IBA Annual Washington Trip: Time Well Spent

September 17, 2014

Approximately 70 Hoosier bankers descended upon Washington, D.C., last week to assert their right to petition the federal government on issues of mutual concern to bankers throughout the country. We met with executive management of several bank regulatory agencies and conveyed our concerns about the impact of some of the excessive regulations written to fully enact the Dodd-Frank Act. This gross regulatory overreaction to the financial crisis has shifted bank risk management from credit risk to regulatory risk. For decades, bankers have measured credit risk so efficiently and effectively that the United States became the largest, most successful economic entity ever on earth. Yet despite that success, Congress has recently been punishing banks for the financial crisis in 2008 that the country has been recovering from so slowly. Never mind that much of the root cause of the crisis traces back to congressional and regulator policy malfunctions that permitted not only bankers, but many nonbank financial service providers, to make loans that were not appropriately creditworthy – all in the misguided zeal to increase the percentage of citizens who own homes.

Consequently much of our discussion with the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau and the Office of the Comptroller of Currency centered on the difficulty under which banks currently operate to provide mortgage loans to the consumers of our communities. New rules regarding a consumer’s ability to repay, that assesses hard debt to income ratio requirements, have eliminated the experienced judgment historically provided by local bankers, known as credit risk analysis. Now it is incumbent upon bankers to first heed the hard guidelines, so that the bank is not subject to frivolous suits or civil money penalties, now known as regulatory risk. Bankers hope that common sense prevails at some point, so that they can return to doing what they do best – assessing credit risk and growing the local economies of the communities they serve.

Our mighty band of bankers also called on Indiana’s 11 U.S. senators and representatives, along with House Financial Services Committee Chairman Jeb Hensarling of Texas. We certainly appreciate the time allotted to us by these busy elected officials, and we appreciate their understanding and support of our concerns about the overreaching regulatory environment in which bankers now operate. We spoke about the innate unfairness of the current tax code, by which banks pay very high taxes, yet are saddled with the inequity that competitors – such as credit unions and the Farm Credit System banks – pay little or no federal taxes. No one would design a system with such taxation unfairness, but it has evolved for reasons long since accomplished.

We were especially appreciative of the time provided to us by our national banking associations with whom we frequently work on issues of mutual concern. The Independent Community Bankers of America, the American Bankers Association and the Conference of State Bank Supervisors all met with us to present their respective views of the current atmosphere in Washington, D.C. Their insights always prove to be extremely valuable.

All in all, it was a productive investment of a few good days to carry the banner for the important business of banking and for the businesses, consumers and communities that rely on its services. The camaraderie among the participating bankers was also of importance, as we all work together to foster a stronger economy for Indiana and for the United States. We left for home with a sense of accomplishment and appreciation for the difficult issues faced by Congress each and every day. We thank our congressmen for their service and their consideration of our positions, and we thank our dedicated member bankers, who took the time to travel with us to DC to speak up for the business of banking and the consumers, businesses and communities it serves.

-S. Joe DeHaven

Revving Up for Fall Elections

September 10, 2014

Labor Day has come and gone, signaling the last hoorah for summer. Later this month we celebrate the start of fall, to be followed all-too-quickly by winter. As temperatures drop, we will no doubt bundle up in jackets and sweatshirts. Another fall tradition, one which we have the opportunity to exercise every other year, is the right to vote for national officeholders. In my opinion, the right to vote should be a responsibility. We enjoy freedom of choice in electing our political leaders, who are chosen to act on our behalf in matters of mutual concern. Sadly, the vast majority of those citizens who are eligible to vote abdicate that responsibility by not showing up at the voting booth.

This year all nine of our U.S. representatives are up for re-election, as are all 100 state representatives and 25 state senators. In addition, Indiana will be holding elections for secretary of state, treasurer of state and auditor of state. While every election is important, the fragile health of the economy plus worldwide instability surely make this election a standout among non-presidential election years. In Washington, D.C., the growing philosophical divide – crystallized by a split Congress, Republican-controlled House and Democrat-controlled Senate – has resulted in gridlock. Congress appears to be unable to deal with the issues that the populace should view as urgent. The military and political fighting occurring in the Mideast and in Eastern Europe should scare us all into voting action; yet, I suspect that only a small minority of registered voters will show up to cast their votes on Nov. 4.

Issues such as immigration, Social Security and Medicare reform, tax reform, and trimming back the excessive regulatory burden that has been hampering businesses in all industries of all sizes within the past few years require that we elect people capable of dealing with them. Can our current Congress deal with these issues? Certainly it has the power to do so, but it has not yet dealt with these issues. Can we elect a Congress that will deal with them? We can, but electing capable candidates does not guarantee action. We must insist, through our advocacy, that Congress address these issues.

We must stay ever vigilant to make sure that our senators and representatives do what we want them to do on our behalf. We must stay ever present, so that we know what threats are arising throughout the world that could impact our way of life. Freedom is not free. We pay the price with the blood of our men and women serving in the armed forces. We pay the price with the sweat and tears of American business owners and workers, toiling for a stronger economy. We must also pay the price with our time. We have to invest the time to stay abreast of the issues and to make sure our elected representatives deal with those issues appropriately.

Let us collectively determine that these winding-down days of summer mark a rebirth of our great nation. Let’s make it a rebirth of “we the people,” eager to participate in our own governance, rather than abdicate that responsibility to those who are elected by a fraction of eligible voters. This fall, let’s get out the vote to make it an election of the people, by the people and for the people.

- S. Joe DeHaven

State Bankers Associations: Committed to the Banking Industry

September 3, 2014

Last week I participated in a meeting in Portland, Oregon, of about 20 of my counterparts from throughout the country to discuss issues we face in leading small-staff state bankers associations (SBAs). The Indiana Bankers Association, with a staff of 15, was one of the largest associations represented at the meeting. As with any other business, leaders of SBAs deal with a thousand details to be accomplished daily. Many of us are blessed with talented and long-tenured staff – certainly the case at the IBA – which makes the task much easier.

Like some of our member bank leaders, several SBA executives will be retiring within the next five years. Some of our discussion centered on the preparedness of each association regarding succession planning. Within the past couple of years, there have been some retirements among SBA leaders, and I have been impressed with the successors who have been selected to advance the missions of these associations. IBA also has a succession plan in place, reviewed and updated regularly by our executive committee.

Whether having served long-term or for a brief time, each SBA executive is deeply committed to the betterment of the business of banking. We share our successes, both individually and as a group, so that we can each make the environment better for our members. We all appreciate and understand the significance of the business of banking to the entire economic, social, educational and governmental environments. Our bank members fund the financial might of the United States. Our members are leaders in their respective communities, and we who represent them are proud of their contributions. We take pride in knowing that we help each of these banks to fulfill their missions of improving the economic atmosphere of the communities they serve.

We also share industry-wide frustrations, particularly within the past few years, when the financial crisis changed our business forever. Some frustrations result from nefarious legislation, but most stem from poorly written regulations. As industry advocates, we work hard to navigate the maze-like legislative process to help promote sound laws. The regulations which result from those laws are intended to uphold legislative best intentions yet, all too often, misaligned regulations do more harm than good.

Regardless of how or why issues occur, it is always an honor to be on the side of those trying to better life for others. While the state bankers associations each seek the same results, at times we go about it very differently. The variation from state to state is surprising. Consequently, meetings like the one held in Oregon allow us to share collectively the ideas we generate individually within our organizations. That free sharing of ideas is at the root of the success that we enjoy on behalf of our members.

It was an honor to participate among such a dedicated and intelligent group of peers from throughout the country. I learned much from them and also shared a few ideas with them. As we return to our offices and put into place the ideas that were shared, we do so in anticipation of creating a stronger financial services industry for the benefit of the consumers and businesses that rely on its products and services.

- S. Joe DeHaven

Continued Congressional Stalemate

August 27, 2014

The week after Labor Day, members of Congress will return to Washington, DC, to complete their work for this year and this session of Congress. Much remains to be done. Many bills have been voted out of the House of Representatives, only to collect dust in the Senate. This stalemate is the result of a divided Congress, with the House of Representatives being controlled by Republicans, and the Senate being controlled by Democrats. Despite pleas from the public, there is very little that the two parties have agreed on and accomplished across party lines. The public may not even be fully aware of the lack of cooperation, since most in Congress have simply quit talking about it to appease a dissatisfied citizenry.

For the Senate, another reason that legislators have not been dealing with difficult issues is the upcoming election. One-third of the Senate is up for election, and the Democrat majority appears to be in jeopardy. Consequently Senate Majority Leader Harry Reid does not want to force his caucus members, who are standing for re-election, to vote on divisive issues prior to Election Day.

The problem, of course, is that multiple issues need to be addressed. For openers, there still are 15 budget items to be approved. Technically these should be completed by Sept. 30, the end of the current federal government fiscal year. Instead Congress will probably pass a continuing resolution, essentially an agreement to allow the government to function – usually under the old budget – for a specific period of time. This happens frequently and, in the past few years, has been the norm rather than the exception.

There also are the big issues that the press continues to bring forward, such as immigration and tax reform, which have been on this list for a long time. For bankers, several regulatory relief measures voted out of the House of Representatives by large margins on bipartisan votes would help with some of the overkill in the drafting of the rules to implement the Dodd-Frank Act. While we remain hopeful that progress will be made with some of these measures, there are not many days remaining in this Congress. It is likely that Congress will shut down in late September or early October to permit incumbents to focus on their re-election campaigns prior to the Nov. 4 elections.

The likely scenario is that Congress will return following those elections for a lame duck session, giving members of Congress some time in November and December to accomplish the work that they failed to do in the past two years. Election results will be known by then and will factor into how cooperative legislators might be. Frankly, I do not see them accomplishing much in a lame duck session. If the Republicans retain the House of Representatives and gain control of the Senate, they will not compromise with Democrats on divisive issues, knowing that in January they can pass their version of solutions and put pressure on President Obama to either veto bills or sign them. If Democrats retain control of the Senate, nothing changes, and we face two more years of gridlock.

I can assure you that the Indiana Bankers Association will be watching and ready to greet members of Congress upon their return from the August recess. More importantly, we will be urging them to move forward on issues that impact our industry.

- S. Joe DeHaven

A Bright Future for Banking

August 20, 2014

Last week I had the privilege of participating in the Graduate School of Banking (GSB) at the University of Wisconsin in Madison. There are six such schools throughout the country, with GSB primarily serving the upper Midwest, including Indiana. The school was founded in 1945 by the 18 state bankers associations located in the central part of the country. Today 16 of those states remain sponsoring states, and the presidents/CEOs of those associations each have seats on the GSB board of trustees. Additionally two bankers and two instructors sit on the GSB board; this year, I am honored to serve as chairman. GSB has over 20,000 alumni bankers.

While in Madison, I attended a meeting of the banker advisory board. This group of alumni bankers attended classes for a couple of days to talk with students and faculty, while observing the educational process. At the meeting, members were debriefed as to what they had observed. Several ideas were discussed, with GSB staff taking copious notes, to determine what changes might enhance future sessions. I was amazed at the level of detail that these volunteer bankers examined, all from the standpoint of improving the educational experience to better prepare students to assume future leadership roles.

Following this meeting, I had the opportunity to sit in on a few classes for firsthand observation and to attend part of the rigorous bank simulation exercise required of all seniors. The exercise is a model through which a small group of students manage a simulated bank during a two-year period of time. The program addresses all of the issues that banks must deal with, but within a compressed timeframe. Challenges including matching assets against liabilities, and selling vs. buying scenarios. It is a fun, high-pressure exercise that synthesizes all of the curricula of the 25-month program.

I also participated in the graduation exercise and had the opportunity to congratulate the class – and each individual member – for completing this significant career/life accomplishment. As a former graduate from many years ago, it was an honor to personally congratulate fellow alumni.

I have often addressed the issues of leadership and management succession. What I observed at GSB was that leaders are being well prepared, and that the quality of the students is impressive. They are smart, driven and hungry to learn. Many of these graduates will be joining their banks’ senior management teams. Others may consider moving to other banks to pursue senior management opportunities.

From what I have seen, both in my capacity as president and CEO of the Indiana Bankers Association and as a board member of GSB, is that there are many young bankers out there who deserve a chance at leadership and who will not disappoint. They know banking, they know their communities, and they appear to know how to lead banks to profitability, as evidenced by the bank simulation exercise. I left Madison encouraged by these future leaders of the banking community. The future of the banking industry is in good hands.

- S. Joe DeHaven

Indiana’s Puzzling Economic Position

August 13, 2014

Sometimes I just get puzzled. Recently the NorthWestern Financial Review issued its August 2014 edition. I always enjoy reading this magazine, which focuses on what is happening in the banking region of which Indiana is the easternmost state. My good friend Tom Bengtson has published this magazine for nearly 30 years. In the August issue, as he frequently does, Tom published a statistical snapshot of the states within the focus region; the statistics compare assets, loans outstanding, deposits, loan to deposit ratio, net income, return on assets and return on equity. What puzzles me is that, by most measurements, Indiana has been doing well economically. However, looking at the numbers in the statistical snapshot, Indiana does not fare very well in the banking industry.

Of the 15 states in the comparison, Indiana ranked 14th among banks of less than $100 million in assets on both return on equity (ROE) of 2.61 percent and return on assets (ROA) of 0.35 percent. The national average for ROE is 6.94 percent, and for ROA is 0.82 percent. While there are 2,005 banks remaining in the 15-state region, and only 27 are in Indiana that are under $100 million in assets, I suspect most in other states are located in more rural areas than Indiana offers. Agriculture lending has been a huge boon for many of these banks. Also, Indiana has not adopted the change from C Corporation to Sub S Corporation at nearly the same pace as has occurred nationally. Consequently, I can understand why Indiana small banks are lagging in these important measurements.

What I am having difficulty deciphering is the outlook of all banks headquartered in Indiana vs. the other 14 states, plus vs. the United States as a whole. Indiana has 129 banks – according to the March 31, 2014, data from the Federal Deposit Insurance Corp. – and these banks collectively rank 13th for both ROE at 7.90 percent and for ROA at 0.86 percent! Perhaps the agricultural lending and Sub S adoptions in Indiana explain some of our industry lag, but there must be other reasons. Even looking at all of the 6,730 banks in the United States, Indiana is trailing. The national figures for all banks are ROE of 8.99 percent and ROA of 1.01 percent. I thought that I knew the answer: It must be that Indiana has a much lower loan to deposit ratio. However, Indiana ranked third among the 15 states for the small bank group, and fourth for all banks in the group. Nationally, Indiana at 78.7 percent was well ahead of the average of 70.0 percent.

As I rack my brain trying to determine why this might be, I remain puzzled. Perhaps our state tax rate is higher. If that is the case, then the General Assembly may have helped our problem with passage of tax decreases in each of the past two legislative sessions that, over time, will lower the Financial Institutions Tax from 8.5 percent to 4.9 percent. Perhaps it is due to our historically inordinate reliance on manufacturing for high-paying jobs and continued expansion of facilities, increasing those jobs that have made Indiana the most manufacturing-intense state in the country. Manufacturing has not come back to the level it was in the late 1990s. Perhaps the fact that Indiana significantly lags the U.S. economy in average wages and family average wages causes us to fall behind. Perhaps it is because our average real estate values are lower than throughout the country. Perhaps it is all of the above.

I am interested in hearing from others as to why this conundrum exists. Until then, I remain puzzled.

-S. Joe DeHaven

New Options in Financial Payments Systems

August 6, 2014

When I started in banking nearly 45 years ago, the payment methods were limited, compared to today. There were no automated teller machines, no Internet, no cell phones and no personal computers. Instead there were lots of branch offices at which people could come in and transact business, a few drive-up facilities, some telephone access and credit cards. Since that time, there has been a virtual explosion of new financial payment system options.

Recently I came across some data resulting from The 2013 Federal Reserve Payments Study, updated as of July 24, 2014. The study indicates that plastic cards are being used prevalently in the payment system today, and that there are three categories of cards: credit, debit and prepaid. A total of 776 million of these cards are issued in the United States, which means there are two and a half cards for every person alive in this country! Of this card total, 334 million are credit cards, 283 million are debit cards, and 159 million are prepaid cards. Prepaid cards are store gift cards, federal or state government-issued cards for various assistance programs, a few payroll cards and some personal cards that the consumer preloads. Usage of these cards on a monthly average is 23 times for debit, 11 times for credit and 10 times for prepaid. So while consumers own more credit cards, they use debit cards at over twice the rate of credit cards.

When comparing ATM usage to going to a branch to conduct an over-the-counter transaction, consumers’ habits were predictable. They used ATMs for 5.8 billion withdrawal transactions, compared with 2.1 billion over-the-counter transactions. The interesting part is that the average size of an ATM withdrawal transaction was $118, compared to the over-the-counter withdrawal transaction of $715. This could be due to ATM amount caps and to more consumer trust in the security offered by being in the branch. However, the one billion ATM deposit transactions averaged $374, compared to in-branch 1.6 billion over-the-counter deposit transactions that averaged $1,000.

Of the 287.5 million wire transfers, 94 percent were from businesses. Those totaled a little over $1,116 trillion. There also were about 3 billion ACH transactions and 1.8 billion secure online transactions. In addition there were 250 mobile payments made using a mobile wallet application, and 205 million person-to-person or money transfer payments completed.

As might be expected, the number of paper check transactions continues to decline, with 45 percent of that decline represented by transactions of less than $50, obviously replaced by the debit card transactions.

While these numbers are large, the trends are not surprising. More and more people are comfortable in utilizing automated transactions in all forms. Perhaps that checkless society we heard so much about back in the 1980s is becoming reality after all.

- S. Joe DeHaven


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