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The Fed promising to be on hold through 2013 means there’s little aspect for relief in interest margins and rates. The credit recovery we’ve seen is starting to wane … so really it’s all about profitability at this point, and that’s a tough picture.

The smaller you go in the banking space, the more spread-dependent you are and the less diversified your revenue stream is.

Mergers & Acquisitions

Mergers & Acquisitions

Are small banks better off growing or shrinking loans?

  • The Fed’s zero interest rate policy is causing a lot of the more creditworthy small businesses to just pay down loans.
  • Credit worthy borrowers is an issue.
  • The uncertainty of regulation and it’s cost are affecting small business loans.

Deposits are still being accepted, it’s certainly a real problem for net interest income growth.

Where should small banks look to find fee income?

The banking industry will lose around $12 Billion in debit card fees this year. Quite a bit of income to make up in this economic environment.

  • Some banks are adjusting fees for checking account balances. Requiring a higher average balance to avoid monthly fees.
  • Some banks are looking at providing asset and wealth management services. Experience and execution will be critical if they go down this path. Nobody likes losing money.

92 Banks have failed this year, down from 2010. 2012?

  • With the FDIC dragging their feet on shuttering these failing institutions, it makes it hard for investors to come in at that point to bale out the institution.
  • Since early 2007 – 510 banks have “imploded.”
  • U.S. Home Prices Fell More Than Forecast. “Residential real estate prices dropped more than forecast in the year ended October, showing a broad-based decline that indicates the housing market continues to be weighed down by foreclosures.” This will affect banks that have real estate portfolios.

For the stable banks that are already at the 9% to 10% capital level, they’re going to be throwing capital off. You’re looking for the best managers to use the capital to acquire others, and you’re looking for the bad managers to make sure that they’re not doing anything else and they’re returning it to the shareholders if they’re generating capital from a good franchise.

What are the biggest challenges for community banks in the next 12 to 18 months?

  • The smaller you are, the more difficult it is incrementally to absorb costs.
  • If we are hit with another recession…not so sure we’ve come out of the last one.
  • Banks are just running out of some levers they can pull. How far can you cut expenses?
  • Competition. Banks that are better marketers using Social Media to increase brand awareness, and meet customer expectations at point of need.
  • Mergers and Acquisitions; Stand alone, merge or acquire.

Is this the new normal?

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Here is the Credit Union Times article where the Banks and Credit Unions respond.

Credit unions and banks are looking to the courts for relief.

TCF Bank is challenging the legality of Fed’s rule and its lawsuit is pending in federal court. Both CUNA and NAFCU have joined friend-of-the-court briefs on behalf of the Minnesota-based bank.

TCF Financial Corp. Chairman/CEO William Cooper has said the Durbin Amendment is a $15 billion-a-year “raid on the banking business.”

The lawsuit hasn’t gone to trial yet, but so far a federal judge has rejected both the bank’s request to stop the Fed’s implementation of the amendment and has rejected the government’s request to dismiss the lawsuit.

The Fed’s rule is supposed to take effect on July 21. It issued a draft rule in December and was supposed to issue a final rule in May but that has been delayed.

According to the proposed rule, the allowable costs for interchange would be limited to no more than the issuer’s allowable costs divided by the number of electronic debit transactions on which the issuer received or charged an interchange transaction fee in the calendar year. Or the issuer could receive debit interchange capped at 12 cents per transaction.

Tester said during the Senate debate that that the Fed rules didn’t contain enough protections for small issuers, such as community banks and credit unions with assets of $10 billion or less. He predicted that some of those institutions could be less profitable or maybe even fail. He cited concerns about the inadequate protection raised by Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair.

Durbin countered that the protections for small issuers were adequate and that the Corker-Tester amendment would mainly help the big banks.

“The biggest banks make the biggest money in this process. Far and away,” he said.

NAFCU President/CEO Fred Becker praised the “valiant fight” by the banks and credit unions in lobbying on the issue and said that it proved how hard it is to get anything passed in the Senate, where 60 votes are needed for almost every bill.

Though Becker conceded that the short-term options for delaying the rule may be limited, he said NAFCU would work with lawmakers to ensure that they keep their promise to monitor the implementation to see if the new rule will hurt small debit card issuers.

CUNA President/CEO Bill Cheney said the vote is “going to create a train wreck that will affect every consumer with a debit card.”

The Corker-Tester amendment would have mandated financial regulators, including the Fed and the NCUA, to perform a six-month study to consider the costs to financial institutions of the new rules, whether the rules will adversely affect consumers, and whether the small issuer exemption is feasible. If any regulator found problems in one of those areas, the Fed would have had to rewrite the rule within six months.

In their attempt to persuade lawmakers to pass the amendment, credit unions and banks worked together.

CUNA, NAFCU and the Independent Community Bankers of America wrote lawmakers just before the vote and said that if the amendment fails “the millions of consumers served by the nation’s community banks and credit unions would be directly harmed and would end up paying more for their banking services.”

The Electronic Payments Coalition ran an extensive advertising campaign, which was matched by similar efforts by the retailers. These ads have appeared both in the Washington, D.C. area and in the home states of key senators.

National Retail Federation Senior Vice President for Government Affairs David French praised the efforts of the financial services lobbyists but said at the end the retailers had an easier case to make.

“It’s harder to get senators to change a law, which is what the banks wanted to do, than to get them to keep the status quo,” he said in an interview. “Ultimately, we made the case about transparency. When consumers swipe their debit cards they pay extra because of hidden fees and it is hard to justify that.”

While the retailers won the fight, Durbin noted during a Senate floor speech that the real winners were the lobbyists on both sides of the issue.

If this goes down in the courts, rest assured the Credit Unions and Banks will find a way to maintain the lost revenue by charging higher fees for various services. The new era of regulation, LESS is MORE.

There has been a blitz by Banks and Credit Unions to OPT IN their customers by the Aug 15th deadline. Banks and Credit Unions have spent the summer deluging customers with e-mails, letters and phone calls informing them of the change. Why?

New federal regulations prohibit Banks and Credit Unions from charging an overdraft fee on ATM and debit card’s when you do not have enough money in your account. Unless…you OPT IN, which then allows Banks and Credit Unions to charge you the overdraft fee. Several banks have dropped their overdraft program, Bank of America being one.

Banks and Credit Unions stand to lose quite a significant amount of revenue, but will make it up in other areas. Remember the days when you were charged for checking? Had to have a minimum balance? Charged for checks? Those days will be coming back.

Your choices.

1. OPT IN – Your transaction for ATM and debit card’s will go through even if you do not have the money in your account. Saving you the embarrassment.  You will be charged an overdraft fee. Avg. Bank overdraft in the US is $35, Credit Unions is $25. Remember…this is per transaction. That $3 latte could be costing you $35.

2. OPT OUT – Your transaction for ATM and debit card’s will not go through if you do not have the money in your account! This could be embarrassing. However, it will save you an overdraft fee!

In the end it is your choice and your responsibility to manage your money effectively. The rich rule over the poor and the borrower is a servant to the lender.

Let me know your thoughts and comments.

It’s a balancing act…challenges vs. opportunities of which there are many.

Baby Boomers (born between 1946-1964) start turning 65 in 2011. Now the average age of the credit union member is approaching 50. By 2030 the older population is expected to grow to 72 million, nearly 20% of the population. They are past the prime borrowing years of (25-44).

Do credit unions have the right kind of mix for their products and services?

  • Convenience – How convenient is your one branch Credit Union? Or a credit union that does not deal in cash? Can you imagine in the 21st century that there are some that still do not deal in cash? Right here in Memphis.
  • Mobile Banking, most larger Credit Unions offer, but what about the small to mid size credit union?
  • Online Banking is now a standard feature at banks and now credit unions. How secure?
  • Debit cards are emerging at the payment instrument of choice. According to a PULSE survey, 54% of consumers prefer using a debit card at point-of-sale over other types of payments. (Check 13%; Cash 15%). The new regulation E will deal with overdraft fees to take effect July 1st.
  • Investment services – most banks offer this, however only the large credit unions offer leaving the small to medium size credit union to figure it out.
  • The gap between banks and credit unions offering free checking is narrowing. With credit unions at 71% vs. banks at 57%.

Credit Unions need to be good at online banking along with the personal touch. Most members  will want these services for free. Above all maintain member confidence that their information is secure, and that the credit union is in total compliance. Failure in these areas will quickly erode member confidence and be the catalyst for them changing financial institutions.

The regulators on Friday closed seven U.S. banks, bringing the total number of bank failures to 57 for the year. The seven bank failures combined will cost the FDIC insurance fund $973.9 million.

All seven banks are based in Illinois. The seven banks closed include Peotone Bank and Trust Company, Wheatland Bank,  New Century Bank,  Lincoln Park Savings Bank, , Citizens Bank & Trust Company of Chicago, Amcore Bank and Broadway Bank. Broadway Bank is run by the family of U.S. Senate candidate Alex Giannoulias.

Bank Name

City

State

CERT #

Closing Date

Updated Date

Wheatland Bank Naperville IL 58429 April 23, 2010 April 23, 2010
Peotone Bank and Trust Company Peotone IL 10888 April 23, 2010 April 23, 2010
New Century Bank Chicago IL 34821 April 23, 2010 April 23, 2010
Lincoln Park Savings Bank Chicago IL 30600 April 23, 2010 April 23, 2010
Citizens Bank and Trust Company of Chicago Chicago IL 34658 April 23, 2010 April 23, 2010
Broadway Bank Chicago IL 22853 April 23, 2010 April 23, 2010
Amcore Bank, National Association Rockford IL 3735 April 23, 2010 April 23, 2010
Tamalpais Bank San Rafael CA 33493 April 16, 2010 April 20, 2010
Riverside National Bank of Florida Fort Pierce FL 24067 April 16, 2010 April 20, 2010
Lakeside Community Bank Sterling Heights MI 34878 April 16, 2010 April 20, 2010
Innovative Bank Oakland CA 23876 April 16, 2010 April 20, 2010
First Federal Bank of North Florida Palatka FL 28886 April 16, 2010 April 20, 2010
City Bank Lynnwood WA 21521 April 16, 2010 April 20, 2010
Butler Bank Lowell MA 26619 April 16, 2010 April 20, 2010
AmericanFirst Bank Clermont FL 57724 April 16, 2010 April 20, 2010
Beach First National Bank Myrtle Beach SC 34242 April 9, 2010 April 13, 2010
Unity National Bank Cartersville GA 34678 March 26, 2010 March 31, 2010
McIntosh Commercial Bank Carrollton GA 57399 March 26, 2010 April 5, 2010
Key West Bank Key West FL 34684 March 26, 2010 March 31, 2010
Desert Hills Bank Phoenix AZ 57060 March 26, 2010 April 2, 2010
State Bank of Aurora Aurora MN 8221 March 19, 2010 March 23, 2010
First Lowndes Bank Fort Deposit AL 24957 March 19, 2010 March 23, 2010
Century Security Bank Duluth GA 58104 March 19, 2010 March 23, 2010
Bank of Hiawassee Hiawassee GA 10054 March 19, 2010 March 23, 2010
Appalachian Community Bank Ellijay GA 33989 March 19, 2010 March 23, 2010
American National Bank Parma OH 18806 March 19, 2010 March 23, 2010
Advanta Bank Corp. Draper UT 33535 March 19, 2010 March 23, 2010
The Park Avenue Bank New York NY 27096 March 12, 2010 April 1, 2010
Statewide Bank Covington LA 29561 March 12, 2010 March 17, 2010
Old Southern Bank Orlando FL 58182 March 12, 2010 March 17, 2010
LibertyPointe Bank New York NY 58071 March 11, 2010 April 1, 2010
Waterfield Bank Germantown MD 34976 March 5, 2010 March 10, 2010
Sun American Bank Boca Raton FL 27126 March 5, 2010 March 10, 2010
Centennial Bank Ogden UT 34430 March 5, 2010 March 9, 2010
Bank of Illinois Normal IL 9268 March 5, 2010 March 10, 2010
Rainier Pacific Bank Tacoma WA 38129 February 26, 2010 March 2, 2010
Carson River Community Bank Carson City NV 58352 February 26, 2010 March 2, 2010
The La Coste National Bank La Coste TX 3287 February 19, 2010 February 24, 2010
Marco Community Bank Marco Island FL 57586 February 19, 2010 February 24, 2010
La Jolla Bank, FSB La Jolla CA 32423 February 19, 2010 February 24, 2010
George Washington Savings Bank Orland Park IL 29952 February 19, 2010 February 24, 2010
1st American State Bank of Minnesota Hancock MN 15448 February 5, 2010 February 12, 2010
Marshall Bank, N.A. Hallock MN 16133 January 29, 2010 February 3, 2010
Florida Community Bank Immokalee FL 5672 January 29, 2010 February 3, 2010
First Regional Bank Los Angeles CA 23011 January 29, 2010 February 3, 2010
First National Bank of Georgia Carrollton GA 16480 January 29, 2010 February 3, 2010
Community Bank and Trust Cornelia GA 5702 January 29, 2010 February 3, 2010
American Marine Bank Bainbridge Island WA 16730 January 29, 2010 February 3, 2010
Premier American Bank Miami FL 57147 January 22, 2010 April 5, 2010
Evergreen Bank Seattle WA 20501 January 22, 2010 February 2, 2010
Columbia River Bank The Dalles OR 22469 January 22, 2010 February 2, 2010
Charter Bank Santa Fe NM 32498 January 22, 2010 February 2, 2010
Bank of Leeton Leeton MO 8265 January 22, 2010 February 2, 2010
Town Community Bank & Trust Antioch IL 34705 January 15, 2010 January 26, 2010
St. Stephen State Bank St. Stephen MN 17522 January 15, 2010 January 26, 2010
Barnes Banking Company Kaysville UT 1252 January 15, 2010 February 3, 2010
Horizon Bank Bellingham WA 22977 January 8, 2010 January 12, 2010

The Obama administration saved all the big banks, without conditions back in March-April 2009. The too big to fail in the eyes of his administration and the credit markets seemed to be the plausible approach.

Fast forward to today, where the large institutions have gotten bigger, is there a way to significantly reduce the risks posed by these institutions without breaking them up?

  • Glass-Steagall was enacted in 1933 to control speculation and not allow banks to own other financial institutions. In 1999 under the Clinton administration this act was repealed, and today we are witnessing the lion share of the profits coming from the trading desks of these financial institutions.

The top 5 bank institutions control 30.7% of all deposits according to the latest FDIC summary dated June 2009.  Bank of America leads with over $900 Billion in deposits, making it larger than ALL the Credit Unions combined in the US.

Is breaking up hard to do?

Consider this statement.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Thomas Jefferson, (Attributed)

3rd president of US (1743 – 1826)

The battle lines are being drawn over commercial lending, as cries of mission creep alleged.

Commercial lending has been one of the key drivers of bank profits. Now credit unions are lobbying for higher limits. The 1998 federal law limited the amount of business loans that credit unions could make. The figure was set at 12.25% of assets, and now CUNA (Credit Union National Association) , an advocate of credit unions estimates that if this was lifted, it would generate $10 billion nationally in new credit union business. Credit Unions are seeking to double the % to 25% of assets.

Business lending dropped 18% nationally in 2009, while credit unions has risen 10% filling in the gap being left by banks. Rarely do bankers and credit unions see eye-to-eye. Credit Unions are cooperatives , not-for-profit institutions owned by its members, while banks are profit driven institutions owned by stockholders.

The message from credit unions to banks…if you are not going to lend to businesses in this economy, get out-of-the-way and let us fill the gap.