Monthly Archives: February 2012

Capital demands mean less lending at smaller banks

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The impact of the recent regulatory focus on capital is evident in the year-end numbers released by the FDIC yesterday: lending is down, particularly among smaller banks.

The lending trend among banks with fewer than $100 million in assets speaks volumes. Here is the situation in six Upper Midwest states:

Illinois – At year-end 2009, the 273 smaller banks (less than $100 million in assets) had total loans of $12.4 billion and a loan-to-deposit ratio of 69.9 percent. At year-end 2011, total loans at the state’s 243 smaller banks were $11.8 billion and the loan-to-deposit ratio was 63.0 percent.

Iowa – At year-end 2009, the 180 smaller banks had total loans of $6.3 billion and a loan-to-deposit ratio of 75.4 percent. At year-end 2011, total loans at the state’s 160 smaller banks were $5.4 billion and the loan-to-deposit ratio was 69.3 percent.

Minnesota – At year-end 2009, the 241 smaller banks had total loans at year-end of $7.8 billion and a loan-to-deposit ratio of 78.6 percent. At year-end 2011, total loans at the state’s 220 smaller banks were $6.8 billion and the loan-to-deposit ratio was 70.7 percent.

Nebraska – At year-end 2009, the 152 smaller banks had total loans of $5.5 billion and a loan-to-deposit ratio of 79.3 percent. At year-end 2011, total loans at the state’s 127 smaller banks were $3.7 billion and the loan-to-deposit ratio was 75.1 percent.

North Dakota – At year-end 2009, the 58 smaller banks had total loans of $1.8 billion and a loan-to-deposit ratio of 71.2 percent. At year-end 2011, total loans at the state’s 48 smaller banks were $1.4 billion and the loan-to-deposit ratio was 62.6 percent.

South Dakota – At year-end 2009, the 50 smaller banks had total loans of $1.5 billion and a loan-to-deposit ratio of 76.1 percent. At year-end 2011, total loans at the state’s 44 smaller banks was $1.2 billion and the loan-to-deposit ratio was 70.1 percent.

It is important to note that the statistics show total lending in Illinois, Nebraska, North Dakota and South Dakota was up over the last three years since larger banks experienced loan growth. In Iowa, the total lending level was virtually unchanged.

It should not come as a surprise that regulatory demands for increased capital should hurt lending at smaller banks more than at larger banks. At larger banks, particularly those that have access to capital markets, raising additional capital is easier than it is at smaller banks. At many smaller banks, the only way to raise the capital level is the shrink the balance sheet, which means less lending.

Furthermore, deposits are way up from 2009, making the current loan-to-deposit ratios look particularly weak.

Critics are quick to say that smaller banks don’t want to lend but I don’t think that is it at all. Banks make their money by lending, so it is hard to argue they don’t want to lend. By demanding more capital, regulators can say they are making smaller banks safer, but at the same time, they are making them less useful. And that’s a shame for everyone.

Nebraska banker featured as he prepares for national leadership role

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We have the privilege of profiling Nebraska banker Jeff Gerhart in the March 1 edition of NorthWestern Financial Review magazine. Subscribers should be getting their copies in the mail this week. Gerhart, president/CEO of Bank of Newman Grove, Neb., is chairman-elect of the Independent Community Bankers of America. Gerhart, a fourth-generation banker, will become ICBA chairman in about two weeks, exactly 40 years after his father, Bud Gerhart, headed the same association.

Ben Haller, the former publisher of Northwestern Banker, the precursor magazine to NorthWestern Financial Review, wrote about the Gerhard family in his 1990 book, “A History of Banking in Nebraska.” Here is a sample. (Dorothy Gerhart is the wife of Buzz Gerhart, Jeff’s grandfather. Throughout the 20th century, before Jeff Gerhart took the bank back to a state charter in 2005, the bank was called First National Bank.)

Dorothy Gerhart related a serious but humorous incident that occurred in 1929 when rumors flew everywhere about the other two banks in town being in trouble. The president of one bank, in an effort to shunt public feeling away from his institution, spread rumors that First National was in deep trouble and privately told business patrons they should transfer their deposits over to his bank. E.L. Gerhart got wind of this maneuver from long-time business customers and after hitting the roof in indignation came up with the ideal solution. He picked up the phone, called the Federal Reserve Branch in Omaha to discuss the situation and was assured he would have full cooperation. Promptly at high noon, when the main street was full of business people and the general public, a large, black limousine identified as “Federal Reserve Bank,” pulled up in front of the bank. Two large men sporting guns stepped out, obviously carrying large satchels of money into First National Bank. They left, waving to E.L. and Buzz, and the low-handed conspiracy of the competitor had been shattered while the false rumor was just getting started! Both of the other two banks were closed by state regulators on July 16, 1929.

We hope you enjoy our March 1 feature.

Data mining key to prosperous future?

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Technology was a major theme of the ABA’s National Conference for Community Bankers, conducted last week in Palm Desert, Calif. Jeremy Grutsche, the man behind the popular TV show and web site Trend Hunter, told bankers during the opening general session that they need to think hard about who they are and about what they are trying to do. Any banker (or anyone in business, for that matter) should be able to articulate their mission in seven words or less. He urged banks to “obsess over your story.” Clearly, in an industry where the product — credit — is increasingly becoming commoditized, bankers need to do all they can to identify distinguishing characteristics about their particular value proposition.

Later, Scott Klososky urged bankers to use all the tools available to them through the internet to find more customers and to learn more about the customers they have. Klososky said winners are no longer the biggest players, but the smartest players, and he said technology gives anyone the opportunity to be the smartest. And much of the technology is available to anyone over the internet. He showed bankers how to mine data from popular web sites such as Facebook and LinkedIn.

With demand for credit tepid and the prospects for improving economic conditions only marginal, bankers do need to ramp it up if they expect to prosper in the coming years. Data will, undoubtedly, be part of the solution. Bankers, who process thousands of payments every day, have access to an incredible about of data. Most banks are not capturing that data, let alone doing anything with it. What kinds of individualized services could banks provide if they tracked data off of the checks they process? There is a lot of potential there.

Many bankers, however, are reluctant, given their respect for customer privacy. But, we all know that companies like Amazon, Target and other big retailers all use customer data to improve their sales. Bankers will have to decide to what extent they want to part of this trend. While the prospect of reaching more customers with more customized products clearly is appealing, bankers do not want to contribute to the kind of future depicted in this two-minute video, produced by the ACLU.

Minnesota thrift with California branches closed

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Minnesota witnessed its second bank closing this year when the Office of the Comptroller of the Currency closed a thrift institution in Little Falls on Friday. Home Savings of America was closed but because no buyer was found by the Federal Deposit Insurance Corp., the FDIC is sending depositors checks in the amount of their insured savings. The FDIC is holding onto the loans for later disposition.

Home Savings of America has $434.1 million in assets and $432.2 million in deposits. The FDIC estimates the total cost of the resolution to the Deposit Insurance Fund will be $38.8 million.

Although based in central Minnesota, the thrift had two branches in Orange County, Calif., and one in Walnut Creek, Calif. Through the third quarter of 2011, Home Savings Bank has lost $7.6 million, and on Sept. 30, 2011, it reported equity capital of 2.73 percent.

Minneapolis Fed echoes other economist’s positive outlook for district banking

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Economists have a favorable outlook for Midwest banks in 2012. The Minneapolis Fed predicts conditions will continue improving just as they did in 2011. Ron Feldman, senior vice president of the Ninth Federal Reserve District, spoke to reporters during briefing yesterday morning. This paralleled the message bankers received at the Wisconsin Group One annual meeting in Bloomington, Minn., on Feb. 11.

“Business loan demand has started to rise in the last sixth to 12 months, the numbers of business loans have risen in the order of hundreds of billions of dollars,” said Clare Zempel, at the group One meeting. Zempel is the owner of Zempel Strategic an economic advisory firm. “It is taking place on the consumer side as well, the credit cycle is starting to shift toward greater demand for credit and for loans,” he said. “We are seeing bullish signs that people are willing to borrow and that banks are able to lend,” he added.

“We’re in what economists call a turning point. Conditions are getting better right now,” Feldman said at the fed briefing. Asset quality is starting to look like it did before the crisis. Nonperforming assets will continue declining in agriculture, construction, commercial real estate and industrial sectors.

Profitability will see mediocre improvement; the number of banks reporting negative earnings has dropped for the last three years. Loss provisions also declined in 2011, this drove profitability upward and will continue to do so in 2012.

Year over year loan growth is headed back upward but the volume will not return to prerecession levels in 2012. The Fed forecasts that the number of banks with loan growth will rise to 30 percent in the next year.

Wells Fargo economists see good news in Minnesota housing market

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The bright spot for the Minnesota economy in 2012 is the housing market, home price are beginning to turn around. Other economic indicators for the state show modest growth for 2012, according to Wells Fargo Senior economists Scott Anderson and economist Ed Kashmarek. The economists spoke to reporters during a telephone briefing yesterday afternoon.

Minnesota home prices are 2.3 percent below the national average but in 2011 the majority of the state’s largest cities saw prices trending up again compared to 2010. Minnesota saw the end of a harsh drop in prices in 2011. Prices appear to have bottomed out and are beginning to rise. In the Twin Cities, a smaller inventory for sale has stabilized home prices which have trended up by 3.7 percent. Fewer homes are being built in Duluth and Rochester. Sales activity has been strong in these areas, which has settled home prices. Duluth prices were down only 1 percent compared to 2010. Rochester’s prices recovered by approximately 2.1 percent in 2011. St. Cloud prices have risen but are still 7.6 percent below last year.

Minnesota economic performance mirrors the U.S. economy, Anderson said. The nation finished 2011 on a good note. National GDP was the highest it had been the whole year in the fourth quarter at 2.8 percent. This is a 1.6 percent improvement on the fourth quarter of 2010. Other areas of the economy are relative bright spots. “We have seen improvements in small business and housing starts are looking a little healthier,” he said.

Minnesota’s economic growth will be at 1 percent in 2012, Anderson said. This follows suite with their national prediction. “We are still forecasting a slowdown for the U.S. GDP to 1.5 percent in 2012,” Andersen said. The primary drivers behind this prediction are a weaker consumer spending market, rising gas prices, lower savings rate for consumers, lower income growth due to slow job creation and the global economy. Export markets brought in $5.1 billion in 2011 but this is the same performance as the fall of 2008. “All together the underlying macro trends in the United States and negative global outlook trends cause us to forecast slow growth,” he said.

Minnesota job markets will continue with slow recovery as well. “Modest job growth is occurring, led by services and manufacturing,” Andersen said. State unemployment is also dropping but the downward trend is caused more by people leaving the labor force. The global environment will weigh more heavily on Minnesota manufacturing and exports in 2012. State budget problems are expected to rear their head once again by 2014.

Main Street is turning some heads

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“Bank Local” sentiment continues to bring new customers in the doors of community banks. “We recently picked up new accounts from some of the bigger banks in town. [The new customers] wanted someone who is friendly and knowledgeable,” said Mark Nowak, senior loan officer at the Freeborn branch of the $91 million Farmers State Bank of Hartland, Minn.

The bank has been family owned since it opened its doors in 1912, the original owner’s daughter is the current president. Farmers State Bank’s customers will often express their appreciation for the bank’s local business model and its local ownership. “I just had a good farm customer of ours in today. He said, ‘I hope I never have to deal with those big banks, I hope you guys are around forever,’” Nowak said.

Farmer State Bank does not use Go Local marketing material currently. However, the bank’s customers believe in the worth of a local bank based on their experience with Farmers State Bank. “We are trying to educate the public; we’ve always said that our best advertizing is word of mouth from satisfied customers,” Nowak said.

Be sure to read the Feb. 15 edition of NorthWestern Financial Review for a feature on the “Go Local” and “Buy Local” movements. Bank customers are increasing looking to patronize companies on Main Street rather than Wall Street. Banks, neighborhoods and towns are working together and organizing this sentiment into campaigns that bring benefits to bankers.

Five large mortgage servicers agree to $25 billion settlement

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Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial have arrived at a $25 billion settlement with government officials over illegal foreclosure practices they employed after the housing bubble burst. The settlement brings over a year’s worth of negotiation to an end.

For those who still own homes, the settlement will force the banks to reduce the principal balances on loans or refinance the loans for underwater borrowers. For those who had their mortgage foreclosed, the banks will pay billions of dollars to consumers. Roughly one million home owners can expected to have their mortgage debt reduced or refinanced. Another 750,000 people who were foreclosure on from September 2008 to the end of 2011 will receive checks for about $2,000. All assistance is to be delivered over three years.

The settlement is unlikely to greatly improve the current housing market. The negative mortgage equity for American families is reported to be $700 billion whereas the aid coming from the banks will be $25 billion.

The New York Times report is here.