in the business and the regulators didn’t understand how the business made money. The asset side and the liability side have to be managed properly.

At that point in time we were into the Carter years when interest rates were going crazy. Again there was a clamor in Congress to do something to the business that would allow it to be competitive on the assets side. Rather than taking the steps gradually, the floodgates were opened and thrifts were allowed to become involved in virtually any type of investment. So as a result, everyone was out there looking for all kinds of opportunities. Many people saw the thrift business as a great way to finance commercial real estate developments. Investment companies looked at the thrift business as a customer for newly created mortgage-derivative products. Frankly, in a lot of cases the people selling these restructuring programs didn’t understand much about the business and the people in the business at the time, who were still having a hard time competing, didn’t understand the various investment vehicles that were now open to them. In many cases they got involved in things they really never should have gotten involved in.

The fraud and abuse element in savings and loans is obviously what has made the headlines. Nationwide, how much fraud and abuse occurred in your opinion?

Fraud was probably not involved in most of the problems within the industry. A small number of operators were people who came in to defraud depositors and the government. For the most part you had individuals who had a whole new array of products and services to offer, had never really dealt in a deregulated environment and were having a hard time picking and choosing what niche they wanted to have in that particular market. Was fraud widespread? No. Should a lot of people have done a better job understanding what they were getting involved in? Yes. Were a lot of people naïve? Yes. Did a lot of people do a lot of stupid things? Yes. But if you started putting everyone who has done something stupid in jail, you’d have the majority of the country in jail.

Currently, several Peoria community leaders are being sued by the Resolution Trust Corp. for negligence and wrongful conduct in approving loans which resulted in big losses at the failed Security Savings and Loan Association. What are your thoughts on the matter?

It is an unfortunate set of circumstances. What you have is a group of business people who truly had the best interests of the institution and the community at hear, but possibly got some bad advice. Perhaps they were not as diligent in understanding all the things that were being brought to them. But were they trying to do anything fraudulent? Heavens, no! Were they negligent? No, I don’t think so; I think they tried to do as good a job as they could. They also likely found themselves in situations where they had to do something to increase the profitability and the capital of the institution, so they did what they thought best at the time. Also, during those times inflation was going crazy and the real estate market was continuing to see significant appreciation, so in many cases people felt that if there were any problems inflation would take care of them by increasing values. I really think it is unfortunate that fine people are being pursued when they really had the best interests of the institutions and community at heart.

How weakened has the savings and loan crisis and bailout left the thrift industry, in fact and in the minds of American consumers?

Despite the fact that for at least a year, you could not pick up the newspaper without reading something negative about his business, the American people for the most part have stayed with the thrift business. Sure, every institution experienced a run-off in deposits, but for the most part that run-off was minimal. Did we have a crisis of confident in the business? Yes, we did. Did we overcome that? Yes, we did. What was probably a more important element in this crisis of confidence in the American consumer’s mind was not so much just the thrift business but the whole element of government being able to have control over what happens in the financial services industry and the economy in general. I think it opened a lot of peoples’ eyes; they began to think “Maybe things in this country need to change because perhaps we don’t have as good of control over all the elements as we had in the past.”

What is the difference between a savings bank, a savings and loan, and a bank?

There is no difference between a thrift and a savings bank. We call ourselves River Valley Savings Bank. Why did we choose “bank” over “savings and loan?” When we formed this organization, the last thing anybody wanted to be known as was a savings and loan.

There is not a whole lot of difference now between a bank and a savings and loan. Regulations have now given both the banking charter and the thrift charter the same powers. It’s a matter of focus. We have chosen to focus on being a residential lender. Some have focused on being business lenders. A primary element in a focus is the expertise or history of the people running the particular organization. The government is in the process of making sure that the capital requirements and other regulation of banks and thrifts mirror one another so that everyone has a level playing field.

What does the future hold for the thrift industry and for financial services as a whole? What changes to you see coming for traditional financial institutions, both banks and thrifts?

We have seen a lot of changes in the last 5-10 years. There will likely be as many more changes in the next 5-10 years. There will continue to be consolidation in the business. You will continue to see mergers of institutions. Our philosophy here is different than a lot of institutions. Many institutions feel that you have to be large to be a survivor. We feel that you need to be smart to be a survivor. You can be a survivor with a $400 million balance sheet as we have, as well as you can with a $5 billion balance sheet, provided you know how to manage that business and you understand how that business makes money. You don’t let the competition price your lending products for you; you don’t let the market dictate what your deposit products are like. You need a plan whereby your bank makes money. While you can’t be too oblivious to what the competition is doing, you must make sure that even if the competition is going unreasonable things, you don’t fall into that trap. That was part of what got the thrift industry in trouble. You much have confidence in your plan and follow it.

We look for opportunities. If there is a merger opportunity that can give us the kinds of returns on equity that we are looking for (which are better than just average bank or thrift investor returns) we will pursuer that opportunity. If we feel that we can only get average returns, we will not necessarily grow the balance sheet just because we feel we have to be bigger. Survival is not going to depend on just being bigger; you will have to be smarter than the next guy.

What changes do you expect from the Clinton administration that might affect your industry?

Hopefully, during the next four year, the duplication of regulatory groups, the FDIC, the OCC, the OTS, will somehow be consolidated and we will have one regulatory body that will govern all financial institutions. That is one thing we at River Valley, and I think people in the industry as a whole, would like to see happen. It’s difficult, when you have a safety and soundness examination, to have the Office of Thrift Supervision come in and the FDIC as well. Many time we have to do the same reports and answer the same questions to both groups. That takes time away from management and staff that could be focused on the business. We would like to see changes whereby the regulators would ask for meaningful information that could be used to help them regulate the business better and give us feedback on what’s happening in the business.

Should the barriers separating and defining various types of financial institutions remain as they are; or should they be lowered or even removed?

Somehow the issue of insured and non-insured institutions needs to be addressed. Non-insured financial services companies such as mutual fund companies and insurance companies are regulated to a certain extent, but certainly not as stringently as the banking community. Right now we are seeing a significant runoff in CD deposits because interest rates are at record lows and a large percentage of our consumer base is senior citizens who depend on CD interest for retirement income. As interest rates have plummeted, those people have been forced to seek a better yield because they have to live on the income. So they have gone out of insured investments into non-insured investments. I’m afraid that in many cases, these people don’t understand the risks attendant to those kinds of investments. As a result, when the pendulum swings back, I think many consumers will find they have gotten hurt because they were involved in something they truly didn’t understand. Then there is going to be a clamor among consumer groups for regulation. What usually happens in such a scenario is an overreaction which impairs the ability of bankers and investment companies to do business because they get so wrapped up in a regulatory environment. Something is going to have to be done to put all of the financial services business at par in terms of regulations.

Do you look for the government to get less involved in insuring deposits in financial institutions?

I don’t think we will see the government ever get completely out of the account insurance business, but I think that the present system needs to be modified. Right now there is consideration to trying deposit insurance premiums to the riskiness of an institution’s balance sheet. That’s a first step, albeit and imperfect one.

Eventually, you may be able to come to your local bank and have optional accounts. There may be certain yields on insured deposits and other yields on a variety of non-insured deposits. You would then have to decide among the various offerings.

How is consolidation among banks and thrifts in Peoria affecting the local market?

There are fewer and fewer players in the Peoria market in banks and savings and loans. You now really only have to thrift institutions in the market – River Valley and First Financial. Consolidation among banks has meant fewer independent entities. Is that good? It is good from the standpoint of competition making everyone attend more to business; and ordinarily the consumer benefits from that. The bad part would be if the industry were to consolidate to the point where there wasn’t much choice among different institutions. Any curtailment of competition would ultimately hurt the consumer.

We still hear about potential major bank failures, even though the banking industry is making record profits. The FDIC funding for potential large failures is somewhat uncertain. How legitimate are concerns of a significant financial crisis in the banking industry?

Unfortunately only the regulators know for sure how safe and sound some of the entities are. My presumption is that the regulators have probably been overly cautious – they don’t want to have something come up all of a sudden like a series of bank failures that would pressure the insurance fund. If that were to happen, Congress and the public would come back and ask why they weren’t told anything about it. If anything, I think they are being overly cautious in making sure they get the word out that there may still be some problems. Do I think we might yet see some kind of crisis in the banking industry similar to what we say in the savings and loans industry? No. I think you have a totally different kind of business. Are there some large institutions that could yet be taken over, putting pressure on the insurance fund? Yes, and much of what happens depends on the course of the national and world economy.

While on the subject of financial institution failures, I would like to make a point. Quite often we hear people say that the government had to bail our the savings and loan industry. I think its important for the general public to remember that it was the government that bailed our the consumer – the depositor. I don’t think there were any investors in the insolvent institutions that got their investment back. They lost whatever they had invested. It was the depositors who were at risk; and it was the government who, in order to maintain credibility in the banking system, made good on the losses that depositors would have absorbed if the government would have let the insurance fund fail. A lot of people have the idea that the industry was bailed our and we, the taxpayers, had to pay for it. We have to remember that we, the taxpayers, helped bail our ourselves as depositors.

What has been the greatest challenge in your management career?

My greatest challenge was right here, when I walked into this office, or coordinate the consolidation of six very different financial institutions. It was my job to develop a focus for this institution and get everyone to pull together toward one goal. I had to make a lot of tough decisions. I had to sit across this table and tell a lot of people that, through no fault of their own, we no longer had a role for them in the company. That was tough, but it had to be done in order to put this organization on sounds footing and operate in a very lean structure to have a fighting chance to survive in a very competitive business.

When we started our, we struggled with out best to run this operation and we made a number of mistakes. When the reigns were turned over to me with the instructions to put everything together that was definitely a challenge. I am proud of what we have today and that I was able to generate the support of the staff and put together the organization that we have today. Most of the credit for what we have accomplished goes to the River Valley Staff.

What are some of your personal observations, both negative and positive, about the Peoria area economy?

The owners of this bank invested here because they felt that central Illinois was a great thrift community. We have a significant population of working class people who use the services a thrift institution offers. We have seen a very strong residential lending market in this area that has bucked nationwide trends. Probably the one element that concerns us the most is the Caterpillar-UAW difficulties. My hope is that the situation will be settled amicably, not just to get a contracts, but a joint management and labor agreement whereby everyone decides to pull together for their own personal well-being, the well-being of the company, and the Peoria community. If that can happen, and I don’t see any reason why it cannot if people are sincere and reasonable, it will say a lot for what is going to happen to the Peoria business climate and the community. We survived the downsizing of Caterpillar back in the early eighties and brought in other businesses and enterprises. River Valley Savings Bank had no problem coming into the community and investing because we felt it was a good stable community. There isn’t any reason why we can’t continue going forward. But we have to have labor peace in this community.

We read last month about River Valley’s involvement with Jubilee Homes, volunteering time and money to provide a refurbished home to an area family. Tell us about this project.

It was a natural thing for us to be involved in because it’s a community reinvestment kind of activity. Some people on the outside might say “Well it’s easy for you to become involved in that because you have a regulation that says you must be involved in community reinvestment.” But, after two years of being involved with Jubilee Homes, we sat down with them and asked for a project that we could become personally involved with. They responded that they have been sponsored the rehabilitation of one of their homes with a business; it had always been with church groups. I said we would like to be the first. We donated the rehab money, but more importantly we put together forty volunteers from River Valley who came and worked Saturdays and Sundays our of the goodness of their heart. They didn’t get paid for it. I was there with them painting and cleaning up, etc. It was really very gratifying to me. These people didn’t look on it as something they had to do because of a regulation; they viewed is as something that was important to the community and their fellow Peorians. And, they wanted to see some publicity on the project so that other business organizations in the community would want to help out also. We’re looking to help people – to help the housing stock in Peoria, to create more affordable housing and to put people into those homes. The message we are trying to convey is that, while we were the first business to get involved, we would like to see other businesses follow suit. IBI