Monthly Archives: August 2010

Industry earnings show improvement

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Fewer banks are losing money. That’s the word from the FDIC this morning as the agency releases second quarter earnings figures for the industry. Here’s the FDIC announcement.

This statement from ABA’s chief economist, Jim Chessen, provides a little more perspective:

Today’s report indicates that the banking industry continues to regain its strength, though the fragile economy still presents significant challenges.  Banks have increased their capital levels and set aside strong reserves to cover problem loans that typically result from high levels of unemployment and business failures.  Problem loans are down, allowing banks to put losses behind them and look for new lending opportunities as the economy improves.

The decrease in loans outstanding is not unexpected given the still weak economy and the regulatory uncertainty that has been hovering over the industry for nearly two years.  Decreased loan levels are in large part due to very low demand from businesses and consumers.  Businesses are still reluctant to take on new debt without having hard evidence that consumers are willing to buy their products.  The economic outlook is still cloudy, which makes a prudent approach to credit a necessity.

Banks added another $27 billion in equity capital in the second quarter and total industry capital is now just short of $1.5 trillion.  When added to the more than $250 billion in reserves banks have set aside to cover losses, this makes for a total buffer of roughly $1.75 trillion against losses.  In addition, the capital-to-assets ratio – a key measure of financial strength – continues to improve and is at the highest level in decades.  In fact, 95.6 percent of banks – holding over 98.8 percent of the industry’s assets – are classified as ‘well capitalized,’ which is the highest regulatory designation possible. 

The increase in the number of banks on the list of troubled institutions is not surprising given some parts of the country are still mired in the recession.  The banking industry is committed to maintaining the strength of the deposit insurance fund and all costs of the FDIC are borne by the industry, not taxpayers.  Each depositor is fully insured up to $250,000, and in the 75-year history of the FDIC no depositor has ever lost a penny of insured deposits.

Navigating the ups and downs of the economy is nothing new to banking.  The vast majority of banks have been in business for more than 50 years, and one of every three banks has served its local community for more than a century.  Through good times and bad, it is this philosophy of building long-term relationships with customers that has made banks successful.

Pour gas on that fire

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I have read several summaries of the Dodd-Frank Act, but this is the first I’ve heard about a rule requiring companies to publish their CEO’s salary in relation to the mean salary atthe company. I am trying to figure our the merit of this requirement. Clearly, the author of this rule wants some kind of compensation reform — either lower wages for CEOs or higher wages for staff.

Let’s be clear that this kind of information is already available. Many newspapers and other publications publish the compensation of big company leadership. And there are many services, including the U.S. Census Bureau, that publish mean income, by household and/or individual. Looking at the two sets of data, we all have a pretty good idea of what’s going on in this country. There already are a lot of people outraged by the disparity between top earners and staff.

The Dodd-Frank Act provision will surely exacerbate the outrage. If such disparity is a legitimate Congressional concern, I would be much more impressed by actual measures to address it than mere efforts to incite hostility over it.

There is a lot of anger in this country now over a lot of issues; I am not comforted by the idea of pouring gasoline on this fire at this time. Congress needs to focus on taking real action; it needs to do much more than simply whip up sentiment. But with our polarized Congress and political scene, this may be the best they can do.

Industry consolidation will leave rural areas behind

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Charles Stones, president of the Kansas Bankers Association, used strong language to communicate his concern for the banking industry in light of additional regulations coming into effect. Stones was one of several people to testify at a field hearing August 23 in Kansas City, conducted by U.S. Rep. Dennis Moore (D-Kan.) chairman of the subcommittee on oversight and investigations for the House Financial Services Committee. Stones said a preponderance of new rules is going to drive many banks out of business:

Traditional banks feel the burden of regulation. For the typical small bank, more than one out of every four dollars of operating expense goes to pay the costs of government regulation. The passage of the recent financial reform legislation, which includes a new consumer financial protection bureau, will certainly add to the regulatory burden now faced by banks. In addition, the past year has seen a multitude of new regulations, from RESPA to Reg E. These new regs are taking a toll on banks, especially traditional community banks. For instance, the new RESPA rules are causing many banks, especially in rural areas to reconsider their participation in residential real estate lending. The question is: who will pick up the slack in these areas if the local community bank exits that market?…

These new regulations and laws are putting, and will continue to put, a huge amount of pressure on the earnings of banks. From exponential increases in FDIC premiums to the new laws and regs mentioned above, one consultant put it very succinctly, “Banks will have a harder time making money in the future.” This will inevitably drive banks to consolidate. Again, who will fill the void in small town Kansas if the current local bank decides it can no longer make a fair profit, and closes? It is time for Washington to realize that traditional banks have economic value in this country. It is not enough to say the words, it is time that policies, laws, rules and regulations begin to demonstrate that fact. Actions speak louder than words.”

Stone took particular aim at the Consumer Financial Protection Bureau and Reg E:

We believe that the CFPB will actually hurt consumers. A study by David Evans and Joshua Wright showed that “Under plausible yet conservative assumptions the CFPB would increase the interest rates consumer pay by at least 160 basis points, reduce consumer borrowing by at least 2.1 percent, and reduce the net new jobs created in the economy by 4.3 percent. The unintended consequences will hurt everybody while only protecting a very small few.

Evans is Lecturer, University of Chicago Law School; executive director, Jevons Institute for Competition, Law and Economics; and visiting professor, University College London. Wright is assistant professor, George Mason University Law School and Department of Economics.

And this is only the start… the unintended consequence of new very strict RESPA rules will likely be the departure of many small banks in rural areas from the residential real estate market. The result will be that many consumers will be unable to secure credit purchasing a home in rural areas of Kansas from a local bank. They will be forced to go out of market, if they can. Most non-bank lenders are unfamiliar with rural area and the low volume makes rural areas unattractive to those types of lenders.

 

N.D. economy strong while rest of country struggles

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I continue to be amazed at how well the economy is doing in North Dakota compared to the rest of the country. Amazing what happens when a good part of your state is an oil field.

Here is the latest news on the overall economy. Pretty dismal. By contrast, read these remarks by Mary Erman, chief operating officer of Starion Financial in Bismarck. Erman was elevated to president of the Independent Community Bank of North Dakota last week, when the group conducted its annual convention. Here is what she said about the state’s economy:

In looking at the North Dakota banking industry, I think we need to take note of how Independent Bankers have been committed to supporting their communities and serving their customers with integrity and good financial advice.  We are blessed with a thriving economy – some of which we should take credit for due to our practices of conservative sound banking.      

Isn’t it fun to see North Dakota in national publications – the July 12th  Newsweek included an article titled “The Great Great Plains” noting North Dakota’s unemployment for May at 3.6 percent compared to national unemployment at 9.7 percent.   The article also reported that Bismarck and Fargo are both in the top 10 of close to 400 metropolitan areas, according to data analyzed by economist Michael Shires for Forbes.  Much of the growth has come in high paying jobs – just in Bismarck, jobs in professional and business services have shot up 40 percent.

We are no longer viewed as the “Fargo” from the movie anymore – and do we hear anyone say “Buffalo Commons”?  Our very own “state owned” Bank of North Dakota has been in the national media and inundated with calls on why they are so successful. 

The strength in the energy industry has brought opportunities and challenges.  A flourishing ag economy and new manufacturing opportunities are having a positive impact in North Dakota small towns where independent bankers are ever involved in economic development and community support.  

Job Service N.D. showed a growth in our labor force of 4,000 since June 2009 translating into increased tax dollars, more consumer spending, and more deposit dollars while the Fed Gazette noted that N.D. shows the least loss of consumer borrowing in the 9th district – a recipe for a sound economy.  

On a more regional basis, Earnie Goss of Creighton University in Omaha released his Rural Mainstreet index yesterday for the month of August. It was down, and many bankers indicated they expect the country to return to recession in 2011.

More than four in 10, or 43 percent, said they thought a 2011 recession was likely or very likely. Only 26 percent indicated that a 2011 recession was unlikely or very unlikely. According to Frank Sullentrop, president, Legacy Bank in Colwich, Kan., “There is too much uncertainty (coming from Washington).  Businesses do not like to take financial risks in uncertain times.” 

But many signs were positive or neutral. The survey reports:

The farmland-price index moved above growth neutral for a seventh straight month to 55.3 from July’s 52.5 and June’s 54.7. “While Rural Mainstreet businesses are experiencing downturns in economic activity, farming income is holding up much better with resulting upturns in farmland prices,” Goss said.

The farm equipment-sales index rose to 52.7 from 51.8 in July. “Farm income will depend heavily on the value of the dollar.  As long as we don’t experience any significant upward moves in the value of the dollar, I expect farm income to continue to grow for 2010,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Many bankers reported very healthy crop yields. For example, Terry Engelken, CEO of Federation Bank in Washington, Iowa, said, “Our county ranges from excellent looking crops to some areas that were too wet to plant.”

Todd Douglas, CEO of the First National Bank in Fort Pierre, S.D., reported, “Although most area row crops look good, grass hoppers have caused damage west and south in our area.”

For a sixth straight month, all bank indicators were above growth neutral. The loan-volumes index increased to 54.2 from 53.1 in July.  For August, the checking-deposit index improved to 59.1 from July’s 54.6.  The index for certificates of deposit and other savings instruments slipped to 54.2 from July’s 55.4. Larry Winum, president of Glenwood State Bank in Glenwood, Iowa, reported that individuals and businesses are focusing on reducing their debt levels and cutting expenses, and as a result are borrowing less.

The August hiring index increased to a still weak 45.9 from 45.4 in July. “Most states in the region continue to lose jobs. Over the past year, Rural Mainstreet has lost approximately 3.5 percent of its total employment,” said Goss. Dale Bradley, CEO of Citizens State Bank in Miltonvale, Kan., echoed much of the sentiment saying, “The economy is certainly not out of the woods yet.”

Much like other elements of August’s survey, Rural Mainstreet retail sales declined to 40.2 from a July reading of 41.7. The economic confidence index, which reflects expectations for the economy six months out, slipped to 46.0 from 52.4 in July and 56.1 in June.    

For a second straight month, the new home sales index sank to 38.8, down from July’s 41.7 and well down from June’s 56.1 and May’s 58.8. “This is the weakest home sales reading that we have recorded this year,” said Goss.  

And Larry Rogers, president of First Bank of Utica, Neb., is concerned that increasingly, people seem to be more willing to walk away from their debt obligations.

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of the 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

New ATM, debit rules discriminate against smaller banks

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August 15 was the last day a bank could charge an overdraft fee on a debit card or ATM transaction by an existing customer if that customer didn’t opt in to the bank’s overdraft program. New rules are a reaction to cries from consumer groups that the overdraft fees have been excessive.

Currently, the new rules apply only to debit card or ATM withdrawals that exceed the account balances, but the FDIC on August 11 proposed additional rules restricting overdraft practices involving checks.

Many of the financial experts have been encouraging customers not to opt-in. They say that instead, they should work with their bank to set up an automatic sweep of funds from their savings account into their checking account in the event they overdraw their checking account.

Banks can no longer cover debit card or ATM withdrawals that exceed account balances if the customer did not opt in or make some other arrangement with the bank. That means some customers could be caught unaware at the checkout counter of a grocery story or other retailer when trying to make a big purchase when they only have little money in their account.

The new federal regulations are particularly discriminatory against smaller banks which typically lack the software for its ATMs to operate on a real-time basis. For example, a bank customer could go to a bank, visit with a teller at the window and withdraw nearly all the funds in his account. An hour or two later, that same customer would likely be able to go to an ATM and use his ATM card to withdraw an equal amount of money, far exceeding his actual balance. This is possible because many banks use ATM software that is updated in “batches” every few hours, or sometimes once a day. That means the balances reported by the ATM can be different from the actual balance of the account. Banks using this older technology are prohibited by law from charging the customer any kind of an overdraft fee if the customer did not opt in.

I have yet to see any good statistics on how many banks operate with this older technology. For many of those banks, the cost to upgrade is prohibitive.

I also haven’t seen any good statistics yet showing how effective banks have been in getting customers to opt-in. Have most customers opted in, or have most ignored the notices from their bank and fallen out of the system? Eventually, this information will come to light.

Financial literacy vs. greed

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The U.S. House of Representatives’ Financial Services Committee, subcommittee on oversight and investigations, conducted a two-part field hearing earlier this week. Part one was conducted under the name: “Too big has failed: Learning from Midwest banks and credit unions.” It took place Monday, Aug. 23 at Johnson County Community College in Overland Park, Kan. See this post. Part two was titled: “Empowering consumers: Can financial literacy education prevent another financial crisis?” It took place Tuesday, Aug. 24 at the University of Kansas in Lawrence.

Whether financial education can be effective in preventing financial crisis is an interesting question. Of course financial education is important. If people are smart enough to avoid bad financial transactions, everyone will be better off. But preventing the next financial crisis will require a lot more than financial education programs.

Note, for example, that numerous financial education programs already exist. Those testifying at yesterday’s hearing cited several of them. State Securities Commissioner Marc Wilson talked about the Kansas Council on Economic Education, and State Treasurer Dennis McKinney talked about a program called Save@School and yet another program called Kansas Investments Developing Scholars (KIDS). There are many other programs, many offered by the Federal Reserve Banks. And the American Bankers Association sponsors Teach Children to Save Day and other programs. So the problem is not a lack of programs.

Wilson noted the two main problems preventing additional success of these programs. The first is that teachers already have a full plate teaching the standard curriculum. It is difficult to ask teachers to present new material which crowds valuable and limited teaching time. Furthermore, many teachers are not particularly versed in financial knowledge themselves, so there is significant ramp-up time necessary to educate the teachers.

The second is that the biggest victims of financial scams are senior citizens. Many elderly people lack financial savvy. How do you reach this demographic with a financial literacy program? It doesn’t matter how good the program is if you can’t reach the people who need it most.

I actually don’t believe the financial crisis occurred because some people are stupid. I think it occurred because some people are greedy. And I think greed is a much tougher nut to crack than knowledge.

Community bank model sound, Hoenig says

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Tom Hoenig continues to be one of the biggest advocates for community banking. President of the Kansas City Federal Reserve Bank, Hoenig said the main threat to the community bank business model is bad public policy which gives advantages to the nation’s largest banks. The U.S. House of Representatives Committee on Financial Services, subcommittee on oversight and investigations, hosted a hearing in Overland, Kan., yesterday where Hoenig spoke.

“Over the past 20 years, as the banking industry has consolidated into fewer and larger banks, a perennial question has been, ‘Is the community bank model viable?’ The short answer is yes. The longer answer is yes, if they are not put at a competitive disadvantage by policies which favor and subsidize the largest financial institutions,” Hoenig said at the hearing conducted by U.S. Rep. Dennis Moore (D-Kan.).

“The community bank business model has held up well when compared with the megabank model that had to be propped up with taxpayer funding.

“Community banks will survive the crisis and recession and will continue to play their role as the economy recovers. The more lasting threat to their survival, however, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks… If allowed to compete on a fair and level playing field, the community bank model is a winner.”

Read his entire testimony here.

Look for hearing coverage in the Sept. 15 print edition of NorthWestern Financial Review magazine.

ShoreBank closes, Urban Partnership Bank takes over

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I thought with the support of Goldman Sachs, BofA, Citibank, JPMorgan and others, that ShoreBank would survive. But, on Friday, the Illinois Department of Financial and Professional Regulation closed the well-known Chicago-based community development bank, which had been operating under a cease and desist order for about a year. Here is the FDIC press release. That bank long had been trying to raise capital, and in the second quarter it reported a $39.5 million loss.

You might remember that last May, many of the nation’s largest banks made large public commitments to the bank in an effort to raise $200 million in additional capital. With such an infusion, it was anticipated the bank would receive an additional $75 million in TARP money and it would survive. Media reports say the bank raised a little over $140 million, the TARP money never came and the bank didn’t make it.

The FDIC announced on Friday that the deposits and assets of the failed bank will be taken over by the newly-chartered Urban Partnership Bank, which is being capitalized to the tune of $120 million by some of those same large companies –American Express, BofA, Citi, GE Capital, JPMorgan, Northern Trust, Goldman Sachs, Wells Fargo and others. David Vitale, a former First Chicago executive who recently joined ShoreBank, is chairman of Urban Partnership; Bill Farrow is president/CEO. This story explains that the new bank will continue the community development mission of ShoreBank.

Urban Partnership Bank paid the FDIC a premium of 0.50 percent to acquire ShoreBank’s $1.54 billion in deposits and most of its $2.16 billion in assets. Urban Partnership Bank obtained a loss-sharing agreement with the FDIC on $1.41 billion of the assets.

ShoreBank was founded in 1973 when Ron Grzywinski, Mary Houghton, James Fletcher and Milton Davis bought South Shore Bank and created a community development bank that served low-income customers and focused on unbanked neighborhoods. I read about Grzywinski and Houghton in Muhammad Yunnus’ book, Banker to the Poor. Yunnus founded Grameen Bank in India, and came to the United States to see whether micro-lending could help the American poor. He found Grzywinski and Houghton, who latched onto the micro-lending concept and found it to be valuable.

Anne Arvia was president and CEO of ShoreBank in 2005 when NorthWestern Financial Review magazine honored her as an “Outstanding Woman in Banking.” In 2006, she became CEO of Nationwide Bank, a subsidiary of Nationwide Insurance of Chicago.