Reduce liability for losses on commercial accounts by adhering to four requirements.
Finding Capital in a New Era
At one year into recovery, “This is different,” said economist Joel Prakken in the opening keynote address for the Missouri Bankers Association’s Executive Management Conference in Kansas City last month. Prakken, of Macroeconomic Advisers in St. Louis, explained that normally the deeper the recession the faster the recovery. Though the recent contraction was the worst since the Great Depression, growth is occurring at about half the usual 7 percent. Although the consensus growth forecast for 2011 is 2.5 percent, Prakken’s forecast calls for 3.5 percent growth next year and 4 percent in 2012.
“We are moving farther and farther away from the imbalances affecting the economy,” Prakken said. Housing prices have hit bottom, in his view, and “financial healing” is taking place. However, he does not expect a return to normal levels of unemployment at 5-5.5 percent until 2015. And both short- and long-term interest rates will stay low “for the next couple of years.”
Prakken labeled both TARP and the economic stimulus bill “probably necessary but messy.” As for TARP, financial institutions have paid back their loans — he doesn’t like the term “bailout” — with a nice return to taxpayers or are preparing to do so. Although he was opposed to loans to General Motors at the outset, “Now I’m not sure it wasn’t the right thing to do,” Prakken said.
If the stimulus bill hadn’t passed, unemployment might be 11-12 percent, he believes. The bill contained too many unnecessary things that were on the political agendas of some members of Congress, but if money hadn’t gone to the states there would have been much more unemployment among state government workers, Prakken suggested.
Commenting on the Federal Reserve’s new round of quantitative easing, Prakken said that although “it is not a game changer, it’s going in the right direction.” QE2 will not put a lot of pressure on interest rates, unemployment or inflation, in his view. Hopefully, the Federal Reserve will tighten monetary policy when needed, Prakken indicated. “They have the tools and I think it will work out fine,” he said.
Of more immediate concern to the MBA members, capital issues were addressed in a special interest session by Don Hutson, national industry partner for the CPA and advisory firm BKD LLP. “Most of you are in good shape,” he said, “but to continue growing you will need some capital.” And it’s hard to raise capital in today’s environment that isn’t dilutive to shareholders, he noted.
Listing sources of capital potentially available to community banks, Hutson listed current shareholders and board members first. Nontraditional investors — wealthy people “looking to invest” — are another possibility, as are other holding companies with excess liquidity interested in acquiring small blocks of stock. Wall Street investors are not interested in anything less than $1 billion. And some private equity funds have been buying smaller and failed banks in some parts of the country to acquire charters but not much in the Midwest, Hutson said.
There will be continuing regulatory pressure to raise capital levels, in Hutson’s view, but strong, well-capitalized banks have a bright future as growth opportunities arise from the demise of troubled and failed institutions. He urged the Missouri bankers to anticipate capital needs and be proactive. With capital modeling and contingency plans, “Start doing the right thing now, before you need it,” he said.
Now is also a good time to grow deposits and in a session titled “Seven Ways to Supercharge New Customer Acquisition,” Alan Friesen of Haberfeld Assoc., Lincoln, Neb., said the best way to increase customers is by not creating barriers to opening checking accounts. Friesen defined barriers as requiring minimum balances and service charges.
Friesen then asked everyone who wants to pay for a checking account to raise their hands. Obviously, no one did. He then told session attendees that this is a prime time to steal customers from the big banks who are moving away from free checking. Friesen then suggested banks not build more branches but use these new customers to increase the profitability of their current branches.
“The branch is the largest expense for your bank,” said Friesen. “The more customers you have the more you spread this fixed cost.”
Friesen used the example of TCF, Sioux Falls, S.D. In 1986, TCF had just 35,000 checking accounts. Today, the bank has 1.7 million and based on the number of branches the bank has, that is 4,027 checking accounts per branch.
Bill Poquette is editor-in-chief of BankNews and Kari English is senior editor of BankNews.
Copyright © January 2011 BankNews Media