Gronstal touts community bank model at Iowa meeting

Conditions around the state of Iowa are getting tougher for community banks, but Superintendent of Banking Tom Gronstal said at the annual convention of the Iowa Independent Bankers that he believes the future of the industry is bright. .Against an environment in which the stock market is down about 20 percent from where it was a year ago, incidents of bank failures are increasing, Iowa's largest home builder recently collapsed, and natural disasters have wreaked havoc in many parts of the state, Gronstal said the number of banks continues to decline, adversely classified assets are climbing and loan loss reserves are on the rise.."Adversely classified assets are trending up but it's still at a fairly reasonable level," Gronstal said on July 18. "Most of the adversely classified assets are participations purchased. In an effort to diversify our risk, we bought a lot of risk, and now it isn't working out quite so well.".Gronstal explained that his department has conducted 325 exams during the last 30 months. The composite CAMELS rating for 273 of those banks stayed the same, he said. "Twenty-six had their CAMELS rating upgraded, and 26 had it downgraded. Most of the downgrades have come in the last 10 months or so. There's no question we are dealing with some additional stress." .Loan to deposit ratios "are holding up," he said. "I think it shows the strength of the community bank model. They have long term relationships with us and they tend to continue to do business with us." .Gronstal said that attacks on the dual banking system, and persistent questions from media about the safety of the banking industry make it difficult for community bankers to go about their business. He also said he feared a sudden drop in farm commodity prices could mean a reduction of ag real estate prices.."Profitability for banks is going to be a struggle for the foreseeable future," he said. The shortage of quality bank personnel also is a problem, he said. "We know it's hard enough to attract anyone to live in Iowa, so it's going to be an issue for us." .Not all factors are negative, though, he said. The positive slope of the yield curve is a welcome market development. "That's really helping," he said. "It gives us the opportunity to get paid for the interest rate risk we just have to take in order to be in the lending business.".Gronstal said community bankers have an advantage over other financial services providers because they typically hold superior market knowledge. Many of the subprime and problem loans in the state, he noted, were made by out-of-area lenders..In 2006, Gronstal's department gained the authority to license non-bank mortgage lenders. He said at that time there were an estimated 6,000 such lenders in the state. ."Last year, when we completed the first licensing round, we ended up licensing 3,190," he said. "The deadline for renewals this year was June 30, and we licensed 1,712. I gotta believe that it's a good thing a lot of those folks didn't renew." .Gronstal urged bankers to be more vocal. "Customer education is important. Community banks have to tell their story," he said. "We need to get it out that we are not the same as Bank of America, Wachovia or any of the other huge institutions that are experiencing all these problems," he said. "We need to build loyalty and competence with our customers. Iowans have an aversion to tooting our own horns and we have to get over some of that.".Convention notebook.Honors in IowaThe Iowa Independent Bankers honored several bankers at their annual convention in July. Harold Harms of Iowa Prairie Bank in Brunsville was named winner of the 2008 Founders Award..Heidi Nissen of Citizens State Bank in Sheldon was named 2008 "Up & Coming Banker of the Year."Recipients of Leaders of Tomorrow Scholarships were: Aarika Koppenhaver of Coralville, and Morgan Baker of Sioux Center..Banker/lawmakers share viewsThe convention's Town Hall breakfast featured comments from three bankers who serve in the state legislature, as well as from one Congressman. .State Sen. Steve Kettering, a Republican from Lake View, shared thoughts on the recently completed legislative session. Kettering is president and CEO of Farmers State Bank in Lake View. ."There are a lot of funds around. We are awash in cash. General fund revenues are up $580 million from last year. That is almost a 10 percent increase. That is what has fueled the increase in spending we have seen in the last two years of the Culver administration," he said. "Spending is up $900 million. It took former Gov. Tom Vilsack eight years to increase spending that much." .Kettering warned that the legislature, which is controlled by Democrats in both chambers, is moving toward eliminating the state's right-to-work status. "In the last two years, we have seen right-to-work challenged in this state. It actually passed in the senate. As you go into this next election, if the majority party retains its position, as it is, you will see the end of right-to-work in this state. That simply means that as an employee you will need to pay the union in order to have a job. I don't think that's good for Iowa. We'll let the voters decide that. ."Prevailing wage is another thing you will see coming down the pike. You are going to have to pay wage scales out in rural Iowa that are far different than what you are used to," he said..Kettering also noted problems with health care legislation that became law. "If you are a family in Iowa making $42,000 a year, you are entitled to government-run health insurance for your children," he explained. "If you are a struggling entrepreneur making $25,000 a year or so, you get to help pay for it. ."It is really a step in the direction of universal health care," he said. "It is openly talked about in that respect. I think we need to be very cautious about the direction we are going." .Kettering had some fun with the college football fans in the group as he described the impact of a smoking ban the legislature passed. Noting that the annual football game between the Iowa State Cyclones and the University of Iowa Hawkeyes takes place in Iowa City this year, Kettering – a Cyclone fan – encouraged fans to "light up" at Kinnick Stadium. "The fine has to be paid by the host, so if you go to the game, light up!" he said. "The host gets fined $100 for everyone who smokes. Then, after you comply, light up again. The penalty the second time is $200. And finally, if you light up a third time, the Hawkeyes would get fined $500.".State Rep. Tom Sands, a Republican from Columbus Junction, gave bankers insight into recent flooding in the eastern part of the state. Sands is an assistant vice president at Columbus Junction State Bank.."We really thought in Columbus Junction that we had it under control," he explained. "There was a man-made levee going right down Highway 92 for about a mile. This thing was eight feet high. It joined the regular levee on the east side of Columbus Junction, and they increased the height of that levee by eight feet. But, unfortunately, this monster of a river just kept growing and growing by several inches a day. It got high enough that it cut across 92, and where the current was the worst was right where the man-made levee made a bend and turned with the regular levee system. The current took the corner out and then that's all she wrote. There was no fighting it then. ."We had businesses that had four feet of water. We had businesses that had eight or nine feet of water. What this really means for a rural community is our only grocery store is out of business. They say they are rebuilding, but for the meantime, we have to drive to Wapello or Washington, or Burlington or Muscatine, for half a gallon of milk, or a loaf of bread. Our only doctor's office, flooded. Our only day care, flooded. Our only pharmacy, flooded. Only hotel, flooded. Only bowling alley, flooded. The list goes on and it is something like 26 businesses. Most of them will be back, but probably not all. "If you drive down the river, to Oakville, those people lost everything. It's a small community with 400 to 500 people. They had a couple businesses, a bank, a bank branch. That whole city was under water. The high part of the city had three feet of water. Twenty-five thousand acres of surrounding farm land was under water. All their crop is gone.."It's going to take a while for those folks to recover. But they will. The media refers to them as victims; they refer to themselves as survivors." .State Sen. Roger Stewart, a Democrat from Preston, Iowa, used his brief time at the podium to encourage everyone to work together. "When I worked in the bank, when a customer came in, it wasn't productive to say 'we're going to do this.' It is productive to the customer to ask 'how can we work together?' That's the way I'd like to work in the Senate and House and in the state.".Stewart is director and semi-retired banker from Maquoketa State Bank, in Maquoketa, Iowa. .U.S. Rep. Steve King noted rising prices for farm land. ."Farm land appreciated 22 percent last year. There is no sign that is backing off. If you take the calculated number of farmers in Iowa and the average amount and price of land, last year's appreciation, in theory, created 86,000 new millionaires in Iowa. I am really happy about that," he said. ."With the subprime mess, the stock market has dropped off a couple thousand points, Fannie Mae and Freddie Mac troubles, it makes me nervous," he said. "But what we have is a lot more equity in this state to ride through these times than we had the last time out.".Legislature helped a littleTom Gronstal, Superintendent of Banking for the state of Iowa, noted a few recent legal changes. He said Iowa law now allows holding companies to use the word "bank" in their name. "You can spell bank with a 'k' instead of a 'c' now," he said. .Lawmakers also established that the Bank Bureau Chief succeeds the Superintendent, should he suddenly become unable to fulfill his duties. In the event of emergencies, the legislature also made it easier for the Superintendent to authorize the closing of bank branches..Gronstal also said he is pleased his office gained significant enforcement authority over non-bank mortgage originators.