NorthWesternFinancialReview.com Blog

The FDIC announced third quarter industry earnings last week, as we noted earlier.

The number of banks reporting losses in the third quarter in the Midwest remained about the same as the number reporting losses for the second quarter – 727 banks and thrifts out of 3,349 or 21.7 percent. At the end of the second quarter, 723 banks out of 3,396, or 21.2 percent, reported losses.

In Iowa, Kansas and Nebraska, the number of banks reporting losses dropped significantly, while in Michigan, Montana, South Dakota and Wisconsin, they increased. Iowa saw the biggest decline, with 45 banks reporting losses compared to 57 at the end of the second quarter, and Wisconsin saw the biggest increase with 69 reporting losses compared to 50 last quarter.

Banks in the FDIC’s Kansas City region were the most profitable in the country. Collectively, the region’s 1,895 banks earned $5.889 billion in the third quarter. Aggregate losses reported by banks in the New York and San Francisco regions brought the nationwide industry total down.

Banks in the Kansas City region reported the highest net interest margin in the third quarter – 4.46 percent. They also reported the highest return on assets (.074 percent) and the highest return on equity (7.19 percent).

Excluding South Dakota, Iowa is the leader in Upper Midwest bank earnings with $306 million recorded through the end of the third quarter. Minnesota, with earnings of $239 million, and Nebraska, with earnings of $234 million, came in second and third. South Dakota reports earnings of $5.056 billion through three quarters; the figure is largely the result of earnings at Wells Fargo Bank, National Association, which reports earnings of $5.376 billion on its own.

South Dakota’s small banks were the most profitable in the region. The state’s 48 banks with less than $100 million in assets reported return on equity of 7.78 percent for the third quarter. That same category of small banks in Iowa reported ROE of 7.14 percent. In most states, however, smaller banks had a tougher time. In Michigan and Colorado, the collective ROE for bankers with less than $100 million in assets was negative; in Indiana it was 0.28 percent, in Minnesota it was 1.16 percent, and in Illinois it was 3.62 percent.

As we head into the Thanksgiving, I pass along these political notes:

First, Roger Stewart of the Maquoketa State Bank in Maquoketa, Iowa, announced he will not seek re-election to the Iowa Senate in 2010. Stewart, a former executive vice president, currently is a director at the bank. He also was responsible for credit review at the bank.

Stewart, a Democrat, was elected to the state senate in 2002. He is chairman of the Economic Growth Committee in addition to serving on other committees…

Second, Alexi Giannoulias is under a microscope as Illinois State Treasurer and the recipient of dividends from a bank in which he owns 3.6 percent of the stock. He explains that most of the dividends received from the $1.2 billion subchapter S Broadway Bank were used to pay taxes. But I doubt that the public has much of an understanding how the sub S structure works and why dividends to pay taxes are typical. Get the details in this Crain’s Chicago Business article. Giannoulias, a Democrat, is running for U.S. Senate…

Third, the U.S. Senate Banking Committee conducted a hearing on S. 1799 last Thursday. The bill regulates overdraft protection programs, which I wrote about earlier. The American Bankers Association notes that the Federal Reserve last week adopted final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless they opt in to the overdraft service for those types of transactions. Given these new rules which address consumers’ primary concerns on overdrafts, there doesn’t seem to be need for additional congressional action…

And fourth, Ken Guenther, the former head of the ICBA, points out in his blog that the the House Banking Committee last Thursday passed an amendment proposed by Rep. Ron Paul to give the General Accounting Office authority to audit the Federal Reserve. When I first wrote about this idea, I didn’t think it had any chance of advancing. Apparently the Fed has been politically weakened by the economic crisis. Guenther points out that GAO auditing is merely a step toward Paul’s real goal, which is to abolish the Federal Reserve. Guenther gives us this quote from Paul on Feb. 4, 2009:

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. …  The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. …  In fact, Congress’s constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender.  Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary policy envisioned by our nation’s founders: one where the value of money is consistent because it is tied to a commodity such as gold. 

Nobody expects the Federal Reserve to go away, but certainly reform legislation will have a lot to say about the Fed’s authority, and there seems to be a serious effort to limit that authority as much as possible.

The industry earned $2.8 billion in the third quarter, up from a $4.3 billion loss in the second quarter and earnings of $879,000 in the third quarter of 2008. Loan loss reserves rose to $62.5 billion, with two out of three banks raising their loss reserves in the third quarter. However, loss reserves rose at a slower rate than in the second quarter. Charge offs and non-current loans are also rising at a slower rate, though both hit 26-year highs. Fifty banks were closed in the third quarter, and there are now 552 banks on the problem bank list, compared with 416 at the end of second quarter.

Other tidbits: Loan/lease balances declined by $210 billion in the quarter, led by an $89 billion dip in C&I loans. Chairman Bair noted that most of the decline was in banks over $100 billion. It was the largest decline since quarterly reporting began in 1984.

UPDATE: Now here’s the official release.

Picture this: A parent is working his way through the checkout line at a grocery store. His shopping cart is filled with a week’s worth of groceries for his family of five. One or two of the kids is dashing about, below the counter level. After the cashier rings everything up, the shopper hands over his debit card to pay. When the cashier runs it through his machine, a message comes up denying the transaction; there’s not sufficient funds in the account to cover the purchase. The shopper hasn’t any cash nor any other forms of payment. One of the kids starts to cry. Other shoppers waiting in line behind him begin to lose their patience…

Fortunately, this kind of scenario is largely fiction in today’s world because most banks will cover such a transaction, regardless of how much money the shopper has in his account. The bank will likely assess a fee, but it will cover the transaction. But that may change.

Congress is considering legislation to put new restrictions on overdraft protection. Ever since overdraft protection programs became popular, a small but vocal group has complained that the fees charged in such situations are unfair. They cite examples that depict shoppers getting hit with $35 overdraft fees when they use debit cards for accounts with only pennies in them to cover purchases of $1.50 or so. They also complain when ATMs permit withdrawals greater than account balances. And they complain that some banks clear checks in order of amount, largest ones first, increasing the likelihood that subsequent checks will incurr an overdraft fee.

But my concern is additional legislation will just make it harder to get a checking account and those who get them will not be as likely to have access to overdraft protection. More rules will not mean better service. In fact, legislation merely exchanges the current set of problems with a new set of problems. For example, is it really better to deny point-of-purchase debit transactions when account balances are insufficient? This will cause a lot of problems at a lot of stores, not to mention cause embarrassment and stress for purchasers caught a little short of money.

For many community banks, there is a technology issue associated with providing real-time account balances on ATMs, so denying certain withdrawals can be problematic. If someone has $50 in their account in the morning, and withdraws $75 at noon, the ATM is likely going to spit out the $75 because it doesn’t know if the customer deposited $25 or more at 11 a.m.  

Banks should have the discretion to determine what order they clear checks. Any order can be criticized as unfair to someone. You could mandate that large checks get cashed last, but that won’t sound so good the minute a customer bounces a rent check.

The point is, a bank provides a valuable service when it allows an overdraft. It is reasonable that they should be paid for that service. Disclosure laws, of course, are reasonable. Nobody should be surprised. But the fact of the matter is, we have disclosure laws now and most customers don’t read the disclosures that are provided.

And never forget that all these situations can be avoided if a customer simply keeps track of their account. These issues only come up when people decline to keep a running total tallied in their head or in a checkbook. I am not criticizing folks who don’t balance their check book. (Most people under 35 don’t.) But then an overdraft shouldn’t come as a surprise.

This City Journal article about the House bill to expand CRA suggests that many CRA loans are in effect subprime loans. Even though most CRA loans are issued at “prime” interest rates with fixed-rate repayment structures

“Approximately 50 percent of CRA loans for single-family residences were nevertheless made to borrowers who made down payments of 5 percent or less or had low credit scores–characteristics that indicated high credit risk. Whether or not anyone called these loans “subrpime,” in other words, the chances are good that many of them have defaulted or remain at high risk of doing so.”

If author Edward Pinto’s assertion leaves you wanting evidence, then you’ll sympathize with the impetus of his article: that it’s impossible to judge the contours of the home-finance crisis, or CRA’s role in it, because “not one regulator had the sense to track the performance of CRA loans…the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and other regulators appear to have no idea how trillions of dollars in CRA loans are performing now.”

Pinto, formerly the chief credit officer at Fannie Mae, says that Fannie and Freddie plus Wells Fargo, JPMorgan Chase, Citibank and Bank of America could provide performance data on a large portion of outstanding CRA loans. He says the information should be evaluated before Congress expands the law.

A bit of a brawl that pretty much captures the tone of the times.

When I cover conventions of the American Bankers Association, I always look forward to listening to Ed Yingling, its president and chief executive officer. With respect to banking and politics, he is one of the smartest people in the country.

At the 2008 convention in San Francisco, Yingling delivered a passionate speech in which his genuine anger came through. He was upset with the way traditional banks were being treated in the heat of the financial crisis. 

Last month in Chicago, Yingling delivered a more even-keeled speech; he even poked fun at himself after Bob Schmermund of the ABA staff introduced him. “It is amazing what a nice introduction you can get when you control the salary of the person making the introduction,” Yingling said. 

Coverage of the ABA convention appears in the Nov. 15 and Dec. 1 editions of NorthWestern Financial Review. Yingling’s comments are part of the Dec. 1 coverage but I want to include a couple of comments here that didn’t make the print magazine.

Yingling pointed out an important political development in the last several months: President Obama now understands what a community bank is. This was not true when he took office in January. Yingling explained it like this:

You may recall President Obama’s speech in early February, his first speech to the joint session of Congress. In that speech, he did lump traditional bankers with Wall Street and non-banks in a pejorative way, all under the heading of “bankers.” I know it upset many of us at the time. I wrote him a letter immediately after that, pointing out that this was unfair, but also could lead to policy mistakes based on this misconception. We have made progress. Here is what president Obama said just five days ago [Oct. 22]. He said: “These are the community banks who know their borrowers, who gave them their first loan, who watched them grow from down the street, not from Wall Street.” Yes, president Obama today sees the difference between bankers like you, and Wall street, even if some outside this hotel today don’t see the difference.

Yingling was referring to thousands of protesters who demonstrated against the financial services industry outside the Sheraton Hotel in Chicago during the ABA convention.

Yingling was also fair about the banking industry’s own shortcomings. He said:

We must recognize that there have been some, a very small minority, but some within our industry who have not done the right thing. Some simply have not been fair to their customers. A banker from Ohio emailed me recently that the differentiation between traditional banking and the bad guys has been muddled by a small minority in our industry who offered products that took advantage of people. He’s right. When that happens we all pay the price. In the future when we see such unfairness, I believe we must address it and stop it.

That is quite a comment to come from the leader of the banking industry. It was met with applause from the audience.

Yingling closed his comments with these words:

True bankers have the trust of your customers and your communities. You have earned that trust… As we come through these tough times and look ahead to the future, we must be the guardians of that trust, and thereby restore public trust in our banking system.

Beside a lousy economy and a sense (if not a certainty) that they’re suffering for the excesses of their most ruthless competitors, self-described “good” banks are facing plenty of consequent headwinds. Just a few, gleaned from magazine interviews over the last few months:

• Paying for strength: the financial crisis may have drawn customers to banks with lots of capital and liquidity, but those things are expensive to maintain. Will customers continue to pay for strength? Bankers and consultants note that it’s the weak banks that have to pay up on deposits–but good banks have to compete with the weak ones for funds–and it’s not easy to sell stability over basis points.
• Guiding perception: customers and employees may be aware that your nonperforming loans and charge offs are higher. Is it beneficial to compare your results to your competitors’? If your problem loans are higher now but still noticeably lower than what your competitors are reporting, do you highlight that information?
• Maintaining morale: can employees accept that “least bad” or “relatively good” are as good as it gets in some cases? Bankers say it’s an ongoing challenge to help employees understand why they should feel good about their banks, especially when employees perceive that they could make more money at bigger–albeit more troubled–banks. As one banker said: “you need to be happy making less money if you work for a good bank; it’s a lifestyle decision.”

Three more banks were closed on Friday, bringing the total for the year to 123. Depositors at the three banks were made whole, apparently even those with balances in excess of insurance limits.

In fact, in only 20 of the 123 bank resolutions so far this year, have depositors with account balances in excess of insurance limits lost funds, according to info provided to me by industry consultant Bert Ely. Not since bank failure No. 88 — Platinum Community Bank in Illinois on Sept. 4 — have high-balance depositors lost money.

Protecting all deposits, regardless of the insurance limit, increases the cost of resolving a failed bank. If the unprotected money could be applied toward the resolution, the impact on the Deposit Insurance Fund would be diminished. Years ago, the FDIC used to include information in their press releases on bank resolutions detailing the number of accounts with balances exceeding insurance limits, and how much was in those accounts. See this example from a bank that failed in 1994. Note the third paragraph, where we are told that $14 million in 813 accounts exceeded insurance limits. Now consider the press releases (one, two and three) for the banks that closed on Friday. None contain information about accounts with balances exceeding insurance limits.

The FDIC is required by law to resolve failed banks in a “least cost” manner. Covering uninsured deposits does not seem like it would be a least-cost strategy.

Nonetheless, community bankers may be glad the FDIC is covering everyone, no matter how much money they have in their accounts. Total coverage levels the playing field with too-big-fail banks. If it were to become clear to the public that Treasury will preserve the largest banks (e.g. Citigroup and Bank of America) while allowing community banks to fail, no large depositor would work with a community bank. It wouldn’t make sense. Why use a community bank if I have to worry whether all my money is protected when I can simply put all I have in a mega bank and be assured my money is safe?

The problem here, of course, is that such a scenario makes a complete mockery of deposit insurance. The public, the economy and the banking industry would be best served with a meaningful deposit insurance system where the same rules apply to everyone. This is only one more reason why it is so important that we get rid of too-big-to-fail.

NRO breaks down the regulatory reform bill from Sen. Chris Dodd. Conclusion?

“We do not often find ourselves writing this, but we prefer the approach put forward by Rep. Barney Frank (D., Mass.) and endorsed by FDIC chairman Sheila Bair. Their proposal would give the Fed stronger bank-oversight powers and would create an FDIC-style fund that would be used to resolve “too big to fail” institutions when necessary. The proposal has its shortcomings, but an approach rooted in what works — and the FDIC works — is preferable to rootless regulatory innovation driven by political demands… Dodd can mint new regulators just as fast as the government mints money, but neither one will buy us out of this mess.”