The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

13 Responses to “Minnesota’s Troubled Community Banking Industry”

1. Mannwich Says:
   September 23rd, 2009 at 3:32 pm

   My home state and paper! Something to be proud of………

2. Mannwich Says:
   September 23rd, 2009 at 3:36 pm

   Now I know how all those giant behemoth homes got built on Lake Minnetonka in recent years, along with all the enormous boats. Excellent “work”, fellow Minnesotans.

3. AndrewShaw Says:
   September 23rd, 2009 at 4:06 pm

   Leaning Tower of Padre:

   http://globaleconomicanalysis.blogspot.com/2008/06/leaning-tower-of-padre.html

   What’s this got to do with Minnesota, you may ask?

   “Hook Harmeling, Senior Director at MCA, was responsible for arranging the 3-year, $75,000,000 interim construction loan with First Bank (First Marshall Bank of Minneapolis, MN).”

   The bubble…just..wow. I’ll never forget this story, hope its actually true.

4. Mark E Hoffer Says:
   September 23rd, 2009 at 4:10 pm

   what has amazed me, is the extent to which these little banks, seemingly coast-to-coast-to-coast, where able to lever-up, for one, and the concentration of asset type (RRE/CRE) there were allowed to carry..

   Weren’t these dudes, and dudettes, supposed to be Regulated? Weren’t the Shareholders, let alone the Depositors minded their books?

   The Answers: MutFunds and FDIC Insurance, only go so far..

   “Investigative Journalism”–what do the ‘Regulators’ have to say for themselves? and, are they still drawing a Paycheck/Pension Draft?
   ~
   Quis Custodiet Ipsos Custodes

   Negligence is, still, a Tort, yes?

   http://www.emergentchaos.com/archives/2008/11/quis_custodiet_ipsos_cust.html

5. call me ahab Says:
   September 23rd, 2009 at 4:10 pm

   mannwich-

   if it was me- i would let them take the house and live on the boat-

   homes are overrated

6. MRegan Says:
   September 23rd, 2009 at 4:21 pm

   From the article to Mark’s point:

   “Four years and millions of dollars in losses later, Thumper Pond is in foreclosure. Lead lender Spire Federal, the 75-year-old credit union founded by oil cooperative workers, is expected to sell it later this summer for a big loss.

   In a different decade, the notion of a credit union investing in risky ventures like Thumper Pond would have been unthinkable, maybe even impossible.”

   Somehow, what couldn’t be done, was. How you ask? Our insatiable appetite for fantasy in Los Estamos Desunidos.

7. willid3 Says:
   September 23rd, 2009 at 5:46 pm

   Mark not sure how shareholders get to do much any more. if you have owned shares you discover all you can do is vote on very generic plans about once a year (if that). and the books don’t have much to do with it. and depositors don’t do that and couldn’t as they have no access to any of the information. and would you really want them to? cause the bank runs were in a lot of cases based on rumor (thats why the FDIC was invented). but regulators were supposed to regulate? that was so last century or so it seemed to be for the last set of them (hard to say about the new ones yet. but need to stay tuned)

8. leftback Says:
   September 23rd, 2009 at 5:59 pm

   $1M is a lot to pay for a place to go and ice fish.

   Q: What does a Minnesotan do when attacked by a bear?
   A: Pick up your cooler and kick him in the ice hole.

9. Christopher Says:
   September 23rd, 2009 at 6:09 pm

   I think it goes without saying that this isn’t just a MN problem.

   They just happen to have some actual journalists who aren’t bought and paid for by the banksters.

   Watch for repeat episodes in supposedly “solid” states throughout the winter.

10. franklin420d Says:
    September 23rd, 2009 at 6:24 pm

    @ Ahab -

    mannwich-

    if it was me- i would let them take the house and live on the boat-

    homes are overrated

    EASY for you to say sailor man

11. facemelt Says:
    September 23rd, 2009 at 6:59 pm

    kinda ironic that the paper doing the reporting was victim to overzealous, over leveraging PE investors…

12. Mark E Hoffer Says:
    September 23rd, 2009 at 7:09 pm

    willid3,

    shareholders “don’t get to do much”, in general, because they’ve accepted not being ‘able to do much’–incl. not having access to ’sufficient’ information.
    and, Depositors have, for the most part, as much access to ‘info’ as Shareholders do, and, if they aren’t satisfied with the level of intel they are able muster, they, too, should haul Anchor, and Sail..

    this: “cause the bank runs were in a lot of cases based on rumor (thats why the FDIC was invented).”, though is some seriously Low Grade ProleFeed–you may care to 2x-check the Source of that Grist.

    and, this: “…that was so last century or so it seemed to be for the last set of them (hard to say about the new ones yet. but need to stay tuned)”
    seems to come from the same Field. Simply, if the ‘new’ Regulators (How many are there, btw?) were any different, we’d know, by now, of, at least, some of the Headline Cases (or, should We assume that the ‘Watchdog’ MSM is too busy chewing on other bones?)

    If we forgot, from, just, last Autumn, We’d bother to remember that ‘rumors’ hurt the Weak, not the Strong..

    The sad thing is that the ‘Banks’ (thanks FDIC and, other, sleeping ‘Regulators’) have constructed a beautiful “Heads they Win, Tails we Lose”, vitually Risk-Free, mechanism for the efficient stripping of Wealth from those too Lazy, and/or Stupid to Learn how to protect it.

    The level of Larceny, and the, concomitant, breach of multiple levels of Trust will, assuredly, scribe this version of Economy Ramp n’ Crash deep into the History Books (or, hasten its decent down the Memory Hole..)

    http://www.thefreedictionary.com/concomitant
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Memory+Hole

13. Mark E Hoffer Says:
    September 24th, 2009 at 12:05 am

    Jeff Schwalen, CEO of Hiway Federal Credit Union, discovered that first-hand when he combed through $31 million in loans from Fort Snelling Credit Union, which federal regulators sold to him in early 2009 to prevent its collapse.

    Schwalen found home equity loans for 50 percent more than a house’s value. One couple with a $200,000 mortgage hadn’t made a payment for more than two years. Some loans had been made so hastily that no appraisal was done.

    These were obvious signs of a lender with judgment clouded by a frenzied real estate market. But they were also evidence, Schwalen said, of lax oversight by the National Credit Union Administration (NCUA), which is charged with regulating the federally chartered credit union.

    “I was surprised the regulators would not have seen these problems earlier,” he said. “The lack of underwriting standards would have been apparent to anyone with a basic understanding of lending.”
    …
    “However, the risks of commercial real estate lending were hardly unfamiliar to either lenders or regulators. Less than two decades earlier, more than 700 savings and loans failed, including Minneapolis-based Midwest Federal Savings, largely because of unsound real estate loans.

    When Congress created the Office of Thrift Supervision (OTS) in response, it capped the amount of commercial real estate loans that savings and loans could make. In 2009, commercial real estate loans represented just 13 percent of troubled assets at those institutions, down from nearly 70 percent in 1990, according to the OTS.

    Banks have no such limits, and while federal law restricts how much credit unions can lend to businesses, there are no limits on home loans. Today, the average credit union in Minnesota has 57 percent of its loans in real estate, mostly home loans and lines of credit. Regulators used to consider 25 percent worth more scrutiny.

    In 2003, as NCUA chairman, Dennis Dollar advised credit unions to be careful about plunging too deeply into real estate lending. But the federal regulator, he wrote, “does not prescribe a fixed, maximum percentage of mortgage loans” in a lending portfolio.

    In 2006, federal bank regulators proposed guidelines — not limits or new rules — that could be used to determine whether a bank had a high concentration of commercial real estate loans in its portfolio.

    Bankers fought it. The American Bankers Association fired off a 10-page analysis of the proposal, opposing it as a costly one-size-fits-all approach. Federal regulators received more than 4,400 comment letters, many from small bankers arguing that regulating commercial real estate lending could choke off a vital money-maker.

    The guidance on commercial real estate exposure became official in December 2006. At the time, 115 Minnesota banks were over the most basic threshold. This spring, 131 were, with nine of them at levels more than double the federal threshold.

    Murphy, the Department of Commerce official, said his division largely dismissed the guidance as “fairly crude” and just a “starting place” for further analysis of state banks. You can’t look at the real estate concentrations by themselves, he said, because a bank could be very well-capitalized and in a good position to manage it.

    But some weren’t.

    ‘Our bank is closed’

    Most of the 3,100 residents of Pine City, Minn., had gone home for the day when the FDIC’s so-called resolutions team descended on Horizon Bank on a Friday night in June.

    They came in small numbers at first. By nightfall, however, the bank was teeming with more than 50 accountants in suits, poring over documents while eating chicken and brownies. They stayed until 11 p.m. but were back the following morning to greet the bank’s customers.

    “All we know is our bank is closed,” said a frustrated Judy Malenke, 68, of Pine City, as she emerged from the bank. “They’re not telling us anything else.”

    The regulatory findings that led to that late-night closure of Horizon remain a secret. Federal and state bank regulators do not share the examination reports that lead to disciplinary actions or bank failures; nor do they disclose the conversations they have with individual banks and credit unions. Their actions remain largely hidden from public view, making it difficult, if not impossible, to gauge their effectiveness, say regulatory experts.

    Regulators say the lack of transparency is by design. They want to prevent a panic that might cause a run on a bank. Confidentiality also ensures that banks executives cooperate when examiners show up.

    “We want them to be honest with us about what’s going on in the banks,” said Fred Fisch, supervisory counsel for the FDIC.

    The Minnesota Commerce Department does release information on when a bank is examined and the hours spent. The information, obtained by the Star Tribune through a public records request, is included on thousands of pink examination receipts kept at Commerce’s offices.

    In Horizon’s case, the reports show only that state regulators conducted three on-site exams of the bank since early 2008, spending a total of 513.75 hours at the bank. That includes a 52-hour exam in March, less than four months before the bank was closed. However, there is no mention in the reports of any unusual finding that would explain why the regulators appeared, unannounced, on that Friday night in June.

    The exam receipts are about the only way to monitor how much time state regulators spend actually monitoring the safety and soundness of Minnesota’s financial institutions. And it is clear that the department entered the boom with fewer resources than it had before, and that it continued paring back during a period of rapid consolidation and growth in the financial sector.

    In 2008, for instance, the Commerce Department spent 15 percent fewer hours examining banks and credit unions that it had just five years earlier, according to data collected by the Star Tribune from exam receipts. Total exam hours fell from 43,088 in 2003 to 36,507 in 2008, while the number of exams fell from 211 to 158 over the same period. The number of examiners, meanwhile, declined from 33 to 30, according to the Commerce Department.

    While Minnesota has 80 fewer state-charted banks and credit unions than in 2000, total assets at the remaining institutions swelled 63 percent during the same period. In addition, the ranks of state-charted institutions include a number of new banks formed in the past decade, some of which are now struggling with heavy loads of bad commercial real estate loans.

    Even with the consolidation, Minnesota has the lowest ratio of examiners to banks in the nation. The state comes in dead last when comparing numbers of bank examiners to banks, savings and loans and trusts, based on 2007 numbers, the most recent available from the Conference of State Bank Supervisors.

    Minnesota has four examiners assigned to its 96 state-chartered credit unions; Mississippi, by contrast, had the same number examining 29 credit unions, as of the end of 2007, according to the National Association of State Credit Union Supervisors, which tracks the numbers for 33 states.

    In addition, Minnesota is one of just four states in the country that has a 24-month examination cycle for credit unions, the result of a legislative change in 2003 urged by the Commerce Department. Most states examine credit unions every 12 to 18 months.

    By contrast, federal regulators keep credit unions on a much shorter leash. In 2008 the NCUA shortened its exam cycle to just a year after its chairman, Michael Fryzel, declared that the agency’s 18-24 month cycle was “totally unacceptable in this economic climate.” The NCUA’s board also approved the hiring of 50 new examiners.

    ‘We’re doing more with less’

    Commerce spokesman Bill Walsh said the decline in length and number of exams is largely because the state has shifted more banks over to an exam cycle that alternates with federal regulators.

    “We’re also getting more efficient,” he said. “We’re doing more with less.”

    He noted that state residents have not lost any deposits. “There’s no evidence that consumers have suffered because of our regulatory regime,” Walsh said.

    Joe Witt, president of the Minnesota Bankers Association, said he wasn’t aware that the state division has such a low number of examiners, but said that even with more staff they wouldn’t have been able to prevent the current problems at many banks.

    “A good loan today can be a bad loan tomorrow,” Witt said. “You would need an examiner there every day to catch every situation.”

    In Minnesota, as in most states, fees charged to banks, credit unions and other financial services companies fund the government agencies charged with watching over them.

    However, the department’s annual budget must still be approved by the Legislature, which means the financial institutions division must jockey with other divisions for resources, said Allyn Long, a former deputy commerce commissioner. “They need to add more people, in my opinion,” Long said. “But to do that, they have to justify their existence, and that’s never easy with the trade associations and their lobbyists saying they’re already regulated enough.”

    John Gillen, 66, was forced into early retirement when the Commerce Department eliminated his chief examiner job in May 2003 for “budgetary concerns,” he was told. “Certainly I wasn’t a drain on the taxpayer since my position was funded by the industry. We were always pinching pennies.”

    Commerce cut Gillen’s position because the duties overlapped too much with the assistant commissioner, said Walsh. The division refilled the chief examiner position in October 2008, he said, because of the growing watch list of troubled banks.

    At the Legislature, the division’s resources haven’t been an issue.

    “It simply doesn’t come up,” said Rep. Jim Davnie, DFL-Minneapolis, a member of the House Commerce and Labor Committee. “There is some frustration within the Legislature over what is perceived to be weak regulatory oversight by the Department of Commerce over the entities it regulates. … But we all wring our hands and no one wants to say anything — for fear of creating a sense of alarm.”

    Alex Robinson contributed to this story. jbjorhus@startribune.com • 612-673-4683 cserres@startribune.com • 612-673-4308
    ~~
    above, from part III

    sorry for the long post, the second part happened, truly, by accident..
    the article, in full, should be read.
    maybe someone will kind enough to edit this, if they deem fit..