NorthWesternFinancialReview.com Blog

Dave Nelson, longtime Wells Fargo and Norwest executive, will leave his post as president of Wells Fargo, Rochester, Minn., to become chairman and CEO of West Bank, and president/CEO of West Bancorporation, Des Moines. The Des Moines Register has the story. Here is the bank’s announcement.

The Bank of North Dakota is getting a lot of attention, not just from the Associated Press, but from politicians in California, Florida, Michigan, New Mexico, Ohio, Oregon and Washington state who wonder whether state-owned banks might be good for their states.

While we’re on the subject of banks with unique ownership structures, Stan Dardis, longtime CEO of St. Paul-based Bremer Bank will retire next month. Here is a profile of Dardis and his successor Pat Donovan. A snippet from Dardis:

“We make our way not through Wall Street, but through Main Street. We do business in our local markets, not in Chicago or New York. Our business is to serve the local communities where we have banks. This approach has served us well during good times and bad.”

Here is a healthy dialogue taking place among residents of Northfield, Minn., a vibrant community about 45 minutes south of the Twin Cities. The main point of discussion concerns the degree of transparency under which banks should operate. There are some participants in the discussion who say the local banks should be more forthcoming and there are those who say the banks have been sufficiently communicative.

Let’s remember that banks already are one of the most transparent businesses out there. Very detailed information is published quarterly about every FDIC-insured bank in the country. Those numbers reveal a lot, and in fact, at NorthWestern Financial Review magazine we use those numbers all the time to cover the industry. Furthermore, publicly-held banks are subject to additional disclosures required by the SEC.

I would argue, however, that banks deemed too-big-to-fail should be subject to an even greater level of tranparency. If taxpayers are on the hook, we have a right to know what’s going on at the bank on a day-to-day basis. That means public access to loan files and the investment portfolio. The public should be able to see what kinds of risk the institution is taking, both in the form of lending and in the form of other investments.

You cannot make the same argument for community banks, however. If Citibank gets into trouble, there is an impact on the taxpayer. If your local bank fails, there is no impact on taxpayers. This is an important point. When a small bank fails, no one with deposits of $250,000 or less lose any money. In many cases, even if deposit accounts exceed that amount, the depositor retains the entire account balance. The FDIC handles failed banks and the cost is charged completely to the deposit insurance fund, which is industry-funded. It is not taxpayer funded.

Even now, when the FDIC fund balance is technically negative, it is important to realize there is a lot of money in the fund. A reserve within the fund is established for projected future losses. The reserve balance is subtracted from the fund balance, so the actual balance of the entire fund is higher than the reported balance. Furthermore, banks prepaid three years’ worth of insurance premiums on Dec. 31, 2009; standard accounting practices prevent the FDIC from booking that money as income right away, although the money is available right away. The point is, the failed bank resolution process is entirely industry-funded for banks that are not deemed too-big-to-fail.  

So while I cannot think of a public policy reason smaller banker should be required to make greater levels of disclosure, I do think the managers of those institutions have an interesting question on their hands. How much should they disclose about the condition of their bank? Each manager is likely to come up with their own answer; some might choose to reveal more than the requirements of the Call Report, and others might choose to reveal nothing more. Customers might react differently to each choice; clearly, anticipating customer reaction is one of the key factors bank managers would have to take into account when making such a decision.

President Obama wanted to hit the largest banks with a bailout fee; now the Congressional Budget Office has come out with a report saying consumers would end up paying that fee. Read about it here.

The president has also suggested that $30 billion in TARP funds should go to community banks to spur Main Street lending. Many bankers are lukewarm on the idea because there is such a stigma attached to TARP. Treasury is picking up on community banker reluctance and now I am hearing talk about the government giving the $30 billion to the Small Business Administration to make direct loans to small businesses. This, of course, would be a disaster. Bankers don’t need another government-sponsored competitor, and taxpayers don’t need a government lender with goals that put it at odds with safe and sound banking practices.

I am intrigued by the attention community banks are attracting from state legislators. In New Mexico, a bill was introduced this session to move the state’s general fund depository account to community banks. The House passed the bill and a committee in the Senate passed it, but the session ran out before the full Senate took it up for consideration.

Then, in Illinois, a resolution was proposed encouraging municipalities and individuals to move their money to community banks. Read it for yourself here.

And last week, Minnesota Rep. Tim Mahoney (DFL-St. Paul) introduced a bill to give community financial institutions preference over non-resident financial institutions for state deposit accounts. Read the bill here.

While community bank advocates can appreciate these kinds of efforts, I think they miss the mark. In most healthy community banks, liquidity is not the problem; it’s loan demand. FDIC numbers for year-end 2009 show that while lending in many areas was generally down, deposits were generally up. As I have said before, what banks really need is relief from accounting rules which require them to immediately write down the lost value of impaired loans; give them five or 10 years to write those losses off and you will preserve a lot of bank capital, giving them much more strength to participate in the economy.

In Minnesota, this issue of who should be a depository for state funds has been debated before. It usually comes down to interest rates. Taxpayers want the greatest return for their money so public treasurers have generally selected depositories that pay the highest rates, even if those depositories are located in other states. In a low interest rate environment, however, you can make a case that those funds should be deposited with in-state institutions. Whether those institutions should be “community” institutions is still another debate.

Mahoney is a respected, 6th-term member of the Minnesota House, but I don’t see his bill gaining any traction. Wells Fargo and U.S. Bank have an enormous presence in Minnesota; they provide thousands of jobs and donate millions of dollars to charity. I can’t imagine a majority of legislators voting to exclude them from the possibility of holding state funds.

Actually, when you read the bill and its accompanying definitions, it isn’t clear whether banks such as Wells Fargo and U.S. Bank would be excluded. The bill only defines the term “community bank” as a bank or credit union in Minnesota. I am not sure how the proposed legislation applies to Wells Fargo, which is headquartered in San Francisco, chartered in South Dakota but has a major presence in Minnesota; or U.S. Bank, which has its headquarters here but its charter in Ohio.

The Minnesota legislature, like most state legislatures, is pre-occupied this session with budget issues. It will be interested to see if it finds time to deal with Mahoney’s bill. The Minnesota legislature, by law, must adjourn this year by May 17.

Economic activity in the manufacturing sector expanded in February for the seventh consecutive month, and the factory employment index rose for the third straight month, according to the Institute for Supply Management’s February report, which was released yesterday.

The Mid-America survey of supply managers in Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota (as well as Arkansas and Oklahoma), also released yesterday, rose to its highest level since April of 2007. “It was a quite unexpected, for me, increase; the number was well above growth neutral,” said Prof. Ernie Goss, who runs the survey from Creighton University. Check out his YouTube clip here.

Clare Zempel, an economist and founder of Zempel Strategic, recently told a gathering of Wisconsin bankers that the global economic recovery is well underway and he sees no chance of a double dip. “There’s a lot of hard evidence that the process of recovery has taken hold and taken hold dramatically,” Zempel said.

Read much more about this in the March 15 edition of NorthWestern Financial Review.

The March 1 edition of NorthWestern Financial Review includes an ag-industry outlook featuring analysis from Prof. Ernie Goss of Creighton University, Jeff Wolfgram of Dakota MAC and Dave Cebulla of UMACC and Pine Country Bank. One indication of relative stability in the ag economy is that Midwestern farmland values have held up pretty well through the recession; Goss and Wolfgram both emphasize this point in our story.

Last week the Chicago Fed released new figures on seventh district farmland values. The district as a whole posted a 2 percent increase for 2009, driven by gains of 7 percent in Indiana, 4 percent in Iowa and 2 percent in Illinois. Wisconsin farmland values fell by 1 percent, and Michigan values declined by 6 percent.

Last Friday, Feb. 19, both Minnesota senators found themselves occupied with bankers, although neither serves on Sen. Dodd’s banking committee. Sen. Al Franken participated in an economic development forum in Bemidji, addressing a wide range of issues, including banking. Meanwhile, Sen. Amy Klobuchar listened to 40-some bankers discuss issues at a 90-minute meeting at the Minneapolis Club.

Paul Welle, a vice president at First National Bank in Bemidji, asked Sen. Franken to protect community banks from additional regulatory burden. The Saint Clout Times covered the meeting with this story.

In Minneapolis, Russ Nelson moderated a meeting organized by Pinehurst Bank of St. Paul. Nelson is a board member at the bank. Minnesota Bankers Association President/CEO Joe Witt and Independent Community Bankers of Minnesota President/CEO Marshall MacKay were there, as well as bankers from all over the state. Sen. Klobuchar and three aides took notes as bankers shared their frustrations and concerns.

Most of the banker comments noted the rigidity of examiners; bankers said they were looking for regulatory flexibility to help them get through economic challenges.

At one point, a banker asked Sen. Klobuchar,  whether she wants community banks to survive. She responded: “yes, we absolutely want community banks.”

Klobuchar said she found the comments to be instructive and she assured them she would follow up on their concerns.

When I first started following the Minnesota legislature in the mid-1980s for NorthWestern Financial Review magazine (then called Commercial West), the banking trade groups used to host huge receptions and dinners. It seemed like most of the legislators came, Republicans and Democrats alike. The lawmakers mingled with bankers and other lawmakers. We all got to know each other, at least a little bit, through these kinds of gatherings. I am told that most industry groups hosted at least one such event during the legislative session every year.

Somewhere along the line, however, a law was passed that made it illegal for a legislator to accept a free meal from a constituent or lobbying group. This put an end to those grand social events. While I can understand the purpose of the law from an ethical standpoint, I also recognize one of the sad consequences: we have lost opportunities for everyone to get together and visit. This is particularly notable among the lawmakers themselves. Republicans and Democrats visit with each other on a social basis far less today than they did years ago. We see the result: a polarized legislature where party differences are greater than ever and partisan rhetoric seems harsher than ever.

I think something similar has happened in banking. Years ago, bankers from the largest institutions used to visit frequently with bankers from smaller institutions. The large banks were serious correspondent banking services providers. They used to host events where they would invite representatives from hundreds of small banks to listen to a speaker, enjoy a meal and visit with one another. Representatives from the large banks used to spend all kinds of time with the folks from the smaller banks, all under the guise of correspondent banking. This promoted a certain level of industry unity.

But throughout the 1990s, things changed. Bankers at the smaller institutions grew increasingly concerned about competition from those larger banks, so they turned to bankers’ bank for correspondent services. The bankers’ bank movement grew so much that today, a good portion of the correspondent business that large banks used to provide is now being provided by bankers’ bankers. This means that the socializing that used to take place between those large bank representatives and the folks from small banks has dropped way off. And one of the results: a greater divide in the industry between the industry’s largest players and its smaller players. There is less industry unity.

Too big to fail, of course, is the issue that really separates the super-big banks from the smaller banks, but I suspect the divide is exacerbated by a diminishing level of communication between folks from large banks and folks from smaller banks.

The FDIC released its quarterly banking profile today. Chairman Bair’s press conference is here. The profile itself is here. Some highlights:

• The industry “essentially [broke] even” in fourth quarter, earning just less than $1 billion. Even that weak aggregate earning figure “represents significant improvement” over the record loss of a year ago, Bair said.
• Key factors in the year-to-year improvement were interest income, non-interest expenses and lower loan-loss provisions.
• Nevertheless, about one in three insured institutions reported a net loss for the fourth quarter.
• Non-current loans continued to rise, albeit at a slower pace — the third consecutive quarter in which non-currents rose at slower rates.
• 45 banks failed in the fourth quarter, driving the year-end total to 140, the highest annual total since 1992.
• All loan categories had declining balances in 2009. Total loans fell by 7.5 percent, the largest full-year decline since 1942.
• The problem-bank list topped 700.

The passing of former Secretary of State Alexander Haig on Saturday brings to mind a spring 1988 event hosted by the old Norwest Bank. Mr. Haig was the speaker at a gathering the bank hosted for 1,400 of its private banking customers in Minneapolis. I got to visit with Mr. Haig during a pre-event reception. 

I remember that Lloyd Johnson, who was chairman, president and CEO of Norwest, presented Mr. Haig with a peace pipe as a memento of his trip to Minnesota.

Mr. Haig talked about the upcoming presidential election, in which then-Vice President George Bush was to run against Michael Dukakis. He also talked about the world political stage. Here is how I wrote about it in the May 7, 1988 edition of Commercial West:

Regarding the world economy, he said the world is shifting from polar domination to multipolar domination. “By the year 2000 the United States and the Soviet Union will not dominate the world as they do now,” he said. By the middle of the 21st century, he added, China and India will enter the class of Super Powers.

Al Haig was an early Republican candidate for president in that 1988 campaign. By the time of the Norwest event, he had dropped out. Someone asked if he would ever run for president again and he responded “never say never.”