Wisconsin’s Main St. bankers go beyond mainstream issues

The theme of the conference was "Making Connections," but many of the speakers at the Community Bankers of Wisconsin's annual meeting focused on the distinctions community banks need to make between themselves and their competitors.. More than 100 bankers and nearly 150 exhibitors attended the conference, conducted Sept. 10-12 in Wisconsin Dells.. CBW President and CEO Daryll Lund emphasized the ways that Main Street bankers must separate themselves in the public eye from Wall Street interests.. "The proposed changes at Fannie Mae and Freddie Mac, tied in with the mortgage foreclosure crisis, are the biggest challenges facing our industry," he said. "It is unfortunate and frustrating that community banks have to defend our stability and soundness because of the failures of banks like IndyMac and subprime losses now being experienced at large regional and national banks.". Lund pointed to a recently commissioned CBW study that showed that the top dozen financial institutions reporting foreclosures in Wisconsin were all headquartered outside the state and included some of the nation's largest banks. The 12 lenders represented about two-thirds of all foreclosure filings in the state in the first half of 2008, while community banks accounted for less than 5 percent of filings. "Common-sense lending has been, and will continue to be, the underpinning of our industry," he said.. One of the association's victories in the past year was successfully lobbying for legislation to prevent industrial loan companies from opening locations in Wisconsin.. Looking ahead, "the 2008 elections will be critical for the banking industry. Issues such as combined reporting and increasing wage liens are real issues that may be considered in the next session depending upon the balance of power following the fall elections," Lund said. .Skills for success. Richard Berg, CEO and co-founder of The Performance Trust Companies, Chicago, focused on the ways banking has changed from "Era 2," which he defined as beginning in October 1979, when interest rates were deregulated, to "Era 3," which began in 2000.. "The opportunity for your industry has never been better and worse at the same time," Berg said. "It depends on how you're going to deal with where the industry is going in Era 3.". Successful bankers in the current era will need to have or develop three overlapping skill sets: finance and risk management; sales and marketing; and execution, management and leadership, Berg said.. "Defining community banks as those under $2 billion, if I looked at your earnings over the past 20 years – absent the last couple – you're looking at 12 to 15 percent return on equity like clockwork," Berg said. "How did you get that 12 to 15 percent return on equity? What was the secret? Keep your asset quality clean.". But today, "finally we're going to separate the really good banks from the not-so-good banks," he said. "Those of you who are willing to rise to the challenge will be closer to 20, 22, 25 percent return on equity, and the others who can't rise to this will be at about 5 or 6 percent.". Berg said successful banks will no longer view wholesale funding as less desirable than customer deposits. "That's culturally really uncomfortable because you've been trained your whole lives that a customer is always more profitable than wholesale," he said. "In Era 3, it's all price-driven." .Tough environment. "This is the toughest operating environment I've seen for community banks in 30 years," said attorney and consultant Jeff Gerrish, partner at Gerrish McCreary Smith in Memphis.. "Be thankful your bank is in Wisconsin," he said, rather than states like Nevada, Arizona, Florida or California. In the latter, 70 percent of all banks are expected to be under some kind of enforcement action.. Gerrish recommended bankers keep an eye on liquidity. "We are having a phenomenon now that we have never in the history of community banking had, with a couple of minor exceptions – and that is the great potential for what I call liquidity failures. IndyMac was basically a liquidity failure," he said.. At the same time, banks must closely monitor asset quality, where problems can quickly "snowball" into other areas of the bank. He said that regulators' perceptions have shifted from "things are okay" when they come into a bank to "things are bad – prove to us they're not." As a result, Gerrish predicted, there will be about 800 banks on the FDIC's problem list six months from now, up from 117 now.. Senior managers also need to keep their boards well informed. "I've had four banks in the last four months that have gone from a CAMELS 1 rating to a CAMELS 4 in one exam," Gerrish said. "The best thing you can do in this environment is identify your problems early. Denial is not a strategy." Get outside help if needed, and call regulators in advance of exams to point out problem areas the bank has identified, he suggested.. Gerrish talked about several trends for the future of community banking, including the aging of the customer base and the need to be "fast followers" in adopting technology. In terms of organization, he predicted that 20 years from now, most banks will be Subchapter S corporations. .Legal, regulatory updates. Legislative and regulatory developments were the focus of a talk by Jim Sheriff, partner and head of the Financial Institutions Group at Godfrey & Kahn, Milwaukee. Sheriff said that although "Goliath lost on TEFRA," referring to a U.S. Tax Court ruling in favor of PSB Holdings, Inc., the parent company of Peoples State Bank, Wausau, on the so-called TEFRA disallowance issue, "the S corp banks' case is still pending.". Another issue being debated in the courts – this time, in the Wisconsin Supreme Court – is the "unauthorized practice of law." CBW is working with the Wisconsin Bankers Association and the Wisconsin Credit Union League to make changes to the rules; a hearing before the court is scheduled for Oct. 28.. Sheriff also brought up the issue of convenants not to compete. "We are seeing more and more questions and litigation over employment contracts than we've ever seen," Sheriff said. Agreements have to be for a reasonable duration and reasonable geographic scope for them to be enforceable, he said.. Providing a national regulatory perspective was Dale Leighty, past chairman of the Independent Community Bankers of America and president and CEO of First National Bank of Las Animas, Colo. Leighty said that many ICBA members, himself included, will be impacted by the dramatic decline in value of Fannie Mae and Freddie Mac preferred stock.. In response, ICBA sent a letter to Treasury Secretary Henry Paulson and others asking that community banks be allowed to treat losses on Fannie and Freddie preferred stock as ordinary losses for tax purposes.