Former comptroller optimistic on community banking

Northwestern Financial Review, Mar 1-Mar 14, 2003 by Bengtson, Tom

A former Comptroller of the Currency told 200 bankers gathered for the Iowa Bankers Association's management conference that community banking will thrive well into the future.

Eugene Ludwig, who was Comptroller from 1993-1998, told bankers in Des Moines on Feb. 6 that banking will be supported by a platform of three components: better use of technology, access to stable funding sources, and use of what Ludwig called "synthetic size" to share risk and expand product offerings.

"Banks must take advantage of technology that will become ever cheaper for smaller players and innovators," Ludwig said. Community banks, he said, can respond to changing market conditions sooner than large banks because those big players are dependent upon "legacy systems which cannot be changed." He encouraged bankers to take advantage of the Internet, which he called a "tremendous benefit."

While there has been a lot of innovation on the asset side of the balance sheet in the last decade, Ludwig said there hasn't been a lot of innovation on the liabilities side. "We must find more funding sources," he said, acknowledging the role of the Federal Home Loan Banks. Funding is a critical issue, he said, because although fee income is growing in banks, the heart of bank income comes from net interest margin. "And that has been declining for 10 years," he said.

Ludwig encouraged bankers to partner with other banks to obtain the advantages that come with size. "Bankers must find ways to syndicate risk through bankers' banks or other networks, while utilizing the power of their particular sector expertise," Ludwig said. "Utilizing networking devices, community and regional banks can achieve improved risk characteristics while still taking advantage of local funding and relationships."

Ludwig called banking a challenging industry that requires both technical expertise and outstanding people skills - a unique combination that community bankers tend to leverage better than other financial services providers.

"For the next decade, there will continue to be consolidation and many firms will continue to diversify their income streams," Ludwig said. "Many customers will want the warm caring relationship a community bank can offer, but the relationship itself will not be enough. Community banks will have to take advantage of technology, networks and other mechanisms that allow community banks to offer sophisticated products and services that can compete head to head with products and services of their larger brethren."

IBA Priorities

The Iowa Bankers Association hosted its annual management conference, under the theme "Building a Strong Future," at the Embassy Suites Hotel, mixing management issues and legislative initiatives. Credit unions dominated the legislative talk, but the association also outlined an effort to change the law to allow banks to sell title insurance.

IBAs Robert Hartwig explained that residential real estate loans could be delivered into the secondary market faster with commercial title insurance. The current Iowa system requires abstracting, and obtaining a title opinion and a title guarantee.

Hartwig said under the current system it can take months to close files while customers wait for an abstract update, title opinions and title guaranty certificates. The delay adds to the cost, and encourages banks to purchase title insurance from out-of-state agents.

"The current system has already forced many local institutions to send millions of dollars annually into other states, as 80 percent of title insurance premiums are retained by the local agency, which would be Iowa abstracters and Iowa attorneys if sales of title insurance were legalized in the state," Hartwig said.

Jeff Plagge of the First National Bank of Waverly and IBA chairmanelect, described ambitious goals for the association's political action committee, known as BUILD. In 2003, the PAC hopes to collect $150,000 with participation from 60 percent of its membership. In 2002, the PAC collected a record $70,000 with 40 percent participation. Plagge presented a chart that depicted the association's goal to increase member participation iri the PAC by 20 percent per year until it has complete participation by the year 2005.

Representatives from the Federal Deposit Insurance Corp., described a healthy banking industry in Iowa. In the state, 40 percent of the banks have a CAMELS 1 rating, and 56 percent of the banks are rated 2, leaving just 4 percent of the banks with a rating of 3 or worse. Shawn Edmundson of the FDIC's Urbandale office delivered the news, declaring "the condition of Iowa banks is very good."

She said that the FDIC is trying to include bank directors more in its exams. Directors are being contacted through bank management, she said, and director involvement is voluntary.

Brad Havran, an Iowa-based Field Office Supervisor for the FDIC, told bankers 34 percent of Iowa banks have an "outstanding" CRA rating, with the rest rated "satisfactory."

He also said the approach to compliance exams will shift beginning July 1 in an effort to reduce on-site presence. He said the FDIC will be spending much less time trying to find violations and that the emphasis will be on evaluating controls. He also said that the Midwest regional office is trying to come up with ways to conduct large bank exams more efficiently.