NorthWesternFinancialReview.com Blog

Today is Art Rolnick’s last day at the Federal Reserve Bank of Minneapolis, where he is a senior vice president and economist. He is moving over to the University of Minnesota where he will head up the Humphrey Institute’s Human Capital Research Collaborative, a joint effort of the University and the Fed on issues related to early childhood education.

Mr. Rolnick has been a tremendous asset to the Fed and the broader community for more than two decades. I have listened to a lot of economists during my career and he does a better job than anyone describing the human meaning of the numbers. In other words, he not only describes the charts and graphs which provide a snapshot of the economy, but he is able to say what that snapshot means in terms of the people in that economy.

His passion is early childhood education. He is not a fan of high taxes, but he makes powerful arguments about the value of directing tax dollars into early childhood education programs. It’s not just about day care, it’s about preparing children to live fulfilling lives as contributing citizens. The Star Tribune ran this interview with Mr. Rolnick recently, which gives you some insight into his thinking.

When you talk about the value of economic research, I think Mr. Rolnick gets it right. Numbers divorced from people really aren’t very useful. Mr. Rolnick always seemed to remember that economics is a subset of sociology.

Best wishes on your new endeavor, Mr. Rolnick.

If you happen to be driving on Interstate Highway 35-W near 82th Street South in the Minneapolis area, take a look off to the west and you are likely to spot the “UBB” logo on the Southpoint Office Tower. The sign went up recently at the top of the 15-story building as United Bankers’ Bank expands and remodels its office space in one of Bloomington’s landmark buildings.

When the current renovation project is complete this fall, UBB will occupy the 15th, 14th and 12th floors. The top floor will house the bank’s information technology applications. Floor No. 14 will be the main banking level, housing executive offices and the board room. Floor No. 12 will be home to the bank’s insurance, trust, bank valuation, training and human resource services.

UBB’s 92 employees plan to make good use of the bank’s 42,000 square feet once the project is completed. BKV Group, an architecture firm in Minneapolis, has been hired to direct the project. Throughout the space, wiring is being installed for state-of-the-art electronic equipment.

Bill Rosacker, president of the bank since the mid 1980s, said Southpoint’s management offered UBB very attractive terms to remain in the building. Five years ago, UBB was considering constructing its own building at 66th Street and Cedar Avenue in Richfield, but ultimately, it decided to stay in its current building.

Bob Rutten, president and CEO of the Citizens State Bank of Arlington, S.D., is the immediate past-chairman of the South Dakota Bankers Association. I had a chance to visit with him at the SDBA/NDBA convention last month in Fargo, N.D. Rutten is the kind of banker you rarely read about in the major newspapers, but he is kind of banker who characterizes the nature of community banking.

The state of South Dakota recently named Arlington, a town of 990 people, Community of the Year. Some of the good things going on in Arlington are the result of involvement by Rutten and his bank. One example is the town’s day care center. A few years ago, the town did an assessment of its needs and many of the families said they needed a day care center for their pre-school-age children.

Bob was among the group of citizens who formed a local corporation to start a day care center. Grant money was obtained, and the bank lent money to be used to upgrade the building identified for the center. Rutten said the business plan had the day care center barely breaking even if everything went right. “People ask, how do you finance that? Well, it was something we just had to do. That was three years ago and the loan is doing fine,” Rutten said.

Recently, the center borrowed a little more money to finish the building’s basement, which would allow the center to expand to host 39 kids. Rutten said everyone in the community benefits from the center, including the parents who use it and the employers who can hire those parents.

A year ago, after Rutten was installed SDBA chairman, the bank hosted an open house in his honor. “During the reception, with the lobby full of people, the doors open and in comes a group of toddlers from the day care center, carrying a banner that says ‘Thank you Mr. Rutten.’ The banner had handprints from the kids all over it,” Rutten shared. He said the banner is still hanging in the bank.

Read more about this enthusiastic community banker in the August 1 edition of NorthWestern Financial Review magazine.

When your July 1 edition of NorthWestern Financial Review magazine arrives, you will see that we have honored three additional bankers as Rising Stars for 2010. They are:

• Daniel Padilla, First National Bank of Omaha, Neb.
• Bryan Bruns, Annandale State Bank, Annandale, Minn.
• Annette Russell, Security Federal Savings Bank, Logansport, Ind.

Padilla came to the United States from Guatemala in 1993, and now heads five First National Bank of Omaha offices that serve the Latino market.

Bruns, born and raised in Annandale, left for Minneapolis to attend college and get his start in banking. He returned to his hometown, however, and eventually worked his way to president.

Russell rose to chief executive officer of the bank from executive vice president when the untimely death of the bank’s previous leader left a void at the bank’s top post. That was 2003 and Russell became the bank’s CEO in her early 30s.

Get the full story in the current edition of the magazine. In our June 15 edition, NorthWestern Financial Review named four others Rising Stars.

I had an interesting conversation with Kevin Murphy, the deputy commissioner of commerce for the state of Minnesota, shortly after he presented some industry numbers at the Minnesota Bankers Association convention in Duluth last week.

He talked about the difficulty of gathering core deposits. He said that many of the banks that have gotten in trouble recently have relied heavily on brokered deposits and wholesale money to fund their loans. Banks have to pay up for this money, so the margins are thinner at banks that depend on brokered and wholesale money compared to those with healthy core deposits. That works fine in a good economy, but when things get tough, the thinner margins just don’t produce the earnings necessary to cover loan loss reserves. Also, brokered money is more volatile, so it is much more likely to leave a bank just when the bank really needs it.

He said that when a bank relies mainly on brokered funds, the financial institution becomes much more of an investment fund than a traditional bank. I think it is an interesting distinction. There is an important difference between lending money and investing money. Part of the difference has to do with the expectation of the person providing the funds. In the case of a bank, the customers who provide the funds are generally looking for safekeeping; in the case of the investment fund, the customers are generally looking for return.

It is one thing for a financial institutions professional to make a conscious decision to change from a banker to an investor, but it is quite another thing for the financial professional to subtly morph from one to the other due to market forces. Core deposits are getting harder and harder to come by. What does that reality mean for you? Is it making you into something you are not prepared to be?

In the past, much of the industry talk has been on lending, that is, the asset side of the balance sheet. But going into the next few years, my sense is much of the industry talk will be about deposits and funding, that is, the liabilities side of the balance sheet.

We can learn a lot from people who have been in the banking industry for a long time; this is a point that is not lost on the American Bankers Association. Here is a press release the trade group issued this morning about an upcoming event at their graduate school of banking:

Former bank CEO Dick Kelley remembers the good old days when banks didn’t have guards:  his branch manager kept a gun in his desk, and took it out every now and then to clean it.

A lot has changed since Kelley was a teller at a small town bank on Cape Cod in 1955.  Back then, he balanced the day’s transactions in a handwritten Boston ledger.  He knew all his customers by their first and last names.  And they knew his.

 Kelley will be one of dozens of “old” bankers gathering at an American Bankers Association Reunion June 12-13 on the campus of the University of Pennsylvania in Philadelphia.  The reunion is being held to mark 125 years of executive education at the elite ABA Stonier National Graduate School of Banking (formerly the Stonier Graduate School of Banking, which merged with America’s Community Bankers’ National School of Banking in 2008).  Together, the two schools have trained more than 20,000 of the nation’s top banking executives and government regulators, most of whom have reached — or will reach — the pinnacles of their organizations.

The reunion will bring together the bankers of yesteryear with today’s emerging bank leaders who are likely to compare notes about how the industry has changed, especially in the past couple of years.

“If I could give one piece of advice to young bankers today,” Kelley opined, “I’d tell them there is no substitution for working your way up.  You have to know how every department in a bank works, and you have to know your customers personally.  Banks today have gotten away from that.”

I am a big fan of the banking schools, having been honored with a journalism fellowship to Stonier in 2005. I also have spent time with the Graduate School of Banking in Madison, Wis., and I know of the outstanding program at the Graduate School of Banking at Boulder, Colo. Education is essential for developing the leadership skills the industry depends upon. I also really like the idea of leveraging the knowledge of experienced bankers, such as Mr. Kelley.

In its May 28 newsletter, the Nebraska Bankers Association points its members to this essay in the Washington Post. The column, by Arthur C. Brooks, is called “America’s new culture war: Free enterprise versus government control.” It is a somewhat unconventional inclusion for a bank trade association newsletter, but I post the link here for your Memorial Day weekend reading.

The question posed by Brooks relates to the question I posed in yesterday’s post, “What’s the goal?” Do we want an economy characterized by decentralized, independent credit allocation decisions? Or do we want an economy characterized by centralized decision-making, controlled by politically-influenced policy? We really are at the cusp of this choice. Free enterprise thrives under the first option; the second option offers perceived security, although at the price of innovation. Brooks essay is good fodder for considering our options.

We sent this post from Bank Lawyer’s Blog around yesterday with our weekly email. At every opportunity, we who care about the banking industry should ask the regulators, “What is your goal?”

I think it is amazing that in all the debate that went on in Congress about financial reform we never got a clear answer about what the goal of regulation should be. Maybe the goal by some people in power is a smaller industry. If so, why? We need to have this discussion, and it needs to happen in an open forum.

I think most regulators would tell you they want a safe and sound industry. But what does that mean? Does that mean no bank failures? I would argue that it does not mean that. No failures could mean the industry is not innovative enough. Remember, the most effective way to never fail is to never try. A certain amount of failure is symptomatic of a healthy industry.

It is easy to understand where some might assume the regulators want a smaller industry. Raising capital requirements is a way to weed out weaker institutions that are unable to raise new capital. But why would we want a smaller industry? From a macro level, we want a diverse system for credit allocation. We do not want a highly concentrated system, as exists in Europe and Canada. The more decentralized the system, the more opportunity there is for start-ups, entrepreneurs and non-traditional borrowers. More centralization just means less opportunity. Sure, it might be easier to supervise an industry with only 6,000 players, but it might not be better for people who need to borrow money.

I hope this is the kind of discussion that is going on at the highest levels of government. What kind of credit allocation system is best for the country? How can government, through Congress and the regulatory structure, encourage that kind of system? Is “number of institutions” an effective way to measure the industry’s size? What about non-regulated companies that allocate credit? How do they figure into the issue?

We need to define our goal. If we are not clear on our goal, then it really doesn’t matter what’s in the financial reform legislation, because if you don’t know where you are going, any road will take you there.

Banks across South Dakota are helping the South Dakota Guardianship Program, a private non-profit organization that provides guardian/conservatorship services to people with disabilities. As guardians, SDGP provides critical decision-making in matters involving health, housing, legal issues and money.

The banks help the program by promoting the SDGP’s fundraiser, called “Golf for Guardianship.” SDGP raises funds by selling a benefit card for $30 which entitles the bearer to one free 9-hole round of golf or 50 percent off the cost of one 18-hole round. More than 90 golf courses across South Dakota participate. Cards are sold individually, or in packs of four for $100. The program, which raised about $10,000 last year, hopes to raise $20,000 this year.

Banks help out by distributing promotional information along with the monthly statements they typically send to customers. A bank simply requests the check-size statement stuffers from SDGP; once they are delivered to the bank, the bank inserts one along with the next statement to go out in the mail. It is an effective way to reach thousands of South Dakotans.

The Independent Community Bank of South Dakota coordinates the bank portion of the program. ICBSD, which has been involved with the program since 1997, called it a popular program with its membership. In addition to promoting the cards, many bankers buy cards themselves to use or give away. The state’s insurance agents are also big supporters of the program.

Ben Haller, Jr., who passed away in October of 2007, owned and operated the Northwestern Banker magazine for decades before it merged into Commercial West magazine in 1987 to form NorthWestern Financial Review. Haller loved the banking industry. This little story, which Haller shares in a book he wrote, gives us some insight into why he was so loyal to bankers:

In 1927 when he was 37 years old, my father’s career as a dentist and as an active part of the Omaha, Neb., business community was ended when a heart problem and a freak accident that caused severe arthritic complications made it impossible for him to stand at his dental chair. Fortunately, he had signed a contract a few months earlier with one of his patients, who was a life insurance salesman, for a disability-for-life income policy that would pay him $400 per month, less than a third of what his income had been running. But, it was enough to pay the rent, buy groceries for 48 meals a day and shoes for 32 feet, (there were 16 in the family) as he would say, and he never complained. That income kept our family going through the severe depression years. Then in 1935, as I recall, the life insurance company in Chicago chose to renege on the policy, claiming my father was faking his disability and demanding by lawsuit that he return the money they had paid him. The disability income was stopped at once while the lawsuit was in progress.

The rent was paid by Haller’s sisters’ earnings, the groceries were provided by the Bickel Brothers grocery store on tab and shoes were provided by the Drexel Shoe Company while the lawsuit dragged on for almost two years. But the money still wasn’t stretching far enough.

Then, on a day I can recall vividly, for I was standing in the hallway as he took the telephone call, Dad heard the voices of two of his long-time friends — Frank McDermott, vice president of the First National Bank (Omaha), and Dan Monen, vice president of The Omaha National Bank — calling to inform him that they had full faith and confidence that he would win this prolonged lawsuit, and to help him through the rough times until then, they were depositing $1,000 in his account at the First National. If more should be needed, it would be put in his account, but they would see him through. To this day, I can still hear Dad thank his two loyal friends with a voice overcome with emotion. Mother was standing by to learn what the phone call was all about and the scene is etched in my memory of him embracing my mother and telling her, ‘Don’t worry anymore, honey, we’re going to be okay.’ Then he told her details of the call.

When my father finally won the lawsuit in 1937 and the insurance company had to pay in a lump sum all the monthly payments it had withheld, you can be assured that the $1,000 was one of the first items paid off, along with that of his fine attorney, Bill Fraser, the loyal Bickel brothers and Drexel Shoe Company.

I like to share this story because it sounds likes something out of a feel-good movie, but in fact, it is true. Of course, this happened decades ago. But my sense is, things like this still happen. There are a lot of web sites that share complaints from customers who have experienced something bad at their bank, but if there are people out there who have a good news story to share, please leave a comment with the details. Thanks!