NorthWesternFinancialReview.com Blog

It has been nearly four years since the economic crisis hit; although many of the problems have been worked out, there remains much work to do and the people doing the work are feeling the effects of this marathon. Jeff Gerrish, speaking at the Bank Holding Company Association Spring Seminar on May 8 in Bloomington, Minn., referenced this. Gerrish is a Memphis-based attorney who focuses on community bank issues. He said borrowers, bankers and even regulators are feeling fatigue.

An example: I got a call from a banker in Indiana. He said “We finally took our first big loss of the cycle.”

I said what happened?

He said “this guy, we loaned him $2 million for a hotel. He was paying. We thought everything was fine. He walks in and throws the keys on the desk and says “I can’t do this anymore.”

Borrower fatigue.

Then Gerrish offered comments about banker and regulator fatigue:

Those of you who are looking for opportunities, find yourself an old and tired banker because there are a lot of them out there. A guy called me and said “Jeff, can you find us a buyer for the bank?”

“What, are you crazy? Your bank is rated 2; you survived this entire mess; this is not a good time to be selling unless you have to because the prices are so bad.”

His comment was, “I am 57 years old, I know we are going to go through another cycle like this, I don’t want to be here when we do.”

Banker fatigue.

We’ve got borrower fatigue, we’ve got banker fatigue and we have a little bit, I would suggest, regulator fatigue. I am beginning to see a little regulator fatigue which is translating itself into, ‘kinder and gentler’ regulators. Different regions are different. I nicknamed one ‘home of the screaming regulator.’ Four years ago meeting with a bank that went from a 2 to a 5, the regulators would sit at the table and would be pounding on you and your client.

“You are going to do this, you are going to raise capital,” and you are sitting there going, “that is absolutely impossible.”

A few months ago I had a meeting at a 5-rated bank and there were eight directors, me and a lot of regulators. The meeting was basically “we know you are 5 rated, we know you have capital, you are likely to fail, and we hope things work out.”

A little bit kinder and gentler, but I don’t know if I attribute that to regulatory fatigue or the fact that it just isn’t that much fun for them anymore either.

We’ll have full BHCA Spring Seminar coverage in the June 1 edition of NorthWestern Financial Review.

There’s a story in Saturday’s Wall Street Journal about the timing of J.P. Morgan’s $2 billion trading loss and how it helps advocates of the Volcker Rule. A similar article appears in today’s American Banker.

Former Federal Reserve Bank of Kansas City President Tom Hoenig, now a director at the FDIC, not only approves of the Volcker Rule, which would curb proprietary trading at commercial banks, but would like to see the largest banks split up in order to separate investment banking from traditional banking. Hoenig has been talking along these lines for quite some time, including at a House subcommittee hearing on Friday. On April 26, he share similar views in Des Moines, telling some 270 bankers that the largest banks should be broken up along six distinct business lines.

“If you look at the largest institutions, there are six lines of business,” he said. “There is the traditional commercial bank. In addition, there is investment banking, there is managing and advising, there are certain kinds of proprietary trading, and broker/dealer activities, and managing investments in trust services.”

Hoenig said the law should segregate these lines of businesses into separate corporations, just as the Glass-Steagall Act separated investment and commercial banking before the Gramm-Leach-Bliley Act was passed in 1999.

Breaking up the largest banks, he said, is not a matter of “getting even,” but a matter of correcting perverse incentives. He said the federal safety net incents the largest institutions to grow and take risks that smaller institutions simply can’t take. Just about the same time Hoenig was making these comments, J.P. Morgan Chase was engaging in highly risky trades that cost $2 billion.

Be sure to read a full report on Hoenig’s April 26 comments in the May 15 edition of NorthWestern Financial Review.

John Ryan, who heads the Conference of State Bank Supervisors, really understands the dual banking system and the role that smaller banks play in our economy. Speaking in Des Moines recently, he emphasized the importance of relationship banking, saying that larger banks simply cannot replicate the level of service that smaller banks deliver day in and day out.

Ryan said there will always be a place for community banks because small business owners demand the kind of attention that only smaller banks can deliver. He expressed concern, however, that on-going industry consolidation has been concentrated among the industry’s smaller banks. “All the net decline in the number of banks has been among banks with $100 million in assets or fewer,” he said, citing a trend going back to 1992.

Individual judgment and the ability to tailor loans to specific situations is the hallmark of smaller banks, he said, but that  mode of doing business is generally out of favor with regulators. Regulation is generally about standardization, he said, whereas smaller banks shine when delivering specialized services. “We have to figure out how to regulate to the institution, not to an arbitrary standard,” Ryan told 270 bankers participating in the annual Day with the Superintendent event on April 26.

Regulators need the flexibility to apply regulations where they are needed. It is a mistake to apply regulations equally across the board to all institutions, and he said dividing the industry into two groups — one with large banks and the other with small banks — still does not provide appropriate distinction for appropriate regulation among a myriad of institutions.

“We need to be smarter about regulation,” he concluded.

John Brown, the chairman and executive vice president of Bank Forward, has been named Executive Vice President of the Independent Community Banks of North Dakota. The ICBND board of directors made the announcement this morning; Brown’s first day on the job will be June 1.

Brown began a banking career 36 years ago at the bank owned by his family, Security State Bank in Hannaford, N.D.. Today, the bank is part of the Bank Forward organization, which has 17 offices throughout North Dakota and northern Minnesota. Brown was president of the ICBND in 1985. He also has served on the North Dakota State Banking Board and on the board of the Bank Holding Company Association.

The top leadership post of the association has been vacant since Don Forsberg left the association suddenly earlier this year after a decade of service. In addition to its membership and advocacy roles, ICBND operates a purchasing exchange and a credit card operation.

Speaking to 270 bankers in Des Moines last week, Professor of Economics Michael D. Duffy of Iowa State University said he expects agricultural land prices to remain high for the coming year. As the price of corn and soybeans come down a bit in 2013-14, Duffy said land prices may follow lower as well.

Speaking at the Iowa Division of Banking’s Day with the Superintendent on April 26, Duffy said the price of farm land in the state is still climbing, although much slower than it has been in the last year. He said the buyers today tend to be farmers who use the land to plant additional crops. This is a change from six or seven years ago when many of the buyers had recreational or other uses in mind.

The average price for an acre of farm land in Iowa is $6,708, although actual prices vary considerable around the state. Nonetheless, that state average is the highest on record. He said the price represents an increase of almost 33 percent since 2010. He said the state hasn’t seen 30-percent annual increases in the price of ag land since the mid 1970s. Duffy said he does not expect the price of land to continue to increase at that rate. Some experts, he said, say the price as peaked and is leveling off.

At least four factors are driving the price of land, Duffy said: strong commodity prices, good farm income, high demand for commodities and a lack of alternative investments for farmers. Gross farm income, he said, traditionally tracks land prices pretty closely.

The USDA is predicting a slight drop in income for farmers who grow corn and soybeans in 2013-14, as more acres around the world come into corn and soybean production. High supplies will lead to lower prices; as the commodity prices come down, land prices are likely to drop as well. Another factor is demand from China; Duffy asked hypothetically what would happen if the country substantially reduced its imports?

Even with a drop in commodity prices, Duffy said only about 25 percent of farm land is mortgaged, so banks are not as exposed as they were to land price fluctuations as they were in the 1980s.

The Federal Reserve Board has released results from its first annual study of debit card fees. Click here for details.

It shows that the so-called Durbin amendment succeeded in reducing the fee debit card issues can charge merchants each time a customer uses the card. The data shows the average charge dropped to 24 cents from 43 cents. That information is useful as far as it goes. The real question is, where did the savings go?

Government price fixing is generally a bad idea; the only way advocates of the price cap on interchange fees succeeded was arguing that it would mean savings to consumers. So let’s see the savings. We know someone is savings 19 cents per transaction, but where is that money going? I don’t know any consumers who feel they are getting a better deal now.

I think we all know the merchants are getting that money, particularly the Walmarts and Home Depots of the world. I suspect additional research will prove this point.

The Durbin amendment was a bad idea from the start. Can anyone give me a good reason why government should fix prices so big box retailers can make more money? Down the line as the true impact of the Durbin amendment becomes obvious, I think the chances improve that the amendment will be rescinded.

Inter Savings Bank, fsb, whose condition has been deteriorating for more than four years, was closed Friday by the Comptroller of the Currency. It was the largest Minnesota-based financial institution to fail since the financial crisis of 2008. The bank, which operated under the DBA InterBank, fsb, was based in Maple Grove, Minn., and had four branches. With the FDIC acting as receiver, Great Southern Bank, Reeds Spring, Mo., assumed virtually all of the failed institution’s $473.0 million in deposits and $481.6 million in assets.

In 2008, Inter Savings Bank’s equity capital ratio dropped to 5.85 percent from 7.36 percent upon recording a net loss of $23 million for the year. Losses and capital depletion continued. In 2009, the bank lost $16 million and saw its capital drop to 3.87 percent; in 2010, it lost $13 million and its capital dropped to 2.21 percent. Last year, the federal savings bank lost $6 million and at year end its equity capital to assets ratio was 1.52 percent.

The FDIC and Great Southern agreed to a loss share transaction on $413.0 million of the assets. Read the FDIC press release here.

The FDIC estimates the cost to the Deposit Insurance Fund will be $117.5 million. It’s the 20th failure of an FDIC-insured institutions this year, and the third one in Minnesota. Since the 2008 financial crisis 20 banks (about 5 percent) have failed in Minnesota.

The tension between the banking industry and the credit union industry is as palpable as ever, with the Senate poised to vote on a bill to expand the authority of credit unions to make business loans.

The Minnesota Bankers Association has its annual Washington  D.C. trip scheduled for this week, and the bankers that make the trip will surely make the case that credit unions should not be permitted to make more business loans. That will be a tough case to make at Sen. Al Franken’s office; Franken is a co-sponsor on S. 2231, the bill to expand the credit unions’ lending power. Finance and Commerce has this article on the issue.

The Independent Community Bankers of America is hosting its Washington Summit this week, with hundreds of bankers expected to participate, including dozens from the Upper Midwest. They also will meet with elected officials to discuss the credit union issue, in addition to other issues.

In Minnesota, the credit unions have further poisoned the air with a recent campaign to encourage consumers to post stories on a facebook page about their bad experiences at banks. This Start Tribune article describes the campaign, which will award prizes up to $2,000 to consumers who post bank bashing stories.

There have been campaigns in the past where individual credit unions have bashed banks, but this is the first time I can remember that the entire industry getting behind such a smear campaign. MBA President/CEO Joe Witt wrote this letter to the Minnesota Department of Commerce to complain.

Surely, most credit unions are managed by people who believe they can best make their case by promoting their advantages rather than by stirring up ill feelings about the competition. I wonder if in the long run this campaign might not backfire.

NFR Communications is very pleased to announce the creation of Local Banker magazine. Get a look at it by clicking here.

For the past 10 years, NFR Communications has published a magazine called Lawmakers Edition, which provided background information on banking industry issues to elected officials. The magazine was sponsored by banker associations in various Upper Midwest states, as well as United Bankers Bank and the Independent Community Bankers of America.

It became evident in recent months that the audience for our message was much greater than elected officials. Educators, reporters, policy analysts and other thought leaders would certainly benefit from a publication describing the issues facing today’s community banker. So we discontinued the Lawmakers Edition and have launched a new, livelier publication serving a broader audience. Local Banker will be published three times in 2012, and beginning in 2013 will move to a quarterly publishing schedule.

We continue to mail the magazine to state legislators and other elected officials, but we are now also sending it to selected members of the media. In addition, we are building broad email distribution. The magazine currently has five sponsors — including UBB and ICBA. We hope to grow the sponsorship base so the magazine can be distributed more broadly.

The magazine is attractively designed and appropriate for public distribution at libraries, colleges and perhaps even bank lobbies. We are happy to work with bankers who would like to make the publication available in these kinds of locations. Please contact us here at NFR Communications to work out the details.

Local banks play an incredibly important role in local economies. Local Banker magazine tells that story.

Wells Fargo released its earnings earlier today, reporting net income of $4.2 billion in the first quarter, 14 percent ahead of fourth quarter 2011. Return on assets for the first quarter was 1.31 percent and return on equity came in at 12.14 percent. Read the entire earnings press release from Wells Fargo here.

Wells Fargo was the first of the publicly held banks to report earnings this season, with JPMorgan Chase also announcing earnings today.

Most of the big banks will announce their first quarter earnings next week. U.S. Bank will announce its earnings on Tuesday, and TCF Financial, Associated Banc-Corp and KeyCorp are scheduled to announce their earnings on Thursday.

Wells Fargo said revenue in the first quarter was its strongest in nine quarters. Hopefully, that’s an indication of how things are going across the industry.