Regulators getting tougher; technology ain't the answer

Northwestern Financial Review, Aug 1, 2001 by Bengtson, Tom

Comment on the liquidity situation. My sense is money is more available than it was a year ago.

The banks I work with seem to have more liquidity. That whole thing has changed. Loan-to-- deposit ratios are no longer an issue. Everyone I know is approaching 100 percent. They are really looking at loans-to-assets, with Federal Home Loan Bank funding and other funding apparatuses. It's a whole new game.

What about core deposits? It seems banks just can't hold onto them any more.

And why should they? The market has moved beyond banks. Either banks change or they will become dinosaurs.

Is it just a matter of the banks paying for the money?

Sure. And the margins are shrinking, so what can the banks do? I have a client that is real estate-oriented on the asset side. They choose to make what they perceive to be lower-risk, collateralized, real estate loans, therefore the margins are smaller because the competition for those assets is tougher. And real estate loans, by and large, don't generate deposits like small business lending. So if you take low risk on the asset side you are not going to have free money. The higher-risk, small business marketplace is about the last generator of free money. Your margins are wider in that business but your risk is higher.

Consider banks with 80 percent of their loans in agriculture. Are they in trouble?Are they viable?

Most of my ag clients are diversifying as rapidly as they can for asset risk. You look at the demographic position of some of these traditional markets and they are dying. And if they are not dying in body count, the age is getting older. Can a community financial institution properly bank a 53-year-old empty nester? There's your question. Whether I work as a bank consultant or as a farmer, will your products be attractive to me? I don't think so. Right now, the agricultural subsidies are huge because we have a budget surplus. What happens 2002 or beyond if the budget surplus goes away? Will Congress be so free with the money for agriculture? I think not. There is tremendous movement that even says rural living doesn't have much of a future. If you are more than 100 miles away from a major urban area, forget it. I tell you, I am 53 years old. I want to be near a quality health care facility. I don't want to go to the doctor and feel like I'm on the TV set of "Gun Smoke."

When you consult with banks how do you address technology?

I can't imagine a community bank leading the market in the technological delivery of services. That's like air conditioning outdoors. I've heard friends and colleagues say that it is a 20-80 mix between technological delivery and traditional. I don't believe it. We're more like in the 5 percent tech versus 95 percent traditional. Is it a five-year window before we flip flop or move toward equal delivery? I don't know but I ain't gonna lead. If anything, I am going to be defensive. Technology is a cost leader. There is no income being generated from this stuff. Every time we bring out a product like electronic bill pay, an astute, informed consumer can find it free in the market. Technology is nothing more than a cost generator. I don't see any income coming from it at all.

Do you see the regulatory environment getting tougher? Is the love-fest over?

As well it should. There are institutions out there getting into businesses they don't know anything about. I am hearing questions from some of my clients that make me think we are back in the 1980s - questions such as: "Can I hold off a provision of the loan loss reserve so I can make this quarter's earnings?" Unbelievable. Are we brain dead? You are going to be examined. Why shouldn't that regulatory event be the capstone of your success? Regulators are not adversaries. I'll give you an example. When I go to Las Vegas, it ain't gambling because I never win. It's a donation. So when people say that regulators are an adversary, that isn't true because you never win. They're not an adversary. They are a superior. So you better get in the frame of mind that it's going to happen, and you can't win; you better play the game. Your next exam is the most important event in the bank. It ought to be maxed. It ought to be dead in the back of the cup. You can't afford anything less.