Monthly Archives: July 2010

Rolnick’s last day at the Fed before moving over to U of M

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Today is Art Rolnick’s last day at the Federal Reserve Bank of Minneapolis, where he is a senior vice president and economist. He is moving over to the University of Minnesota where he will head up the Humphrey Institute’s Human Capital Research Collaborative, a joint effort of the University and the Fed on issues related to early childhood education.

Mr. Rolnick has been a tremendous asset to the Fed and the broader community for more than two decades. I have listened to a lot of economists during my career and he does a better job than anyone describing the human meaning of the numbers. In other words, he not only describes the charts and graphs which provide a snapshot of the economy, but he is able to say what that snapshot means in terms of the people in that economy.

His passion is early childhood education. He is not a fan of high taxes, but he makes powerful arguments about the value of directing tax dollars into early childhood education programs. It’s not just about day care, it’s about preparing children to live fulfilling lives as contributing citizens. The Star Tribune ran this interview with Mr. Rolnick recently, which gives you some insight into his thinking.

When you talk about the value of economic research, I think Mr. Rolnick gets it right. Numbers divorced from people really aren’t very useful. Mr. Rolnick always seemed to remember that economics is a subset of sociology.

Best wishes on your new endeavor, Mr. Rolnick.

Mark-to-market on loans poses big threat to community banks

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It would be understandable for bankers to believe that the big debate regarding the future of their industry is essentially overnow that the president has signed the Dodd-Frank Act into law. But that would be wrong.

I have been saying for a long time that even more important for community bankers than all the changes in the financial reform bill are the changes the Financial Accounting Standards Board wants. FASB wants banks to account for loans on a mark-to-market basis. Read the details here. Bankers have until Sept. 30 to file comments and they should take the opportunity to do so.

Mark-to-market on loans is a disaster for community banks and the industry needs to do whatever it can make sure they don’t have to follow these rules. The FASB press release notes smaller banks will have four additional years to comply once the rule is passed, but that’s not good enough. Click here to read letters which have been submitted to FASB on this topic so far.

Mark-to-market accounting on loans ultimately will reduce the availability of credit. Businesses at the margins are likely to be the biggest losers. Start-ups, seasonal businesses and struggling firms that might otherwise get character loans from community banks are not likely to be able to obtain those loans in a market-to-market environment. A lender is not likely to be willing to gut it out through an occasional bad quarter with a borrower if he has to take a hit to capital to do it.

The key advantage that community banks have over larger banks is the ability to make character loans. Mark-to-market forces all lenders to treat all loans like a commodity, and there is no way a community bank can compete selling a commodity.

Plan vault cash carefully and reduce expenses

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Noel Busch is a well-known consultant who has worked with literally thousands of banks over a career spanning 38 years. He pens a very useful article that is set to appear in the August 1 edition of NorthWestern Financial Review. He discusses many ways for banks to increase earnings and reduce costs without increasing their risk.

He discusses, for example, vault cash. He says most banks overdo it, keeping much more on hand than necessary. “Vault cash levels are viturally always found to be higher than actual usage would call for, due to many factors — some historical, others psychological and others that are the product of varying degrees of calculated guessing,” he writes.

“In addition to the opportunity cost of excessive cash surpluses, cash shipping costs are seldom measured relative to the cost of carrying cash. Plotting cash usage and fluctations related to day of the week, holidays, community festivals and paydays enable the bank to define optimum levels and to identify optimum order quantities, deliveries and shipments.”

Busch estimates that in most cases a bank can reduce its cash delivery costs by 15 percent to 25 percent with some careful planning.

Watch for your August 1 edition of NorthWestern Financial Review to land on your desk in the next week or so. Not a subscriber? Click here for subscription details.

Banking becoming a utility?

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For a long time industry observers have suggested that the banking industry is poised to move toward the public utilities model. There are enough policy-makers and elected officials who believe the payments system is similar enough to the sewer and electric systems, that banking really should be treated like a utility.

I think you can make an argument that we are headed in that direction. Sheila Bair’s interest in creating a small dollar loan product is a big step. The FDIC, a government agency, is devising a product for the industry to offer. Notwithstanding the merits of the product, why is it appropriate for the government to create financial products?

The creation of a Consumer Financial Protection Bureau as part of the Dodd-Frank Act is another huge step in the direction of “utilitizing” the industry. Some press accounts have referred to CFPB as the most powerful financial regulatory body ever created, with unbelievably little accountability. The truth is, we really don’t know what this agency is going to look like or what it will do, but certainly its potential is ominous. It is not crazy to believe that it will evaluate financial products for the purpose of telling financial services organizations which products they should offer and which they should discontinue. They may also have a thing or two to say about product pricing. All this sounds an awful lot like the way public utilities are regulated.

Since it is the largest institutions which will be hit hardest by the CFPB, I see them as being most vulnerable to being neutered into utilities. Certainly our country can function with a utility-like financial services sector, but we will lose innovation, creativity and fresh ideas. If the people working in financial services have to worry more about pleasing regulators than customers, then it’s all over.

A functioning financial services sector isn’t good enough; we need a thriving financial services sector. If the banks thrive, the economy thrives and the whole country thrives. Sure regulators have a role; they need to stem abuses, but they don’t need to suck the creativity out of the whole system. Because, frankly, I expect more from my bank than I do from my water company.

Seven banks failed Friday

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The Commerce Department closed the Community Security Bank of New Prague, Minn., on Friday — a day on which regulators closed seven banks bumping the year-to-date total of closed banks to 103. Last year at this time, regulators had closed 64 banks in a year when they closed 140 total.

Community Security Bank lost $1.8 million in the first quarter, and reported equity capital of 3.09 percent as of March 31, 2010.

Roundbank of Waseca, Minn., purchased most of the assets and assumed the deposits of the closed bank. Roundbank paid the FDIC a premium of 0.89 percent to assume all $99.7 million in deposits and most of its $108 million in assets. In its press release, the FDIC does not mention a loss sharing agreement on the assets.

The FDIC estimates the resolution will cost the deposit insurance fund $18.6 million.

It is interesting to note that this is the seventh bank failure in Minnesota this year, while no surrounding state — North Dakota, South Dakota, Iowa or Wisconsin — has experienced any bank failures this year. I understand the rural nature of those states compared to the Twin Cities, where most of the Minnesota bank failures have occurred. Nonetheless, housing markets have been strong in Madison, Wis., West Des Moines, Iowa, and Sioux Falls. Real estate has caused a lot of troubles in the banking industry, but apparently the effects have been minimized in those markets.

Some pundits would suggest that Minnesota is simply over-banked, with a bank for every 12,652 citizens. That’s certainly a valid argument compared to Wisconsin, which has a bank for every 20,000 citizens. But South Dakota has a bank for every 9,783 people; Iowa has a bank for every 8,174, and North Dakota has a bank for every 7,021.

Economic conditions are generally getting better, but bank conditions are a lagging indicator, so we will see trouble in some banks for months to come. Bank failures will continue to be in the news throughout 2010 and probably through 2011.

Title trouble

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I know someone who recently sold their home. Everything was going great until four days before the closing when they got a call from their closer that there was an unsatisfied lien on the property. The homeowners were shocked. Turns out a mortgage they had in the early 1990s had not been properly recognized as closed. County records had not been updated to show the loan had been paid off in 1995. Fortunately, the homeowners had the loan origination documents, and a bank statement from 1995 showing the loan was paid off.

The bank that lent the money had been purchased by a larger bank about a decade ago. When the homeowners called, the acquiring bank referred the homeowners to a toll-free number that put them in touch with a customer service person in a town some 400 miles away. The customer service person there told the homeowners that they would need three to five business days to research the situation. But she warned that given the situation involved something that happened 15 years ago and banks are only required to keep records seven years, she was not hopeful the situation could be resolved.

The homeowners were disappointed that the bank statement from 1995 showing the loan payoff was not sufficient to satisfy the title company. They were further disappointed that the bank seemed so indifferent about resolving the problem. And the homeowners were particularly disappointed that it looked like their closing would be pushed back; it seemed there was no way they were going to get a satisfaction letter before the originally scheduled closing.

The homeowners’ realtor, however, took matters into his own hands and contacted someone else at the bank. It was a local contact who had helped the realtor on another matter a year or so ago. That bank employee was able to go to the bank’s archives and found the loan documents from the early 1990s. With the documents located, it was no problem for the bank to produce a mortgage satisfaction letter that met the title company’s requirements. The bank agreed to immediately notify the county so they could get their records up to date.

It remains unclear why the county records were out of date. Did the bank neglect to inform the county 15 years ago? Were the borrowers responsible for notifying the county? Did the county fail to record the info even after being informed? No one knows.

I share this story because there have been many, many bank acquisitions in the last one or two decades, and the acquiring bank assumes responsibility for mortgages made by the acquired bank, even mortgages that have long since closed. I wonder how many of them were not properly recorded by their respective counties? How many will show us as a problem that threatens to delay future real estate transactions? Maybe it is a minor problem in the scheme of things, but it certainly doesn’t seem minor to anyone who is planning to close on the sale or purchase of their home.

National charters and the next comptroller

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Comptroller of the Currency John Dugan announced he will leave his office on August 14, completing his term. He had the job during a very interesting time in the history of the industry.

My guess is the OCC will become more important as a regulatory agency in the future. Although the Dodd-Frank bill preserves the dual banking system, I see the national charter going in a different direction than the state charters. Dodd-Frank makes a lot of distinctions between large banks and smaller banks, with nationally-chartered banks generally taking a tougher hit on new regs and costs.

Currently, there are 1,430 nationally-chartered banks and 5,247 banks with state charters. Dodd-Frank, with its emphasis on capital and its increased compliance obligation, will lead to consolidation. Where will most of the sales take place? Although the rules hit larger banks harder, smaller banks are less equipped to handle any increases in rules or costs. I am willing to bet more state-chartered bank owners sell than national bank owners. Proportionally, the number of national charters will grow compared to state charters. That’s just a guess.

It will also be interesting to see whether the proportion of national bank failures changes in relation to total bank failures. On March 19, Comptroller Dugan noted in a speech in Orlando that 33 of the 195 banks to fail since the start of the financial crisis in 2008 had national charters. That’s 17 percent, which aligns almost exactly with the percentage of national charters to total bank charters. As the provisions of Dodd-Frank become implemented, it will be interesting to see, albeit years from now, whether failures skew one way or the other, or whether they remain evening distributed among the charter types.

So whom ever President Obama selects as his next Comptroller will certainly have an interesting environment in which to work, although for reasons much different — we hope — than Dugan had.

Jobs biggest challenge to rural economy

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Lack of hiring will be the most significant negative factor affecting the rural economy in the Upper Midwest, according to bankers who participated in the July Rural Mainstreet Index compiled by Creighton University, Omaha, Neb. Only 10 percent of bankers said they see positive impact from the 2009 stimulus spending package. And two-thirds of the bankers said they expect the financial reform legislation to have a negative impact on community banks. Farmland prices are generally rising, although the index indicates that bankers see contraction in the overall rural economy. The index focuses on some 200 rural communities in 10 Midwest states.

After recording an index above growth neutral for two straight months, the overall index for the Rural Mainstreet economy dipped below growth neutral 50.0, according to the July survey. The Rural Mainstreet Index (RMI), which ranges between 0 and 100, sank to 49.3 from June’s 52.6 and May’s 54.3.

Creighton University economist Ernie Goss said, “Much like other economic indicators from across the nation, our survey is signaling slowing in economic progress. However, surveys over the past several months show an economy that has improved significantly from last year at this time.”

The farmland-price index moved above growth neutral for a sixth straight month to 52.5, down slightly from June’s 54.7. “The farm economy has clearly improved from last year and we are seeing that reflected in farmland prices. However, the strengthening of the U.S. dollar, which has dented farm commodity prices, has slowed the growth in farmland prices,” said Goss.

Terry Engelken, CEO of Federation Bank in Washington, Iowa, said, “We are seeing a few farmland sales over $7,000 per acre.”

The farm equipment-sales index slipped to 51.8 from 53.1 in June. “The outlook for farm income for 2010, while still healthy, has softened a bit lately. This has cut into the growth in farm equipment sales,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

For a fifth straight month, all bank indicators were above growth neutral. The loan-volumes index dipped to 53.1 from June’s 57.9. For July, the checking-deposit index improved to 54.6 from June’s 53.5. The index for certificates of deposit and other savings instruments climbed to 55.4 from 51.8 in June.

This month, bank CEOs were asked to assess the financial reform bill just passed by Congress. Only 29 percent expect it to have a positive influence on community banks while 66 percent anticipate a negative impact. The remaining 5 percent expect little or no impact stemming from the reform package. Some bankers voiced concern for the consumer. For example, Dan Coup, CEO of the First National Bank in Hope, Kan., said, “The sad part about the whole package is that the consumer will again be the biggest loser.”

Amplifying the negative sentiment for the bill, Barry Linnens, CEO of Cottonwood Valley Bank in Cedar Point, Kansas said, “Our small community banks, did not create this situation. However, we will be the first to step up to the plate and help the local community and economy.” On the other hand, Pete Haddeland, CEO of the First National Bank in Mahnomen, Minn., expects the financial reform package to reduce his bank’s FDIC premiums by 39 percent.

After moving above growth neutral for two consecutive months, the new-hiring index fell below 50.0. The July hiring index slumped to 45.4 from June’s 50.9 and May’s much healthier 56.1.

Much like other elements of July’s survey Rural Mainstreet, retail sales nosedived with a reading of 41.7 for July, well off of June’s 52.6. The economic confidence index, which reflects expectations for the economy six months out, slipped to 52.4 from June’s 56.1.

As indicated by Steven Lane, CEO of Security Savings Bank in Farnhamville, Iowa, “People seem to have very little confidence in the economy getting better.” After two straight months of healthy new home sales readings, the July index plummeted to 41.7 from 56.1 in June and 58.8. “Much like the rest of the nation, residential housing has hit a roadblock,” said Goss.

According to Dale Bradley, CEO of Citizens State Bank in Miltonvale, Kan., “There are many economic bumps in the road before we see progress in the U.S. Economy.”

Here is a state-by-state summary:

Colorado:Colorado’s RMI for July once again moved below growth neutral to a weak 45.5 from June’s 47.6. The July farm and ranch land price index dipped to 52.1 from June’s 53.7. Colorado’s farm-equipment sales index moved lower to 50.4 from June’s 51.1. The rate of job losses for Rural Mainstreet Colorado over the past 12 months was 2.7 percent.

Illinois:For a third straight month, Illinois’ RMI advanced above growth neutral. The July reading was 53.4, down from June’s 54.6. For a sixth straight month, farmland prices advanced above growth neutral with a July reading of 56.0, down from 57.2 in June. Farm-equipment sales for July dipped to 54.3 from June’s 54.6. Jim Shafer, president of the First National Bank in Tremont, reported that home sales, hiring and the overall economy were all up slightly. The rate of job gains for Rural Mainstreet Illinois over the past 12 months was 1.5 percent.

Iowa:Iowa’s RMI once again climbed above growth neutral with a July index of 52.5, down slightly from June’s 54.2. The farmland- price index dipped to a still healthy 55.6, down from June’s 57.0. The state’s farm- equipment sales index declined to 53.9 from 54.4 in June. Charles Helscher, president of Farmers Savings Bank in Keota, reported that, “In our area, beans look decent and some corn planted in the first planting window appears average at best, but the corn planted late leaves a lot to be desired.” He expects no bumper crop in his area. The rate of job gains for Rural Mainstreet Iowa over the past 12 months was 0.4 percent.

Kansas:The RMI for Kansas remained above growth neutral 50.0 for the month. The index dipped to 51.2 from 53.1 in June. The farmland-price index decreased to 54.9 from June’s 56.4. The July agricultural equipment sales index slipped to 53.2 from June’s 53.8. The rate of job losses for Rural Mainstreet Kansas over the past 12 months was 0.1 percent.

Minnesota:The RMI for Minnesota moved lower to 54.5 from 57.0 in June. Minnesota’s farmland-price index decreased to 56.6 from June’s 58.4. The July agricultural equipment-sales index stood at 54.9, down slightly from 55.8 in June. Pete Haddeland, CEO of the First National Bank in Mahnomen, said, “Crops look very good.” The rate of job gains for Rural Mainstreet Minnesota over the past 12 months was 1.7 percent.

Missouri:Missouri’s RMI slumped to 49.6 from June’s 51.6. The July farmland-price index for Missouri declined to 54.1 from June’s 55.7. The July farm-equipment sales index decreased to 52.4 from June’s 53.1. The rate of job losses for Rural Mainstreet Missouri over the past 12 months was 0.6 percent.

Nebraska:The July RMI for Nebraska dipped slightly to 53.2 from June’s 55.3. The farmland-price index for July decreased to 54.2 from June’s 57.6. The state’s farm-equipment sales index sank to 54.2 from 55.0 in June. The rate of job gains for Rural Mainstreet Nebraska over the past 12 months was 1.0 percent.

North Dakota:For the 14th straight month, North Dakota’s RMI was the highest in the region. However, the index slid to 56.5 from June’s 58.5. North Dakota’s farmland-price index declined to 57.6 from June’s 59.1. Farm-equipment sales stood at 55.9 down slightly from June’s 56.5. The rate of job gains for Rural Mainstreet North Dakota over the past 12 months was 2.8 percent.

South Dakota: For a third straight month, the RMI for South Dakota was above growth neutral with a July reading of 50.8, down from 53.0 in June. The state’s farmland-price index sank to 54.7 from 56.4 in June. South Dakota’s farm-equipment sales index was 53.0 for July, compared to 53.8 for July. The rate of job losses for Rural Mainstreet South Dakota over the past 12 months was 0.7 percent.

Wyoming:Wyoming’s RMI for July sank below growth neutral with a reading of 47.5, down from June’s 48.8. The July farm and ranch land price index declined to 53.1 from June’s 54.3. The state’s agriculture equipment sales was unchanged from June’s 51.7. The rate of job losses for Rural Mainstreet Wyoming over the past 12 months was 1.6 percent.