Until the credit markets return to some form of normalcy, rallies in cyclical stocks such as retailers like Saks Fifth Avenue (NYSE:SKS) or transporters like United Parcel Service (NYSE:UPS) will prove premature and unsustainable.

As part of my series to explore the current state and outlook for local credit markets around the country, I spoke with Mariner Kemper, chief executive officer of Kansas City-based regional bank UMB Financial (NASDAQ:UMBF), my second interviewee for the regional bank CEO series.

UMB Financial offers traditional forms of credit to consumers and businesses, such as deposit accounts, credit cards, home equity lines of credit, residential mortgages, and business loans. The bank also offers more complex financing for sophisticated investors on Wall Street in forms such as asset securitization and loan syndication services.

UMB owns and operates 136 banking centers in Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, and Arizona. Its main competitors are big players Bank of America (NYSE:BAC) and US Bancorp (NYSE:USB) and Oklahoma-based regional bank BOK Financial (NASDAQ:BOKF).

Touring the country
In part 1 of this series, I spoke with BB&T's (NYSE:BBT) Kelly King, who was cautiously upbeat about the markets in which his company does business. Kemper, however, says the credit markets that UMB Financial serves remain soft and that until real estate values recover, lending cannot be resuscitated.

Additionally, Kemper notes that until private capital begins flowing into the secondary market, we will most likely not see a real rebound.

What follows is an edited transcript of the interview.

Jennifer Schonberger: What are you observing in the markets you serve? Are you seeing signs of recovery?

Mariner Kemper: Signs of recovery would be an overstatement, in my opinion. I would argue that things are still very soft. Looking ahead, I believe that the banking community has yet to see losses from commercial real estate, and I think there will be more losses in the consumer sector as well.

Schonberger: So, is the worst yet to come?

Kemper: I'm not sure there will be a decline in a significant way; we're certainly not going to see any recovery for a while.

Schonberger: How do your lending volumes now compare with before this crisis? More specifically, now versus pre-August 2007 and now versus the end of 2008?

Kemper: We're somewhat of an anomaly because we didn't get caught up in some of the product craze that took place over the past decade. So, we have no exposure to subprime, and our commercial real estate category is all owner-occupied borrowers.

In 2008, we saw total loan growth of over 13%. In the first quarter, we've seen over 5% loan growth. Now, we chose to get out of the indirect lending business of a couple years ago. So, if you back that category out, we saw over 11% loan growth in the first quarter. Total loans grew $193 million to $4.3 billion.

Schonberger: What are you seeing on the consumer side? Are they paying down debt? How strong is demand for credit?

Kemper: I think you find that consumers are paying down debt, and they're also not spending as much. As a result, our interchange volume was down slightly. I think demand is certainly softer nationwide.

Our loans are up largely through market share grab, rather than through expansion of credit or economic recovery. We've been able to pick up market share while our competitors are internally focused. So, generally speaking, market demand is soft for credit as well as for us, and the data speaks to that nationally.

Schonberger: Refinancing has certainly gone up, but are you seeing improvement in demand for new mortgages?

Kemper: I think that's mainly where you're still seeing it. I don't think you're seeing any increases in purchase money. Our mortgage production was up almost 40% in the first quarter, but it was all refinancing.

Schonberger: What is your outlook for the credit card market? Is this a major shoe waiting to drop?

Kemper: It certainly is going to continue. You're going to see charge-offs for the industry go up, but I think most of the large increases have already taken place. The industry is currently somewhere around 8% or 9% for the first quarter. I think they'll run at those numbers or slightly higher for a while until the industry works its way through the losses.

Schonberger: President Obama is proposing new legislation that would govern credit card fees -- perhaps capping them. How would these new rules affect availability of credit? Is there the potential for this plan to actually make it harder for banks to offer credit, especially at a time when the consumer needs it most?

Kemper: I think very much so. I think you would find that the banks that tighten their standards would continue to make money. However, by … tightening their standards, they're going to weed out a large number of the folks that the government is intending to assist through the process. I think it will [have] a very negative impact on the consumer.

Schonberger: The same for the commercial/corporate side -- what are you seeing there? Are businesses -- big and small -- lining up for credit, or are they simply saying, in light of the recession, why should I increase my fixed costs to expand in an uncertain environment?

Kemper: Capital expenditures are down. The commercial customer base is largely focused on expense management and weathering the storm. So, I think the demand for credit in the commercial space is soft.

Schonberger: What's your outlook for the commercial real estate market?

Kemper: I think commercial real estate has yet to play out in the banking system.

I think that we've played out subprime largely, but I think that the same practices and the same players extended lost credit into the commercial real estate space in the past five years or so, and I think those losses are yet to be realized in the system.

Schonberger: What are you seeing in the states/areas you serve?

Kemper: Generally speaking, our market territory is the mid-west. We didn't have these large swings in real estate values. So, we're somewhat isolated as a region and as an institution from the problems that were caused on bank balance sheets through expansion into these markets where real estate values had expanded so wildly in such a short period of time.

Schonberger: How do you feel about the outlook for credit markets now that government programs such as the TALF and the PPIP are in place? Do you think those programs will work in aiding lending or shoring up the banking sector?

Kemper: A couple of the programs conflict with each other. The PPIP is designed to get the market going again, to get these assets acquired and to get the originations flowing again. However, the problem with that is we've suspended mark to market.

So now the banks aren't so excited to unload these assets because they don't have to mark them to market any more. Therefore, I think those two programs conflict with each other, and I don't think they're going to see the impact that they wanted to see from those programs. I think there's still some major pressure on the system.

The real way that we recover from the problems that we have is by letting the free market system work, letting the losses be realized, and letting the banks that have gotten themselves into trouble work through their problems.

Let the banks that have gotten into trouble fail or merge. Let the real losses take place and create a real bottom. We've created a false bottom. We've created a bubble within a bubble, and we need to allow the real bottom to form. We can't realize the bottom by creating a false bottom, and until we do we'll be bumping along and creating a false sense of recovery.

Schonberger: What needs to happen for you to increase lending or for lending to become more normalized? Is it the economy? Or is it Wall Street? Also, do the comps even matter? Our prior points of comparison are skewed -- in other words, once that happens, should expectations be lowered for a new "normal"?

Kemper: I think real estate values have to recover for the economy to recover and for lending to really get jump-started again. So that as a baseline. Getting real consumer credit into the real estate space again is not the banks; it's the secondary market. It's the secondary market that's frozen, not the banking environment, and until we can figure out how to get private capital flowing into the secondary market, we will probably not see a real rebound.

Got questions you'd like me to ask other CEOs? Chime in below in the comments section.

For Related Foolishness:

Jennifer Schonberger does not own shares of any of the companies mentioned in this article. United Parcel Services is a Motley Fool Income Investor selection. The Motley Fool has a disclosure policy.