Many bankers in Minnesota got a chance to meet the new commerce commissioner for the state, Michael Rothman, at ICBM’s Day at the Capitol last week; many more bankers will meet him tomorrow the Minnesota Bankers Association’s Day at the Capitol tomorrow. If you won’t be making either event, you can get a pretty good introduction to Mr. Rothman from this article produced by Minnesota Public Radio.
U.S. Rep. Ron Paul (R-Texas) vaulted to the national stage with his run for president in 2008. The pillars of his platform were ending the income tax and abolishing the Federal Reserve. A lot of people ignored him in the presidential race, but I don’t think we can ignore him now.
Paul is the chairman of the House Financial Services subcommittee on domestic monetary policy and technology. In other words, he is leader of the committee that has jurisdiction over the Federal Reserve’s most important work — that is, work related to monetary policy. You might remember that Paul authored a book called “End the Fed,” which sold enough copies in 2009 to make it a best seller on some lists.
Two days ago, Paul introduced H.R. 459, the “Audit the Fed” bill. Similar legislation was introduced in the last congress and was actually part of the Dodd-Frank Act until it was removed at the last minute in conference committee. The bill calls for a thorough audit of the Federal Reserve. In the last congress, Paul won the support of 320 co-sponsors; he has 56 co-sponsors so far on the current bill.
It seems unlikely that the Fed will ever go away, and in this age when transparency is all the rage, another audit of the Fed seems like a popular idea. My main concern is politicization of the Federal Reserve. Effective monetary policy must be free of political encumbrances. Politicization of monetary policy ultimately leads to cronyism or socialism. For the sake of our economy, I hope the Fed holds on to as much independence as possible.
On Tuesday, my faith was restored: there are rational people at the Financial Accounting Standards Board. That’s the day FASB agreed that traditional loans held by banks should not be subject to fair-value accounting, or mark-to-market valuations. The minutes from Tuesday’s meeting spell it out.
More than 2,800 people in banking and other industries sent FASB letters commenting on its proposal to require fair-value accounting for banks and their loan portfolios. The letters made it clear that such accounting treatment simply is not consistent with most banks’ business model. The American Bankers Association cheered FASB’s shift on this issue. Here is their statement.
The issue won’t be settled until there is a final rule, and there remains some questions surrounding the accounting treatment of securities held by banks. Nonetheless, this general move away from mark-to-market on loans is an enormous, positive development.
Sixty-eight bankers met for the Day at the Capitol event sponsored by the Independent Community Bankers of Minnesota earlier today at the Saint Paul Hotel. The program consisted of short presentations from Senate Minority Leader Tom Bakk (DFL-Cook);Senate Majority Leader Amy Koch (R-Buffalo); House Speaker Kurt Zellers (R-Maple Grove) and House Minority Leader Paul Thissen (DFL-Minneapolis). Bankers also had the opportunity to hear from new Commissioner of Commerce Michael Rothman.
Koch outlined Republican priorities for the session, which are jobs, budget resolution and government reform. She and Zellers noted that the coming biennium is projected to have $1.5 billion more in revenue than the state had last biennium. “We believe we absolutely can budget with existing revenue,” Koch said. Zellers said Colorado, a state roughly on a par with Minnesota, spends $20 billion per biennium, compared to Minnesota which spends $30 billion. Zellers asked what’s so different between the states?
Bakk, however, said “additional revenue is going to have to be part of the conversation.” He said tax cuts will not automatically lead to job growth. He noted that Minnesota is home to 21 Fortune 500 companies, while South Dakota has none, even though it has a more favorable business tax climate. Bakk said businesses like to operate in Minnesota because of the qualify of the state’s workforce and the quality of its living. He said state spending has historically contributed significantly to that quality.
Thissen, an early candidate for governor in 2010, said “the budget has been balanced on the backs of average citizens.” He said his priorities are making sure Minnesota returns to prosperity for everyone, and getting the budget under control.
Rothman, who grew up in Chaska, Minn., went to Carlton College (Northfield, Minn.) and the University of Minnesota Law School, said he contacted several state industry leaders upon announcement of his appointment. He noted that he contacted Marshall MacKay, ICBM president, and Bill Rosacker, president/CEO of United Bankers Bank, Bloomington. He said he has known ICBM legislative affairs expert David Skilbred since 1988 when they both worked on the staff of the Minnesota senate.
Rothman worked at the Minneapolis law firm of Winthrop & Weinstine. When he was appointed commissioner, he said one of the first things he did was sit down with Ed Drenttel, who head’s the firm’s banking practice. He gave Rothman a crash course on industry issues, information which supplemented Rothman’s own direct industry experience.
Rothman said he wants to be “the commissioner you know both by name and by my face.” He encouraged bankers to contact him. “The state’s financial picture is dependent upon you doing well,” he said.
This story about a big Chinese bank buying retail branches in the United States makes me nervous. There is something about foreign companies gaining control of our financial system that really makes me uncomfortable.
When we lose our banks, we lose a bit of our culture; we have an example of that right here in Minneapolis.
For years, Richfield Bank & Trust was a leading community bank in the Twin Cities. It was founded by a former state senator, William Kirchner, in 1947, and I remember doing a big write-up in NorthWestern Financial Review for the 50th anniversary in 1997. It was among the largest state-chartered banks in Minnesota for many years.
Then in summer of 2002 it was purchased by M&I, another venerable franchise, although based out of state. It was a blow to people who had always looked to RB&T as its locally-based bank. Now, Wisconsin-based M&I announces it will be acquired by Harris Bank in Chicago, which is owned by BMO, the Toronto, Canada-based Bank of Montreal. So what started out as a community bank in the modest suburb of Richfield is now part of a mega bank based in another country.
Acquisitions are one thing, but when the acquirer is based in another country, it’s just tougher to swallow.
What are we to make of H.R. 87, the legislation introduced by U.S. Rep. Michele Bachmann (R-Minn.)? The bill, introduced earlier this month, would repeal the Dodd-Frank Act. Here’s what she said about the bill:
“I’m pleased to offer a full repeal of the job-killing Dodd-Frank financial regulatory bill. Dodd-Frank grossly expanded the federal government beyond its jurisdictional boundaries. It gave Washington bureaucrats the power to interpret and enforce the legislation with little oversight.
“Dodd-Frank also failed to address the taxpayer-funded liabilities of Fannie Mae and Freddie Mac. Real financial regulatory reform must deal with these lenders who were a leading cause of our economic recession. True reform must also end the bailout mindset that was perpetuated by the last Congress. I am proud to work towards repeal of Dodd-Frank because Congress must protect the taxpayers, instead of handing out favors to Wall Street.”
Bachmann is correct about one of the major deficiencies of Dodd-Frank, which is that it fails to address the housing GSEs.
But, realistically, this bill has no chance of becoming law. Far more realistic are incremental efforts to roll back some of Dodd-Frank’s worst provisions, such as the Durbin amendment. Apparently, U.S. Rep. Barney Frank, the former House Banking Committee chairman, is willing to talk about that.
The interesting thing about Bachmann is she sat on Frank’s House Banking Committee. It seems that during the 18-month debate the led up to the passage of Dodd-Frank last summer, she could have been much more vocal about throttling back this legislation. She could have done a lot more good then in terms of mitigating the impact of reg reform than she can do now by calling for repeal of the law.
Bachmann has talked of running for president; she has the fundraising prowess and the oratorical skills to make a credible candidate. But I would like to see her pay a lot more attention to the nitty-gritty committee work of lawmaking before I would believe she has the legislative muscle to shepherd sweeping repeal legislation through Congress, let alone run the country.
One of the biggest questions in banking these days is how big do you need to be to survive? I am hearing different answers — $100 million in assets, $250 million, some say $400 million. Clearly, the regulatory compliance obligation is increasing and that requires more overhead. The larger an organization, the easier it is to handle overhead costs.
Think about a bank with $100 million in assets. If it is in a good market, it might have $80 million in loans. If it manages is assets and liabilities well, it might make 4 percent on those loans, which is $3.2 million. Figure another $100,000 in income from non-interest areas, so revenue totals $3.3 million.
A $100 million bank might have 20 employees. At an average salary of $50,000 each, you end up with a $1 million payroll. Add another $300,000 for benefits and payroll taxes. That leaves $2 million for everything else. If you have $85 million in deposits, figuring 20 basis points for deposit insurance, that’s $170,000. Figure another $100,000 to be added to the loan loss reserve. There are other expenses, including building maintenance, technology contracts, legal and accounting expenses, and many, many other things. If you want to grow, you have to devote money to marketing. If you have debt on your building, that’s going to be a big expense. And if you have debt on the bank itself, you’ll have that additional expense.
My point is, you can blow through that $2 million very quickly. This example assumes a fairly efficient, well run bank. If you have more employee, operate several branches or have a CAMELS rating of 3 or higher, your expenses are going to be (much) higher. So can a $100 million bank make it? How about smaller banks?
I sure hope they can make it. Communities all over the Upper Midwest depend on their local bank, most of which have assets of $100 million or fewer. In Minnesota, for example, 235 of the state’s 405 banks have fewer than $100 million in assets. In Iowa, 173 of the state’s 363 banks have less than $100 million. In Illinois, it’s 261 of 609; in North Dakota, it’s 53 of 92; in South Dakota it’s 50 of 84, and in Nebraska it’s 142 of 226.
It is important to note that many smaller banks do just fine. In Minnesota for example, 170 of those 235 banks made money last year. An important factor, however, is the number of shareholders. If a bank is owned by a single person or family, then a little earnings goes a long way, but if earnings have to be distributed among 100 to 150 shareholders, then there’s going to be more pressure to generate earnings.
If you run a bank and have comments to add to this analysis, please leave a comment. I think this is going to be THE discussion of 2011.
Will the economy improve noticeably in 2011? Business leaders in Wisconsin are cautiously optimistic that they will. One recent survey notes that three-quarters of Wisconsin bankers say the state’s economy is improving, while another survey reports that about half of the state’s business owners and managers expect increases in revenue, profitability and wages for 2011.
Seventy-six percent of 106 bank executives surveyed by the Wisconsin Bankers Association said that the state’s economy has hit bottom and is improving. That is up from 56 percent six months ago and a reversal from a year ago when 70 percent said the Wisconsin economy was “still weakening.”
Nonetheless, 77 percent of bankers in the most recent survey characterized current economic conditions as fair, while 15 percent rated them poor. This is the lowest statewide rating since the WBA survey began in 2004. Current demand for business loans was rated fair by 54 percent of bankers and poor by 38 percent. SIxty-two percent don’t expect demand for business loans to improve during the first six months of 2011, while 34 percent predict demand will go up.
Bankers said their biggest obstacle to business lending is low demand (38 percent), followed by a lack of qualified borrowers (36 percent) and regulatory burden (18 percent). Click here to read WBA press release.
WBA testified at a state senate hearing yesterday, saying lending is gradually increasing as the economy recovers. (See details here.)
A First Business Bank survey of business operators assesses the Wisconsin economy in the northeast region, Milwaukee and Madison. It found reason for optimism in all three areas, although the northeast is fairing best. The northeast region had the highest percentage of firms reporting an increase in actual sales revenue, actual profitability and actual changes in wages. Northeast also had the highest percentage of firms reporting exceeding expectations for performance in 2010.
Dave Vetta, president and CEO of First Business Bank-Milwaukee, said businesses are moving in the right direction, although he said “we are not out of the woods.”
“Dane County (Madison) showed the highest percentage of businesses that increased prices in 2010 and had the highest percentage of firms projecting increased prices for 2011,” noted Mark Meloy, president and CEO of First Business Bank-Madison.
“There is reason for optimism,” said Corey Chambas, president and CEO of First Business Financial Services, the holding company for First Busienss Bank. “2010 was a chellenging year, however, there are signs that Wisconsin businesses are weathering the storm.”
See the full report here.