Bankers from the Dakotas hear of trouble on the horizon

Northwestern Financial Review, Jul 15-Jul 31, 2004 by Hilgert, Jackie

Bankers from North Dakota and South Dakota were in good spirits at the NDBA/SDBA joint convention conducted in Bismarck, N.D., June 13-15. And why not? Most bankers are enjoying an environment of high commodities prices coupled with developing export markets for their customers' agricultural products. Nonetheless, growing consumer debt and a palpable threat of another terrorist attack are dark clouds on the horizon; the gathering storm could affect the success of banks soon - perhaps as soon as the votes from this year's presidential election are tallied.

It was that doom and gloom message, delivered by economist Don Reynolds - coupled with vows by association leadership to continue battling competition from tax-advantaged industries - that emerged as themes of the convention. It was billed as the 120th anniversary of the "Dakota Banking Association," the precursor to NDBA and SDBA.

Export opportunities for heartland agricultural products have exploded with the demise of communism, said Reynolds, who heads 21st Century Forecasting of Fort Worth, Texas. "After the wall came down, we began to create 3 billion capitalists in India, China, Eastern Europe and Southeast Asia," Reynolds said. "Capitalists are also consumers; they are customers." There's a natural trend, he added, when people start to obtain money, we see a massive explosion of consumer demand.

Reynolds also said global outsourcing of jobs could ignite an ag export explosion. "The first thing that happens when you start to make money is you upgrade the quality of your diet," the economist said. With global demand for better food, America stands to benefit as a top exporter of ag products. Prices, he said, are going up the same way oil prices are going up.

Denny Everson, president of agribusiness for First Dakota National Bank, Yankton, S.D., liked what he heard from Reynolds but refused to become too optimistic. In the business for more than 30 years, Everson said he believes pricing is cyclical. "Eventually, prices come down," he said.

Consumer spending, while a panacea to the post-Sept. 11 economic downturn, will soon become a source of woe, Reynolds predicted. "In 1950, personal debt was 20 percent of personal income. In 1995, personal debt was running at 80 percent of personal income. Today, it's 118 percent of income," Reynolds reported. "How long does that trend continue?" he asked. Home equity loans finance a large portion of consumer spending, he said, and with prices and inflation both going up, trouble is just around the corner, he warned.

"This economy is hot," Reynolds said. "Corporate profits are up 28 percent, the stock market is up 38 percent since the bottom of the low and we'll continue to see terrific job numbers because it's an election year." But, he said, with inflationary pressures building, three 25-basis-point moves by the Fed during 2004 would not be a bad thing. Once the country gets past the election, he added, issues like budget deficits, the weak dollar, and person debt levels will need to be addressed.

Reynolds predicted the yield curve would go negative; short rates will be paying a bit more than long rates before they eventually flatten out and the 10-year bond will be 6 percent sometime in 2005, he said. "If we see a 200-basis-points move in interest rates, that will negatively impact bank earnings across the board by 4 percent," Reynolds opined.

And then there's Saudi Arabia, a country where 16 is the average age of its citizenry and the unemployment rate is 20 percent. With fundamentalists controlling the thoughts of young Saudi's, Reynolds feels their oil fields are very vulnerable to terrorist attack. "Demand for oil is huge now due to development in the Third World," he said. With the impact of sabotage on oil prices dramatic, Reynolds summed up his view of the global economy: "I'm worried about the future."

Separate states

Jim Benson, president and CEO of Pioneer Bank & Trust, Spearfish, S.D., greeted nearly 100 South Dakota bankers as SDBA's 2004-2005 chairman with his promise to continue fighting against non-bank competition. "Our industry is always under the gun and we continue to be okay because SDBA is a strong advocate for us," Benson said. Benson noted there are 17,000 people working in banks in South Dakota. "I hope to let our banks know to get the employees into the fight."

Curt Everson, president of SDBA, acknowledged that 2003 was a transition year for the association with the sale of Banclnsure and subsequent departure of Gary Palmer, and also getting to know Roger Novotny, South Dakota's Director of Banking and Finance who began his tenure in February. Everson promised to use technology more effectively to get SDBA members information without bombarding them.

Transition is only in its beginning stages at NDBA after longtime Executive Vice President Jim Schlosser announced he will retire July 2005. Schlosser, who took the reigns of the association 12 years ago, said NDBA just completed its strategic planning and his board won't put the search for his replacement into motion until autumn.