Industry Focus: Bankers

Left to right: Paul Rechlin, Lewis & Clark Regional Development Council; Dennis Rodin, USDA – Rural Development; Bob Humann, Bank of North Dakota; Craig Larson, Starion Financial; Tim Hennessy, U.S. Bank; Dean Reese, North Dakota Development Fund; Bon Wikenheiser, North Dakota Small Business Development Center; Robert J. Entringer, North Dakota Department of Financial Institutions; Steven Swiontek, Gate City Bank; Rob Landblom, Roosevelt Custer Regional Council for Development; Dale Pahlke, Dakota Community Bank; Jerry Hauff, Cornerstone Bank; Dale Van Eckhout, Small Business Administration North Dakota; Rick Clayburgh, North Dakota Bankers Association, Ernest Strube, Goose River Bank

It was Mae West that said, “Too much of a good thing can be wonderful.” Those in North Dakota’s banking industry would likely concur with that statement. As is true in several other industries throughout the state, banking in North Dakota is experiencing a boom that brings with it a fair share of challenges. However, they are challenges the industry is eager to overcome. Recently, executives representing banking interests from around the state met at the Bismarck offices of the North Dakota Department of Commerce to discuss the banking boom and its impact on the state.

Connie Brennan, publisher and editor-in-chief of North Dakota Business Magazine, served as moderator for the event. These monthly meetings, sponsored by North Dakota’s Department of Commerce, are designed to bring industry leaders together to discuss issues pertinent to their fields. Following is a condensed version of the roundtable discussion.

How well have North Dakota banks weathered the economic downturn?

Rick Clayburgh: North Dakota banks weathered the economic downturn very well. Most notably our banks did not get involved in the sub-prime lending issues. We had participation loans that impacted some of our banks, [but] they have weathered through that. Our banks are sound, secure, and ready to serve their customers.

Tim Hennessy: Given the current environment, there will be consolidations and mergers and we’ll see fewer banks. I don’t believe community banking will disappear, but you will certainly see consolidation.

How big of a challenge are regulations for your industry?

Bob Humann: I see a huge challenge going ahead. When it comes to residential real estate lending, the federal regulations are almost overwhelming. It’s going to be more and more challenging for community banks to have people on staff that are going to be able to handle all these regulations and do the amount of volume that they’re working with. Dealing with some of the hidden features of Dodd-Frank, the HMDA regulations, and the Consumer Protection Agency, it’s just going to be harder and harder for a lot of these smaller community banks to be able to justify having a full person dedicated to residential real estate loans when they might only look at five or six loans a year.

Ernest Strube: I can attest to that as a small rural bank. In our products we really don’t offer a mortgage loan any longer for our customers. The solution to that at one time was the referral program where we could refer it to a mortgage company that would work with us to help underwrite loans. Now, from a compliance standpoint, those aren’t being looked at favorably towards the banks. We’re really stuck in a community where we have very few options to do a mortgage loan for a customer, and we see that only getting worse. I don’t know how we can view that as being in the best interests of the consumer when you can walk into your local community bank and say, “There’s a house down the street I’d like to buy.” We say, “Well, we’re sorry, but we can’t provide financing unless you provide us some other sort of collateral.” That’s a shame, there’s no justice in that for the customer.

Steven Swiontek: It was unfortunate that Congress enacted Dodd-Frank with the idea that painted a broad brush and covered all banks and mortgage companies in one swoop. The bankers in this area weren’t the ones that created or caused the problems, but yet all of those regulations are permeating down to all of us. A large percentage of the Dodd-Frank Act regulations haven’t been implemented yet, so we’re going to see those coming down next year because regulatory agencies haven’t been able to get all of those implemented. It is a key challenge. We’ve had to add two and a half individuals to enhance our regulatory area to make sure that we comply with lending issues. The question really needs to be asked, have any of these regulations caused the consumer to be more informed and more educated? You need to look at that and answer it. All of us want to do things the right way and make sure that the consumer is informed, but have all of these regulations enhanced or helped them? The answer to that question is still out there.

Jerry Hauff: The real impact is on the consumer. The borrower that goes into a small town community bank or even a larger bank that has the talent and expertise, they’re going to pay more. They go through more frustration [because] they don’t understand the process. You can spend time talking to them [but] you can’t explain it; you can’t really bring it down. It’s the consumer that’s really getting taken advantage of. If I sign my name a hundred times, I don’t have a clue what I’ve signed; that’s where the negative impact is.

Dale Van Eckhout: The regulatory environment for banks is becoming increasingly cumbersome. SBA recently came out with the Small Loan Advantage guaranteed loan program to allow lenders to utilize their expertise and policies on loans up to $350,000 with minimal additional justification required for an SBA guarantee. In North Dakota, we also have the Entrepreneur Centers of North Dakota (ECND) which is an informal partnership between the Bank of North Dakota, the North Dakota Department of Commerce, SBA and USDA RD to assist business and lenders in efficiently matching financial programs to their needs.

Craig Larson: There’s impact to our industry. We’ve been approaching a billion dollars in assets and we’ve been asking ourselves what is that going to mean. Unfortunately, one of the things we’re saying is, it means we’re big enough to staff those compliance departments. It’s a shame that you have to potentially be that big to survive this onslaught of regulation. A year ago we acquired a $70-million bank, 60-years of family-owned business, the gentleman sold us that bank strictly because he said, “I’m tired and fed up with trying to keep up with regulations that don’t add value.” The consumer is going to pay a price, but we’re going to see continued consolidation in our business.

Robert J. Entringer: It’s only going to get worse with the proposal from Basel III if it goes through. It’s only going to get more difficult, especially commercial and residential real estate lending. It’s not going to be easy. Basel III was intended to be covering banks that were systematically important and then the fed comes out and says, “Nope, it’s going to cover everybody.” The banks that they consider to be systemically risky are the biggest of the big. As you’ve heard, the community banks didn’t cause this problem, but now it’s going to affect them. (Editor’s note: Among other things, Basel III is a global regulatory standard that will require banks to hold 4.5 percent of common equity. This is up from the 2 percent previously required.)

Clayburgh: You have a Congress that’s trying to address political perception and they create all these regulations. The only people that really know how to regulate are the people they’ve been regulating, our community banks. It’s creating a situation that will be detrimental to the consumer. One of my members recently said, based on the Basel III discussion with the regulators in the international lending, “Dodd-Frank took us to the edge, Basel III is pushing us over.”

Is the state-owned bank a competitor or a collaborator?

Clayburgh: Part of the original mission statement was to act as a resource to our banks not to compete with our banks. I think the leadership of the bank has been very respectful of that relationship of being a service provider, a banker’s bank to our banks, and really tries not to cross that line. Occasionally when they do, they’re very open to the industry being able to say, “You’re getting a little too far down that competitive path.”

Hauff: Bank of North Dakota does a great job of working together and trying to help solve problems and put credit in places where a bank would normally not do it. It starts with the leadership, [but] the staff on the front end is very accommodating, willing to be open and work with us. We’ve had nothing but a great experience with them.

Swiontek: We’ve had a wonderful collaboration with the Bank of North Dakota when it comes to mortgage lending. What I appreciate is that you can give them a call or come and visit with them; I think that’s a good rapport. We’re looking to try and meet the needs of North Dakotans, and it’s been a very good, healthy relationship.

Dale Pahlke: It does a lot of good for the state. They can step up and handle some big deals that a lot of the banks can’t handle. We’re talking about community banking going away or getting tougher, but with the Bank of North Dakota, a lot of small banks are able to sell off participations, whether it be commercial or agriculture. For us that do home loans, we sell home loans to them. They provide a lot of resources that are important to our people and banks within our state.

Humann: When I go to different banking associations outside of the state, what I find is that we really enable community bankers in the state to be able to compete and strive, whereas a lot of other states don’t have that. They can only do so much, and then they’re out of the transactions. That’s one of the biggest pluses.

Bon Wikenheiser: I have to echo that. Most of the clients that we see are not the clients that walk in with the business plan and the matching financing that a commercial lender can use; the Bank of North Dakota products allow the gap financing packages and local investment to really drive where they want the communities to go.

Rod Landblom: When you’re getting into some of the community development projects that are out there, the Bank of North Dakota is at the table, not necessarily as an active participant, but they are there to serve as an adjunct. We find that the Bank of North Dakota is really kind of a partner, even at a distance.

What kinds of borrowers do you see coming in?

Pahlke: We have two segments of borrowers; we have our segment that have been here all their lives and understand North Dakota and how things can be good or bad. Then we have the segment that comes from the outside that’s here really to take advantage of the situation. I don’t mean that in a derogatory way, but they’re here to capitalize on our good fortune. You have two different sets of borrowers, and you need to look at them closely to make sure that you’re appropriately passing the risk on as it should be. There is a lot of loan demand, but can you bank it? That gets to be the issue.

Paul Rechlin: I have the feeling that what is happening is there’s more demand than there is supply. With the regulations, on top of the fact that we’ve had another wave of refinances, the mortgage lending staffs are way overworked at most banks. What’s happened is, where they used to have the time to find a program for borrowers that may not be the perfect borrowers but there is a place for them, those people are being kicked aside because there just isn’t time for it anymore. Some of the community banks have gotten rid of their mortgage lending departments; there’s a pent-up need there that can be met, but there simply isn’t the time and resources to meet it.

Are deposits an issue for banks?

Pahlke: Fortunately, at this point in time, we have all kinds of money in the state of North Dakota and most banks, certainly in the Western part, have about all of the deposits that they need. Most of my life we fought for deposits, but in the last couple of years, deposits are an easy thing to get. It’s the loans that are hard to get, the good ones.

Larson: That’s especially true out West. Certainly, all banks in North Dakota have access to deposits more so than they’ve had over the years, but out West it’s extremely so.

How does legislation and politics affect the banking industry?

Hennessy: North Dakota is a little bit unique because our economy is rolling right along. Overall from our perspective, there’s still a lot of uncertainty. Between the uncertainty in the United States and what’s going on in Europe, that is what’s partially holding back our economy. Customers are hesitant to make big moves. We’ve got things going on in North Dakota, but we still have customers that are keeping their powder dry even in this economy.

Swiontek: If there are a large number of regulations concerning the control of fracking, that could have an impact on housing, energy and oil production; that would impact the banking industry. There are a lot of unknowns that people are waiting to see what’s going to happen.

Clayburgh: From my perspective, as representing the industry in Bismarck, we have a very open legislative process. They’re very understanding to the issues that occur. We have a very astute legislature on business and banking issues. Our legislature won’t impact our banking industry that much, except we’re hoping for some tax relief.

Humann: One of the risks of the presidential election is we don’t have a Farm Bill. I know we talked a lot about the Bakken oil play, but we have agriculture as the number one industry here. We need to get a sustainable Farm Bill put in place for the future. We have record high land prices and for the farmers to be able to sustain those types of dollars and the high inputs, we need to have a Farm Bill that’s going to take us into the future.

Is the banking industry fairly taxed?

Clayburgh: We’re looking at that right now. Are we taxed fairly, especially if you compare that to a normal “C” corporation? Our system works, the financial institution tax in North Dakota is six and a half percent. A percent and a half of that is retained at the state level and five-percent goes back to cities and counties. Each of our banks around the state can say, “Here is what we’re putting back into our communities,” which is a good tool. In terms of tax relief, we received relief of a half-a-percent; we went from seven percent to six and a half. There’s going to be further discussions to [lower] that to a six at the next [legislative] session. The legislature is not looking for new taxes; we’re going to be sitting with about a $1.6 billion surplus at the start of this next session. Tax policy from not enough taxes is not going to be the issue. How they going to provide relief back to all the taxpayers is the issue.

Are interest rates going to drop any lower?

Strube: We hope not.

Hennessy: I said that a year ago and it went lower.

Larson: The feds are talking 2015; they’re starting to project out and are more public with where they see interest rates going. We’re budgeting and planning on low rates for the next couple years. It certainly is an earnings challenge for banks as we have seen floors hit on the cost of borrowing, [interest rates] can’t get any lower. As loan rates have been coming down to follow that, I think margin compression around the industry is very real. In North Dakota we’ve been able to hold that up with our loan demand and the economy we have here. Structurally banks are going to be challenged more and more as that rate stays low for another year. It’s going to be harder to make money; it will translate into earnings challenges for banks.

How do you deal with the new businesses moving into North Dakota?

Hennessy: We get a lot of calls every week because we have a national presence and we have branches in the Western part of the state. We’ve never really changed our lending standards, and they’re not used to that. There are people coming in that have gotten more liberal on their lending relationships than what the majority of banks in this state are accustomed to.

Larson: Tim [Hennessy] sees bigger deals than we do and hear about; the $10 to $30 million deals that are out there, especially out West, and that’s just not in our wheelhouse. We work with home builders, if we have a 10-year relationship with a home builder, that builder may be able to build so many specs or pre-sold and might have a line of $2 million. If [a home builder] has come to town in the last 6-12 months to follow this boom, that home builder would have nowhere near that sort of flexibility in either volume of dollars that we’ll advance or terms and conditions. We’ll be more conservative on the front end and let these folks prove themselves, versus someone we’ve dealt with for 5 or 10 years. We ease our way into a relationship [before they are] able to bank the same way as our longer-term customers.

What concerns do you have for the upcoming year?

Pahlke: We’re always concerned with agriculture and this drought going from here as far as you can see across America is terrible. If we have another nationwide drought that hits us, it would be very severe to our state and banks, because so many of our banks are agriculture oriented banks; especially in the smallest communities.

Van Ekhout: The biggest impact on farmers if you have a drought is not the crop producers; it’s the livestock people, because you can’t get federal crop insurance for a calf. The corn and wheat producers get federal crop insurance.

Speak Your Mind