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Gathering at the Gaylord Opryland Hotel

By: Kari English

Acting FDIC Chairman Martin Gruenberg told attendees at the Independent Community Bankers of America’s Annual Convention and Techworld last month that 2011 was the second full year of improvement in the industry. Earnings have grown the last eight quarters while the number of banks on the FDIC’s problem list has decreased for the third consecutive quarter. The Deposit Insurance Fund has been in the black since June 2011 and the FDIC is forecasting significantly fewer failures in 2012 — somewhere between 50–60 failures, Gruenberg estimated.

“Loan growth has been led by lending to commercial borrowers,” Gruenberg said. “Loans to medium and large commercial and industrial borrowers have increased in each of the last six quarters. In the fourth quarter we saw growth in small C&I loans as well.”

Gruenberg also said community banks with assets of less than $1 billion account for a little more than 10 percent of the banking assets in the United States, but provide nearly 40 percent of all small loans that insured financial institutions make to businesses and farms.

“Given the labor-intensive, highly customized nature of many small business loans, it is not clear that large institutions would easily fill that critical credit need if community banks were not there,” said Gruenberg. “Community banks play a crucial role in the financial system.”

With a similar message, ICBA President and CEO Cam Fine started his speech to attendees by stating that 70 percent of new job creation is started from small businesses and community banks finance most of the small businesses in this country.

“Who never stops serving their communities? Us. We are the roots of this nation’s credit system,” Fine said.

View photos from this convention.

Fine said community banks use a relationship-based model of business while large banks use a transaction-based model. While both models are valid, they require different regulatory schemes, according to Fine. “Exemptions and tiered regulation make sense,” Fine said. “It should be scaled to risk on the system.”

Fine went on to say the ICBA supports any regulation that protects community banks, such as the Communities First Act, which would provide tiering of regulation and provide relief for smaller, low-risk institutions.

Protecting community banks was also mentioned in a speech by Consumer Financial Protection Bureau Director Richard Cordray. He told attendees that although the CFPB’s main job is to protect consumers in the financial marketplace, it is also its job to protect those who serve consumers well in the financial marketplace.

“Honest businesses will benefit when those that cheat their customers are held accountable. We want all financial institutions, all of your competitors, to have the same kind of accountability that community banks face every day,” said Cordray. “And we want to protect you from the pressures that an unregulated market can put on you to adopt practices that make profits by hiding costs and risks to consumers.”

One of the CFPB’s major objectives is to help level the playing field for community banks and non-bank competitors. But to do that, Cordray said the agency needs community bankers’ help.

“We need to hear from you about what you see going on in the marketplace. Where do you see corners being cut? Where do you see standards being bent or stretched? Where do you see the law being violated?”

Corporate Governance

Other speakers highlighted corporate governance in their speeches.

“What I think is most important going forward is that you carefully balance your efforts to improve earnings in the short run against the need to make strategic investments that will benefit the bank in the long run,” said Acting Comptroller of the Currency John Walsh. “Realistically assess the changes underway in the markets you serve. Understand them and leverage them to position your bank for future success.”

Walsh also suggested banks that are considering shifting their strategies have a sound business plan, fully understand the risks and make upfront investments to manage those risks. He also cautioned attendees to select third-party vendors carefully and make sure that incentives for the vendors and the bank’s employees are structured to drive the long-term results the bank is seeking.

In a breakout session, Jeff Gerrish, chairman of Gerrish McCreary Smith in Memphis, Tenn., told attendees they are probably conducting their board meetings wrong. Gerrish said the majority of meetings are spent looking back at what just happened when regulators want boards to look toward the future. Turn the agenda upside down and spend less time reviewing the minutes of the previous meeting, which can be done last, and more time on strategic thinking, which should be first on the agenda.

Gerrish also suggested that out-of-area shareholders do not care about the community; they are more concerned about their dividends. Gerrish provided the example of a shareholder dying and leaving his shares to his kids, who may not live in the area. Gerrish said to eliminate them (by buying them out) for people who actually live and work in the community.

Similarly, he suggested setting parameters for removing shareholders, such as people who have not returned proxy notes in the last three years and people who do not even have an account at the bank. Gerrish said now is a good time to buy these shareholders out while stock values are low, as opposed to three years from now.

Attendance at this year’s ICBA national convention at the Gaylord Opryland Hotel in Nashville was up 16 percent from 2011 and was the second-largest convention in 23 years, according to the ICBA. (The largest was in 2006.) The ICBPAC silent auction fundraiser hit a record high raising more than $471,000. Next year’s convention will be in Las Vegas.

Kari English is senior editor of BankNews.

Copyright (c) April 2012 by BankNews Media