NorthWesternFinancialReview.com Blog

There have been debates inside the banking industry for years about the clearing order of checks. Now, a federal court in California has ordered Wells Fargo & Co. to repay $203 million in overdraft fees as a result of the way it clears checks. 

When a bank receives several checks written on the same account in one day, in what order should they be cleared? In numerical order? In order of check amount — lowest amount to highest, or highest amount to lowest? It’s an issue because if clearing checks No. 1 and 2 mean there’s not enough money in the account to clear checks No. 3 and 4, then overdraft fees may kick in.

Consumer advocates typically argue that a bank should clear the smallest checks first, so more checks will clear and fewer checks would be subject to overdraft fees, should the account balance fall negative. Some banks argue it makes more sense to cash the largest checks first because those are typically for the more important expenditures, such as house or car payments.

At a small bank, the check clearing volume is sometimes low enough that bankers can actually make decisions on a case-by-case basis. They may know the account holder and may know which order will work best for the customer. At larger banks where they are clearing thousands of checks per day, parameters need to be programed into a computer so clearing can be done on an automated basis. In these cases, there isn’t much room to take into account the peculiarities of individual customers and their accounts.

Overdraft situations, by nature, represent a breakdown in communications. The bank gets a mixed message from a customer when he or she has $200 on account and writes checks totalling $300. It is not surprising that resolution of these situations often leads to hard feelings. Miscommunications usually do.

I think what the Wells Fargo case really illustrates is that whatever system a bank chooses to implement, they need to communicate it clearly to the customer long before checks are ever written. Every bank customer should be able to explain how their bank clears their checks. If it is by amount, they should know whether the bank’s policy is to clear highest to lowest, or lowest to highest, or some other method. This way the customer can decide whether that system is suitable for them, and if not, they have the option of exploring other banks.

Customers don’t typically take great care to memorize the details of their checking account. But, banks have to do all they can to mitigate the opportunity for miscommunication or misunderstanding.  Banks can provide clear, plain-language disclosures in easy-to-read type. And recently enacted new rules from the Fed, and now from the FDIC, will reduce to likelihood of further miscommunication on these issues.

A House-Senate conference committee passed financial regulatory reform legislation this morning, just about the time I was finishing up a bowl of Wheaties for breakfast. Here is how the Huffington Post covered it. Although CNBC published this before the committee finished its work, I thought this comment from Sen. Judd Gregg was interesting.

Here is the statement issued by the American Bankers Association:

“The American Bankers Association remains strongly opposed to the legislation agreed to by the House and Senate conferees today. 

 “Bankers have supported key reform principles since the beginning of this debate.  Creating a systemic risk council, creating a robust method for handling the failure of large institutions, ending the concept of too-big-to-fail, closing gaps in regulatory oversight, and enhancing consumer protection are all laudable goals that the industry supports. 

 “But these important provisions are overshadowed by a number of other provisions in the bill that run far afield from Wall Street reform and will ultimately harm Main Street.  The consequences involved are very real and will have a very negative impact on traditional banks, on consumers and on the broader economy.  This bill will, in the end, add well over a thousand pages of new regulations for even the smallest bank.  As a result of this volume and the new restrictions, many small banks are telling us they will simply have to sell out to larger institutions that have the staff to deal with the massive volume of new reports and rules. Above all, the capability of traditional banks to provide the credit needed to move the economy forward has been undermined in numerous ways.

 “We have worked tirelessly to ensure that members of the House and Senate understand and recognize these concerns.  While we have had some success in this regard, in the final analysis, the legislation in question simply does more harm than good and will make it exceedingly difficult for banks to be the drivers of economic growth and recovery going forward.”

Here is the press statement issued by ICBA:

“Congress has nearly completed work on the most monumental financial regulatory overhaul legislation since the Great Depression.  This financial and economic crisis has clearly demonstrated that reform of Wall Street is needed to safeguard our financial system, the nation’s taxpayers and our communities from a future catastrophe. ICBA has grave concerns with some sections of the final bill and opposed them throughout the process, but we are pleased that the bill also includes many other provisions that we have long advocated.

“While the bill could go further to restructure megafirms and hold nonbanks that were the root cause of this crisis accountable, it does include powerful language that will help rein in these culprits from their excessive size and risks they pose to our financial system.   In particular, ICBA is pleased that Congress adopted a version of the Volcker Rule that will bar megabanks from propriety trading and investing in or sponsoring a hedge fund or private-equity fund. Ultimately, this will help prevent major financial firms from putting customers, taxpayers and the financial system at risk by conducting risky activities solely for their own profit.

“ICBA also appreciates that Congress recognizes the differences between Main Street community banks and Wall Street by ensuring megabanks pay their fair share for the risk they pose to the FDIC’s Deposit Insurance Fund (DIF), and ultimately our entire financial system.  The change in the deposit insurance assessment base, which ICBA advocated, will save community banks roughly $4.5 billion over the next three years—capital that will be reinvested in the communities they serve.  ICBA is pleased that other measures such as the permanent increase in the FDIC insurance limit to $250,000 and the extension of the Transaction Account Guarantee (TAG) program for an additional two years were also included in the bill.  Many other sections of the bill recognize the value of a tiered regulatory system that differentiates between small and large banks.  Additionally, ICBA is pleased that conferees modified an amendment that would have prevented all financial institutions from including trust-preferred securities in their Tier 1 capital.  With the modification, bank holding companies with less than $15 billion in assets, and institutions organized as mutual holding companies, will be able to grandfather the TruPS they issued before May 19, 2010.  These provisions will go a long way to help community banks continue to do what they do best—serve the needs of their local communities. 

“However, ICBA is gravely disappointed that debit interchange language was included in the bill.  This ‘compromise’ proposal will only compound the harm to consumers and Main Street by imposing new and onerous burdens on debit card issuers, and will fail in any way to adequately account for the significant operational costs and losses incurred by community banks due to fraud and merchant data breaches. Now is not the time to change a proven interchange system just so big-box merchants can reap higher profits and pass their costs of doing business on to America’s consumers.  Consumers have already suffered enough thanks to this economic crisis that was triggered by too-big-to-fail.

“ICBA also continues to have serious concerns about a separate Consumer Financial Protection Bureau (CFPB).  While we appreciate that community banks will have some exemptions from the proposed CFPB, we fought hard for further changes and are disappointed that further changes were not included in the legislation.  Community banks have always viewed consumer protection as a cornerstone to their business model, so it makes sense that the CFPB focus on those too-big-to-fail and shadow institutions that were at the heart of the financial crisis.” 

The House and the Senate will vote on the conference committee bill next week and get it to the president for him to sign into law .

My sense is the bill will mean a lot of new jobs for regulators, but I am skeptical it will do much to prevent another financial crisis.

Each year since 1998, NorthWestern Financial Review has devoted two issues of the magazine during the summer to its Rising Star selections. Soliciting nominations from readers, the magazine selects outstanding mid-career bankers. They are typically younger than 45 years of age but have worked in the industry for at least 10 years. In addition to making a difference at their bank, Rising Star selections often are key players in their community and in the industry.

The June 15 edition of NorthWestern Financial Review, which will hit subscribers’ desk early next week, features four selections for this year; an additional three selections will be named in the July 1 edition. Featured in the June 15 magazine are:

• Todd Means, vice president, MidWestOne Bank, Iowa City;
• Andrew Sexton, vice president and director, Readlyn Savings Bank, Readlyn, Iowa;
• Patrick Artz, president, State Bank of Bottineau, N.D.; and
• Lesly Couper, senior vice president/marketing and communications, Alpine Bank, Rockford, Ill.

Our magazine feature will give you insight into their aspirations, how they got into banking, and what makes them tick.

We will announce the three additional selections on this blog before the end of the month.

Prior to this year, we have honored 93 bankers over 12 years with Rising Star recognition. Our seven selections this year brings the list up to 100 bankers.

People who follow banking were anticipating the failure of TierOne Bank for months, and on Friday regulators closed the $2.8 billion, Lincoln-based bank. It was the largest bank failure in Nebraska’s history. The bank’s troubles were no secret. I wrote last Friday about its miserable first quarter earnings and its dismal capital position; last month, people were talking at the annual convention of the Nebraska Bankers Association about the bank’s imminent demise.

A curious twist on the closing, which took place June 4, is the Cease and Desist order issued by the Office of Thrift Supervision on June 3. The order gave TierOne until July 15 to file a capital restoration plan. The bank already had missed an earlier-established deadline of May 31 to shore up its capital.

When the OTS closed the bank, it reported “TierOne incurred operating losses since mid-2007 with negative earnings in 10 of the prior 11 quarters. The losses, resulting from increasing levels of non-performing assets and loan loss provisions, depleted capital. Since March 31, 2009, core capital declined 74 percent while real estate owned more than doubled and non-performing assets tripled…The growth in TierOne’s problems assets resulted from concentrations in construction, land, and commercial real estate loans in markets with significant declines in real estate values, including Florida, Nevada, and California.”

Great Western Bank, Sioux Falls, S.D., is purchasing the failed bank’s $2.2 billion in deposits and nearly all of its $2.8 billion in assets. It paid the FDIC a 1.5 percent premium on the deposits. Great Western is getting a loss-share agreement on $1.9 billion of the assets. Great Western is owned by National Australia Bank.

Ironically, Great Western had a deal with TierOne Bank about a year ago to buy 32 of its offices but the transaction fell apart. Now, through this deal with the FDIC, Great Western is getting TierOne’s 69 offices, including 59 in Nebraska, nine in Iowa and one in Kansas. The FDIC says the deal will cost the Deposit Insurance Fund $297.8 million.

TierOne is the only bank so far this year to fail in Nebraska. The last closing in the state was Sherman County Bank, Loup City, in February 2009.

TierOne Bank was organized in 1907 as Fidelity Savings and Loan Association. In 1935, its name was changed to First Federal Savings and Loan Association of Lincoln. In 1995, it obtained a federal savings bank charter and changed its name to First Federal Lincoln Bank. In February, 2002, it changed its name to TierOne Bank.

As an advocate for small businesses, I appreciate the importance of strong ownership. I am sure you see it when you lend money: Owners who are active in their business make the best customers because they understand the day-to-day details of their enterprise; they are usually willing to make the tough decisions because their survival depends on it. Disinterested ownership is usually bad for an enterprise. If the owners aren’t paying attention to the business, then why should the customers?

One of the many interesting points Andrew Redleaf and Richard Vigilante make in their new book “Panic,” is the importance of strong ownership. They argue that the growing popularity of securitization for home loans diminished the benefits of ownership in the mortgage market. Before securitization, a homebuyer put 20 percent of his own money toward a mortgage, granted by a banker who thoroughly scrutinized the borrower before making the loan. Borrowers knew the best way to protect their 20 percent stake was to make timely payments. Lenders stayed close to the borrower because they wanted him to pay off the loan as planned. And if things didn’t go as planned, lenders would work through troubled patches to get the borrower back on track because loan repayment was always preferable to foreclosure. A strong homeowner matched with a strong mortgage owner created a stable housing market.

Securitization weakened the ownership stake of the homeowner and the lender. Borrowers could get mortgages with as little as 2 percent down, or in some cases, nothing down. Lenders no longer held onto their mortgages so they had no incentive to maintain a relationship with the borrower. All ownership transferred to faceless Wall Street investors who had absolutely no relationship with the person living in the house. I understand the advantages securitization brings to a market, but is there a way those benefits could be obtained without sacrificing the benefits of strong ownership? I think there must be.

We know what a difference ownership makes when it comes to business; let’s also recognize it in mortgage markets. Strong ownership means accountability, something that securitization tends to obfuscate. Whatever mortgage rules emerge from pending legislation, let’s hope it restores some of the benefits of strong ownership.

Larry Marik, chairman of First National Bank of Columbus, Neb., was elected chairman of the Nebraska Bankers Association last week. He has worked at First National Bank of Columbus since 1980, a $390 million institution. He was mayor of Columbus from 1984 to 1992. He also was chairman of the Columbus area Chamber of Commerce for four years.

I had a chance to visit with Larry last week at the NBA convention. Here is what he had to say about Nebraska banks and the 2008-2009 crisis in the financial markets.

“We weren’t the cause; we are going to be part of the solution,” he said. “We are going to have pain along with it. There is no question about it. There will be new consumer regulations.  

“We support good regulation of the industry, we always have, we always will. But we are talking about a nucleus of the industry – community banks, traditional banks — that weren’t part of the problem. The Wall Street banks, the shadow banks, the people who have come and gone — you gotta really dig to find where they are going to get a lot of oversight … We know legislation is going to come, we want to have the best package that we can have put together as an industry. Consumers in the state of Nebraska will pay the price of higher regulation. That comes in cost and in paper burden,” he said. 

“It isn’t disclosure and paperwork that makes Nebraska banks successful, it’s the trust in the people, and that’s what we have, and that’s one thing that I’m not going to let simply slide away,” Marik said. “That trust has indirectly been shaken and we are going to work to restore trust back to its fullest degree.”

Marik said additional regulation will drive some bankers out of certain business lines. ”The smaller your bank, the bigger deal it is because the rules are the same for everybody. There are banks in the mortgage business doing one or two mortgage loans a month; they won’t be able to keep up. Some are going to choose to get out of that business and try to farm it out or branch it out to someone else. That’s taking a piece of business away, regulation is doing that. Not the fact that the banker doesn’t want to do the deal, not the fact that the banker isn’t there, the regulation is becoming so burdensome that there is a tremendous risk of not doing it right.”

I got a chance to talk to many people, and their comments will be part of the NBA convention coverage we provide in our June 1 edition of NorthWestern Financial Review magazine.  

The mood at yesterday’s Day with the Superintendent in West Des Moines, Iowa, was subdued. There was a sense that financial reform is coming and there’s nothing in it for community banks. What I heard from one banker was: “The legislation won’t really do anything to hurt the big Wall Street banks, and it will do a lot to hurt us, and we had nothing to do with creating the problem.” That seemed to sum up the general mood of the meeting.

Someone else commented that the legislation will be another big step toward turning the banking industry into a utility, like the businesses that provide electricity or water.

Neil Milner, the long-time head of the Iowa Bankers Association who now heads the Conference of State Bank Supervisors, talked about some of the specifics in the reform legislation. He said his organization, which promotes the dual banking system, is lobbying to change Senate language which would strip the Federal Reserve of its responsibility to supervise some 800 community banks across the country. He also questioned the wisdom of putting the proposed new consumer financial protection agency in the Federal Reserve. He said Congress can avoid any budget impact by locating it in the Fed, where the independent agency would need to fund it. Milner noted that if the Fed has no authority over the agency, it is not likely to be very interested in funding it.

It appears the legislation will permit de novo branching across state lines for any bank. Milner said he would like to see the national 10 percent deposit cap applied to S&Ls; currently, thrifts are not included in the calculation.

The news on the economic front was subdued as well. Economist Bernie Goss told the 400 bankers that they should prepare for higher interest rates, higher taxes and inflation. He said there are signs the economy is improving but that the question is whether it will last.

Look for complete meeting coverage in the May 15 edition of NorthWestern Financial Review.

It’s that time of year when citizens with political aspirations throw their hats in the ring for spots at the state capitol. In Iowa, two men with banking ties recently announced they are running for seats in the Iowa General Assembly.

Jeff Smith is running for the open House seat in District 6, which is in the northwest corner of the state. Smith, from Okoboji, is running as a Republican. For 15 years, he worked for the First Bank and Trust in Spirit Lake. He was a commercial lender, ag lender and branch manager. When Smith’s family sold the bank about two years ago, he stopped working in banking in honor of the transaction’s non-compete clause.

Here is how Smith introduces himself at his web site:

The Citizens of District 6 need an EXPERIENCED LEADER with a common sense approach to represent them in Des Moines. I grew up on a family farm in Northwest Iowa. After college, I transitioned into the banking industry, working with ag and commercial lending. My LEADERSHIP EXPERIENCE includes president of the Spirit Lake Chamber of Commerce, president of Spirit Lake Noon Kiwanis, chair of the University of Okoboji Winter Games, member of the Spirit Lake Planning and Zoning Commission.

Smith will face 22-year-old Zach Whiting of Spirit Lake in a June 8 Republican primary. No Democrat has emerged as a challenger yet for the general election this fall.

Chip Baltimore, a vice president at Boone Bank & Trust Co., is running as a Republican for the House District 48 seat. Baltimore is challenging Donovan Olson, a Democrat from Boone, who is serving his fourth term for the district, which is located in central Iowa, just northwest of Des Moines.

Baltimore announced his candidacy last month with this statement:

Chip Baltimore, a long-time resident of Boone, announced today his candidacy for the Iowa House of Representatives for District 48. In making his announcement, Baltimore stressed the importance of understanding the challenges faced by families and small businesses located in local communities. “As an attorney, I spent many years helping a wide variety of clients solve the most important problems in their lives. I am honored to have had so many people trust me to listen to their particular situations and fight to come up with effective answers. Now, on a much larger scale, the State of Iowa and the people of District 48 face mounting concerns about our state and local economy and will look for an effective leader to address those concerns. As I begin this campaign, I look forward to discussing the many issues and challenges facing our families, friends, and neighbors, and will lead the way in taking those issues to the House of Representatives for real, practical solutions.” Baltimore is currently general counsel and trust officer with Boone Bank & Trust Co. in Boone. He previously practiced law privately in Boone for ten years and Minneapolis for three years. Baltimore graduated from Iowa State University in 1988 with degrees in finance and economics, and received his Juris Doctorate degree from the University of Minnesota Law School in 1993. Baltimore is married to his wife, Diana, a doctoral student at Iowa State University. Chip and Diana have two children, Blake and Danielle, who attend school in Boone.

Learn more about Baltimore at his web site. Baltimore also faces a challenger in the June 8 primary, a fellow named Bill Yewell.

Last year, the FDIC changed statutory interest-rate restrictions for banks that are less than well capitalized. These banks are not allowed to pay interest rates more than 75 basis points higher than the local prevailing rate or the national average rate as reported on the FDIC web site. 

FDIC Chairman Sheila Bair, speaking to bankers at the ICBA convention last week, noted an interesting problem associated with the rule. She said that community banks located in areas where there are a substantial number of branches of nation-wide banks are put at a disadvantage because nation-wide banks can attract deposits with lower rates than community banks. The prevailing rate in these areas is thus lower than other areas, which prevents community banks from paying what they need to pay in order to attract deposits. The big banks remain attractive even with low rates because of their perceived safety as too big to fail.

“The largest banks enjoy lower average funding costs — and the differential appears to be rising,” Bair said in a speech to a packed ballroom at the Gaylord Palms Hotel. “In our judgment, this trend is driven at least in part by the market perception that some of these banks are too big to fail.

“It was never our intent for this regulation to disadvantage smaller banks.

“That is why, as of today [March 19], we have amended the Q&A document on our website to clarify that the FDIC will, as appropriate, drop multiple branches of the same banks from the calculation of locally prevailing deposit rates.”

Bair said the FDIC made the change after a concern was raised by members of the FDIC’s Community Bank Advisory Committee.

Yesterday, we posted links to statements regarding financial reform legislation from the three Minnesota U.S. Representatives who serve on the House Financial Institutions Committee. NorthWestern Financial Review, of course, covers banking in 14 Upper Midwest States. There are 71 congresspersons on the House Financial Services Committee, 18 of those are from NorthWestern Financial Review’s coverage area: 12 Democrats and 6 Republicans.

Following are links to statements from some of the other committee members.

Rep. Luis Gutierrez (D-Ill.) government assistance for large banks.

Gutierrez on too-big-to-fail.

Rep. Dennis Moore (D-Kan.) on the passage of financial reform legislation. (Moore announced in November that he is not seeking re-election after six terms in Congress.)

Rep. Melissa Bean (D-Ill.) on the bill’s passage.

Rep. Gwen Moore (D-Wis.) has not published a statement on her web site about the financial reform bill, but she had this to say about credit card legislation passed earlier this fall.

Rep. Ed Perlmutter (D-Colo.) sees financial reform legislation helping Main Street businesses. This is the statement he issued on Dec. 11, immediately after the House passed the bill.

Rep. Joe Donnelly (D-Ind.) issued this statement on Dec. 11.

Rep. Bill Foster (D-Ill.) said he voted for the bill in order to prevent future bailouts to financial services firms. Foster also urged Speak Pelosi to use remaining TARP money to pay down the deficit.

Rep. Andre Carson (D-Ind.) made this announcement after voting for reform legislation.

Rep. Gary Peters (D-Mich.) supported the bill, focusing on his amendment to require banks to repay all government money.

Rep. Don Manzullo (R-Ill.) voted against the bill, supporting instead efforts to strengthen existing regulation.

Rep. Judy Biggert (R-Ill.) explained her vote against the bill with this statement.

Rep. Thad McCotter (R-Mich.), who voted against the reform legislation, explains his views in this interview on CNN.

Rep. Lynn Jenkins (R-Kan) voted against the bill, saying she doesn’t want to make the bailout permanent.