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I am fascinated by the process by which healthy banks work through the FDIC to purchase banks that have been closed by the OCC or their state regulator. In our January edition of NorthWestern Financial Review, we write about Central Bank of Stillwater, Minn., acquiring four failed banks in 2009.

The subcommittee hearing last week in Washington D.C. hosted by U.S. Rep. Luis Gutierrez gave us insight into the details of U.S. Bank’s acquisition of nine failed banks that made up the FBOP Corp.Rep. Gutierrez of Illinois heads the subcommittee on financial institutions and consumer credit. The Jan. 21 hearing focused on the Oct. 30, 2009 failure of FBOP Corp., a $19 billion holding company based in Oak Park, Ill., just outside of Chicago.

Richard C. Hartnack, vice chairman in charge of consumer and small business banking at U.S. Bank, testified offering the following synopsis of the events that constituted the acquisition:

We had previously registered our interest in reviewing franchise sales with the FDIC. As is typical, our Director of Corporate Development received an email, that presumably was sent simultaneously to other interested parties, informing us that this institution was potentially going to be sold by the FDIC.

The process then proceeds along these lines. We are presented and execute a confidentiality agreement covering the potential transaction. We are given access to a “data room” on a secured web site where a limited number of registered users from our company are able to perform the typical acquisition “due diligence” process. Following that we are granted a limited and tightly controlled opportunity to visit with management of the subject bank. We then perform a valuation exercise that leads to our developing a bid that conforms to the specific bidding conditions on the property in question.

The bid is submitted to the FDIC. Once the final decision is reached by the regulator of record to take control of the failed institution, the FDIC is named receiver and then the receiver completes the sale to the winning bidder.

We have actively engage in the bidding process on seven occasions. We have declined to bid on numerous other occasions because our investigation suggested that the offered franchise was not a good fit with our organization. We have been the successful bidder on 4 of the 7 occasions on which we bid.

Read about the factors that led to FBOP Corp’s closure in our Feb. 1 edition of NorthWestern Financial Review.

Yesterday’s rate-comparison announcement from the National Credit Union Administration illustrates a point I’ve heard repeatedly in reporting an upcoming story about credit unions: if CUs are having a hard time raising enough capital to keep pace with share growth, they should curb that growth by paying less in dividends/interest. In the seven CD categories tracked by the NCUA survey, credit unions paid, on average, 31 bps more than banks for deposits.

The pace of share growth at some credit unions is certainly causing capital concerns, as indicated in this December letter from NCUA chairman Debbie Matz to Congressman Barney Frank, chair of the House Financial Services Committee. In the letter Matz points out that some credit unions are reluctant to take in more deposits, which, without a corresponding rise in capital, diminish net worth and make the credit union susceptible to prompt corrective action.

“The risk of reputational damage from being branded less than ‘well capitalized’ and in need of ‘restoring’ net worth…is reportedly having a significant chilling effect on the willingness of some ‘well capitalized’ credit unions to accept new share deposits,” Matz said.

H/t to CSBS Newbytes.

President Obama will deliver his state of the union address this evening. The longer he talks, the less effective he will be. At this point, we don’t need more talk; what we need are meaningful actions.

The president, for example, is going to tell us that he is implementing a spending freeze, but this will do virtually nothing to reduce our deficit, given that all the big-spending programs will be exempt and the ones that will be included have incredibly bloated budgets already. More words, Mr. President, just don’t do any good. Take some real deficit-reduction actions, tell us about it after you’ve done it, and then we will all feel a little better.

The president may say something this evening about financial services industry reform in the context of improving the economy. But, here again, I wish he would just keep the words to a minimum. I appreciate the fact that the president says he wants to end too big to fail, but until some actions are actually taken to end it, I am tired of all the words. President Bush (the first one) was ready to end too big to fail also in the early 1990s, and that led to the passage of FDICIA, but as we have seen in the last 18 months, that piece of landmark legislation did not solve the problem as advertised.

Changing the rules governing the banking industry will do nothing to give the economy a boost. The business sector simply needs clear signals that the market will be allowed to work. Inconsistent government intervention in private commercial affairs has made it impossible for business people to predict what the business environment will be like in the near future, so they are less willing to venture out with new enterprises. They are hunkering down.

But at this point, of course, it would be very hard to believe that the Obama Administration has any interest in backing off. So for tonight, I really prefer fewer words. Some big actions in the next few months — like figuring out what to do with Fannie and Freddie — would go a much longer way toward restoring confidence than even the most eloquent of speeches this evening.

Richard Vigilante, a good friend of this magazine and coauthor of an upcoming book on the financial crisis, says the attempt to undermine Ben Bernanke’s reappointment as Fed chair “is just one more part of the great cover-up of the government’s responsibility for the mortgage crisis and the crash itself.” Likening the latest mau-mauing to a taste for “beat[ing] up the smart kid,” Vigilante and coauthor Andrew Redleaf say Washington elites are “contemplating throwing Bernanke to the wolves to distract attention from their own guilt.” The authors offer a measured defense of Bernanke:

“The Fed, meanwhile, under Bernanke, actually did go out into credit markets and buy some paper, (even if not the right paper) trying to put some kind of a floor on bond prices and some kind of a ceiling on yields. Moreover, both before and after the crash Bernanke did about as well as one could expect just the sort of things one can expect a central banker to do under such circumstances: hand out free money to any banker he could find wandering the streets. It did not work especially well, which was predictable, but it was exactly what theory says a central banker is supposed to do.”

Rural economies in the Midwest remain weak, although they are showing signs of improvement, according to the latest Rural Mainstreet Index, complied by economist Ernie Goss of Creighton University, Omaha, Neb.

Following are excerpts from a press release Goss issued Jan. 21:

For many of the bankers, health care costs remain an issue.  According to Jeffrey Gerhart, CEO of the Bank of Newman Grove, Neb., “Increasing health care costs continue to concern me.  Our costs continue to rise but meaningful improvements in our health care system that would lower the cost do not seem to be the focus of Congress.”

 

This month we asked CEOs by how much farmland prices have changed over the past six months.  More than one in 10, or 11 percent, indicated that farmland prices had increased by more than 5 percent over the second half of 2009.  Approximately 31 percent reported that farmland prices declined over the past 6 months.  The largest share of bankers, approximately 41 percent, reported no change in farmland prices over the past half year.

 

However, there were wide variations in reports of farmland prices.  For example, Dale Bradley, CEO of Citizens State Bank in Miltonvale, Kan., reported, “Land prices seem to be staying strong.  Crops were good this fall, but prices are down and that does not bode well for our farmers.”

 

Despite the corn harvest being behind schedule, yields are up dramatically for 2009 according to the bankers.  More than one-third, or 38 percent, indicated that yields were up more than 10 percent over 2008 levels.  On the opposite side, only 7 percent reported that yields were down by more than 10 percent.  Overall, 65 percent reported yields up from 2008, while only 15 percent indicated that yields were down from 2008.

 

Even with the current muted economic conditions for Rural Mainstreet, bankers were very upbeat about future economic prospects.  The monthly confidence index, which tracks bankers’ economic outlook six months from now, climbed to 59.7 from December’s 53.7 and November’s 50.1.    

 

Hiring in rural areas was decidedly negative.  Nonetheless the negatives are getting less negative as the new-hiring index advanced to 40.1 from December’s 33.4. 

 

 “Over the past year, the Rural Mainstreet economy has lost 150,000 jobs, or 3.1 percent of its employment.  While this loss is certainly a problem, it is encouraging that the annualized pace of job losses has declined from the 5.4 percent experienced only a few months back.  I expect the pace of losses to moderate significantly in the months ahead,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

 

This month, bank CEOs were also asked when they expect the Federal Reserve to begin raising interest rates.  Only 7 percent expect a rate hike in the first half of 2010, while 37 percent anticipate that the Fed will not raise rates until 2011.  Most, or 56 percent, expect a rate increase in the second half of 2010.  Pete Haddeland president of the First National Bank in Mahnomen, Minn., does not expect a rate increase until unemployment peaks and is on its way down.

 

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of the 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road.

 

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 11 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

 

Colorado: Colorado’s RMI expanded to 40.3 from 39.8 in December. The January ranch- and farmland-price index rose to 46.8 from December’s 43.8 and 44.1 in November. The state’s Rural Mainstreet loan volume index plunged to 32.7 from December’s 44.6.  Colorado’s Rural Mainstreet economy has lost more 3.7 percent of its employment over the past year.  This compares to a loss of 3.9 percent for Colorado’s urban areas.

 

Illinois: The Illinois RMI once again moved below growth neutral. The RMI for January rose to 38.4 from 37.6 in December. Farmland prices continue to slump with a January index of 44.4 which was higher than December’s 42.4.  Illinois’ Rural Mainstreet economy has lost more 5.3 percent of its employment over the past year. This compares to a loss of 4.0 percent for the state’s urban areas.

 

Iowa:  Iowa’s RMI remained below growth neutral, according to the monthly survey of bank CEOs.  The RMI for January edged higher to 41.2 from 40.7 in December. The farmland-price index was also below growth neutral with a January reading of 47.6, up from December’s 44.7.  Iowa’s Rural Mainstreet economy has lost approximately 3.2 percent of its employment over the past year.  This compares to a loss of 1.5 percent for Iowa’s urban areas.

 

Kansas: The Kansas RMI, like much of the region, was below growth neutral 50.0.  The index was unchanged from December’s 39.0. The farmland-price index climbed to 45.4 from 43.0 in December.  The January loan volume index plunged to 31.4 from December’s 43.8.  But all was not negative for agriculture.  According to Frank Sullentrop, president of Legacy Bank in Colwich, “Commodity prices and farm income have been one of the few bright spots in our local economy over the past year. Kansas’ Rural Mainstreet economy has lost approximately 6. percent of its employment over the past year.  This compares to a loss of 3.2 percent for the state’s urban areas.

 

Minnesota: Minnesota’s RMI inched higher to 39.8 from December’s 39.3.  Minnesota’s farmland-price index advanced to 46.3 from December’s 43.3.  The January loan volume index for the state’s Rural Mainstreet economy sank to 32.2 from 44.1 in December. Brian Nicklason, president of Woodland Bank in Remer reported, “Winter tourism in our area is down.  Lack of good snow and high gas prices are the likely cause of the downturn.  Most restaurants, bars, gas stations and motels are finding customer traffic is below last year’s levels.”  Minnesota’s Rural Mainstreet economy has lost approximately 3.4 percent of its employment over the past year.  This compares to a loss of 2.9 percent for Minnesota’s urban areas.

 

Missouri: The Missouri RMI slipped to 41.5 from December’s 41.7. The January farmland-price index expanded to 48.0 from 45.7 in December.  Loan volumes remained weak with an index of 33.9 for January which was down significantly from December’s 46.5.  Missouri’s Rural Mainstreet economy has lost approximately 3.9 percent of its employment over the past year.  This compares to a loss of 2.2 percent for the state’s urban areas.

 

Nebraska:  Nebraska’s RMI climbed to 42.3 from December’s 42.0.  The farmland-price index for January expanded to 48.7, up from December’s 34.7. The January loan volume index tumbled to 34.7 from December’s 46.8.  But some areas in the state reported solid growth in farmland prices.  For example, John Nelsen, president of First Tier Bank in Holdrege, said, “Our farmland sales have been very limited but have set record highs as they occur.”  However, he is somewhat concerned about the financial strength of the agriculture sector. Nebraska’s Rural Mainstreet economy has lost approximately 2.2 percent of its employment over the past year.  This compares to a loss of 1.9 percent for Nebraska’s urban areas.

 

North Dakota:  For the eighth straight month, North Dakota’s RMI was the highest in the region and the only one above growth neutral.  The January RMI for the state slipped to 52.1 from December’s 52.2.  North Dakota’s farmland-price index climbed to 52.6 from 50.2 in December.  The state’s loan volume index plunged to 38.5 from December’s 51.0.   North Dakota’s Rural Mainstreet economy has increased the size of it employment by 1.8 percent.  This compares to a loss of 1.1 percent for the state’s urban areas.

 

South Dakota: The RMI for South Dakota remained below growth neutral with a January reading of 43.2, up slightly from December’s 43.1. The state’s farmland-price index climbed to 49.7, which was up from December’s 47.1.   South Dakota’s loan volume index for January slumped to 35.6 from 47.9 in December.  South Dakota’s Rural Mainstreet economy has lost approximately 2 percent of its employment over the past year.  This compares to a loss of 1.3 percent for the state’s urban areas.

 

Wyoming:  Wyoming’s RMI for January slipped to 39.2 from December’s 40.1. The January ranch- and farmland-price index rose to 45.7 from December’s 44.1. However, according to Kent Shurtleff, CEO of Wyoming National Bank in Riverton, “The value of farmland is hard to ascertain in our market.  Not a lot of farms have sold recently to my knowledge.” The Wyoming loan volume index for January tumbled to 31.6 from December’s 42.4.  Wyoming’s Rural Mainstreet economy has lost approximately 6.6 percent of its employment over the past year.  This compares to a loss of 3.1 percent for the state’s urban areas.

The president indicated in his weekly address that it was good to see banks paying back their TARP obligations (with interest) but “not good enough.” He scolded as audacious those who say “that it’s somehow unfair, that because these firms have already returned what they borrowed directly, their obligation is fulfilled.”

Leaving aside questions of whether it’s fair to change terms after repayment, or whether banks should cover the shortfall caused by non-bank TARP recipients, there is still the question of likely effect. In his earlier post, Tom conceded “a certain intellectual appeal” in the proposed fee. Mike Moebs, principal at a Lake Bluff, Ill.-based financial services consultancy, said that “for all the wrong reasons” President Obama may be doing a good thing by taxing big banks. “If the big guys are beyond their economies of scale, why not use the price mechanism?” Moebs said.

“In Great Britain they’re taking the likes of the Royal Bank of Scotland and Barclays and saying to Royal Bank of Scotland, you’ve got to get rid of 900 branches by the end of the first quarter of this year; Barclays, you have to get rid of 1,000 branches. That’s more of a hatchet-type of approach…but Obama is stepping in and saying, I’m not going to face those social and political consequences; I’m just going to tax you guys–and I’m not going to tax the small [banks]. So your prices for your services have got to go up, and the small guys [will] have a competitive advantage. Now, if you big guys don’t bring down your cost, the small guys are going to win.”

The tax could cause big banks “to reduce [their] long-term average cost of operation, which is what the economy of scale is, and get it back down [to where} the small guys [are],” Moebs said.

Meanwhile, the president discussed additional big-bank reforms today.

All bankers should be concerned about the bank tax President Obama announced he will include in his next budget proposal.

He proposes to charge the 50 largest financial firms 15 basis point on liabilities, less deposits, for something he is calling a Financial Crisis Responsibility Fee. In a move he says is designed to reduce the federal deficit, he said the fee will assure the government recovers its $700 billion in TARP money. Recently, the government said it expects not to recover about $117 billion of that. While banks are likely to repay all of the money they got, with interest, Treasury will lose money on investments it made in AIG, Chrysler and GM. President Obama’s proposed tax is expected to raise $90 billion in the next ten years and if that doesn’t cover all the TARP losses at that point, the tax apparently will be continued until every dollar is repaid.

The companies that will get hit with this tax are the American subsidiaries of foreign banks, and American companies such as Goldman Sachs, JP Morgan Chase, GE Capital, HSBC, Morgan Stanley, Citigroup and Bank of America. President Obama specifically noted that the tax will not impact community banks.

But I think community bankers do need to worry. The government has poured $110.6 billion into Fannie Mae and Freddie Mac, and neither is expected to return to profitability anytime soon. (Read the details in this CBO report.) When will Treasury want this money back? If President Obama is content to go after big banks to recoup losses on auto companies, how much more content will be be to go after all banks to help recoup losses at Freddie and Fannie? Certainly the connection between the banks and the housing GSEs is much stronger than the connection between the largest banks and the automakers.

The President’s proposed tax has a certain intellectual appeal, going after wholesale funding and other non-deposit liabilities. This can reasonably be called a tax on risk, and excessive risk-taking is part of what precipitated the financial crisis. On the other hand, like all taxes on corporations, it is citizens who will pay through higher-priced products and services.

For now, President Obama seems sensitive to the distinction between large and small banks but when he has to come up with a way to pay for the Fannie and Freddie bailouts, I really wonder whether that distinction will remain meaningful to him.

TIB — The Independent BankersBank of Irving, Texas — has purchased the bridge bank set up by the FDIC in the wake of the failure of Independent Bankers Bank in Springfield, Ill., on Dec. 18. Here is the TIB press release, and here is the press release from the FDIC. Although TIB President Michael G. O’Rourke says TIB already has about 100 customers in the region, TIB would generally be considered a new player in the bankers’ bank arena serving customers in the Upper Midwest.

Gayle Earls, hired by the FDIC to run the bridge bank, predicted on Jan. 5 that a buyer for the bridge bank would soon be found. Earls was chief operating officer of TIB for 19 years. After he left TIB, he served as CEO of the bridge bank the FDIC set up after the failure of Atlanta-based Silverton Bank last May. No buyer was ever found for the Silverton Bridge Bank and it was closed down after about four months of operation.

The FDIC says TIB is paying a premium of 0.32 percent to assume all of the bridge bank’s deposits; TIB also is  purchasing $111.8 million of its assets, although TIB says it is not acquiring any of the bridge bank’s loans, distressed assets or trust services. In a separate transaction, the FDIC announced Empire Advisory Group, Inc., Springfield, Ill., has agreed to purchase the corporate trust department of the failed bank for $119,000.

TIB already has been approved to open a branch in Illinois. It is estimated that IBB Bridge Bank was serving about 450 of IBB’s former customers.

“We are very pleased to be able to step into this role and provide a stabilizing influence for the community bankers of Illinois, Indiana, Michigan, Iowa and the rest of the region,” said O’Rourke.

Looking to serve the former IBB customers, Bankers Bank of Madison, Wis., announced earlier this month that it would open two new offices in Illinois and a new office in Indianapolis. In addition, Bankers’ Bank announced it had hired four former IBB staff members: Catherine Bryant as first vice president, and Matthew Coppola, Marlene Luther and Mark Wade as vice presidents.

Anyone who works with numbers knows they can be deceiving. I have to call the Minneapolis-based Star Tribune on some numbers they ran in their Jan. 11 edition. Here is the online version of the article the newspaper ran about high concentrations of commercial real estate loans at some Minnesota banks. The print edition of the newspaper included a list of 17 banks that it says have commercial real estate loan concentrations equaling more than 400 percent of capital. The list does not appear online.

No. 14 on the list is Central Bank of Stillwater. It caught my eye because my colleague Tony Telschow and I just spent quite a bit of time researching this bank, which experienced phenomenal growth in 2009. When you receive your January edition of NorthWestern Financial Review in a day or two, you will see that we have named the management team at the bank — Owner John Morrison, Chairman Kurt Weise and President Larry Albert — our Bankers of the Year.

The Star Tribune article implies that high concentrations of real estate loans put these banks on shaky financial ground. But in the case of Central Bank, the numbers are misleading. A substantial portion of the real estate loans currently on the books at Central Bank came from failed bank acquisitions. Virtually all of those loans come with an 80 percent loss-share agreement with the FDIC. That means they pose little risk to the bank. Should a million dollar loan go bad, the FDIC will pick up $800,000 of the loss. Central Bank would never have acquired these assets had they not come with the FDIC loss-share agreement.

The article makes it sound as if these banks exercised poor judgment but in the case of Central Bank acquiring these assets was a savvy move. With the loss-share agreement in place, the bank picks up an investment with little down-side potential and tremendous up-side potential.

Data by itself never tells the whole story. You have to look beyond the numbers. To get a more complete story about Central Bank, be sure to read our January edition of NorthWestern Financial Review.