Local Banker

Local Banker www.LocalBankerMagazine.com • Spring 2012 • Premier Edition

Meet bankers who are making a difference

Smaller banks play big role in nation’s economy

Financial literacy by the numbers

BankingRelationship

Local bankers offer personal touch

2 Local Banker — www.LocalBankerMagazine.com

Local Banker www.LocalBankerMagazine.com • Spring 2012 • Premier Edition

welcome to Local Banker

Local Banker brings reporters, elected officials, policy-makers and other thought-leaders news, information and opinions about the essential role community banks play in the U.S. economy. The magazine will examine and explain industry issues, as well as shine a spotlight on the important work local bankers do to improve the quality of life in their communities. Local Banker is published on the premise that a broader understanding of community banking is better for savers, borrowers, lenders and other key players in the U.S. economy – national, regional and local.

Sponsoring OrganizationsLocal Banker is funded by:

United Bankers’ BankBloomington, Minn.

www.ubb.com

Independent Community Bankers of AmericaWashington, D.C.

www.icba.org

Independent Community Bankers of South Dakota

Mitchell, S.D.www.icbsd.com

Nebraska Independent Community Bankers

Lincoln, Neb.www.nicbonline.com

Independent Community Banks of North Dakota

Bismarck, N.D.www.icbnd.com

contentsUp Front

Legislators should avoid attempting to replicate North Dakota’s success with a state-owned bank, Pg. 3

Quarterly SpotlightNational Voice — Local PerspectiveNebraska banker builds on legacy of service to community, Pg. 6By Tom Bengtson

Leading with PurposeBankers support employee-directed giving program, Pg. 8By Tom Bengtson

DepartmentsLocal DifferenceFrom Michigan to Montana, Midwest bankers are supporting local citizens, economies, Pg. 4

Industry BuzzThe service model allows community banks to thrive during soft economy, Pg. 10

InterviewConsumer-focused community bankers question Washington’s one-size-fits-all approach to regulation, Pg. 12

Local News • Iowa banker talks compliance challenges, Pg. 13• Milwaukee bank anticipates Community Development Fund grant will boost local economy, Pg. 13By Matt Doffing

Community Focus Bank partnership gives local retailers, consumers a holiday shopping boost, Pg. 14By Liz Wheeler

Financial Literacy The landscape of financial education shows room for improvement, Pg. 15

Local bankers makea difference for people in cities

across the Upper Midwest. Turn to Page 4 to learn how.

Spring 2012 3

Up Front

Local BankerPublished quarterly by

NFR Communications Inc.7400 Metro Blvd., Suite 217

Minneapolis, MN 55439Tel. (952) 835-2275Fax: (952) 835-2295

www.LocalBankerMagazine.com

PublisherTom Bengtson

EditorJackie Hilgert

Staff Writer Matt Doffing

Editorial ContributorsJustin Dullum, Liz Wheeler

CirculationLaurie Feltault

DesignTraditions Communications

cover: iStockphoto.com/Nicolas Hansen

© 2012 NFR Communications, Inc.

State-owned banks not the answerBy Tom Bengtson, Publisher

©iStockphoto.com/George Peters

Lawmakers around the country are floating the idea of starting a government-owned bank for their state. Apparently, as many as 17 state legislatures are looking into creating state-owned banks along the lines of the Bank of North Dakota.

No legislator should waste time on this errant idea. In terms of giving the local economy a boost, it would be much more productive to look for ways to help existing banks be more effective.

I understand the initial appeal. Revenue-hungry lawmakers in other states are impressed by the Bank of North Dakota’s annual profits. They figure a state-owned bank might be a good place for their municipalities to deposit their money, and a state-owned bank surely would make all those loans that regular banks refuse to make. But it would be a huge mistake to go down this path.

Local banks already provide a place for municipalities to put their money. Lenders make careful decisions about how to lend that money, usually to enterprises close to home so those very same municipalities benefit. I hate to think of the kind of loans one might be tempted to make when politics enter the picture. The potential for conflict of interest is huge. We absolutely do not need the government picking winners and losers, any more than it already is.

Advocates for state-owned banks like to claim that the existing banking system isn’t doing the job. If those lawmakers want to help spur economic development they should help existing bankers rather than attempt to create an alternative banking system. One way to help bankers make more loans is to exempt the income they make from certain kinds of loans – perhaps small farm loans or rural non-conforming mortgages – from income tax. That would allow them to offer such loans at a little lower rate and compete with tax-exempt lenders such as the Farm Credit System or credit unions.

State-owned bank advocates might object to the cost of offering such a tax benefit but I am certain that in the long run the cost of setting up, running and ultimately closing down a state-owned bank would be far greater. Furthermore, a state-owned bank does not have deposit insurance; the potential liability to taxpayers is huge.

The idea of creating more state-owned banks is pure folly and legislators everywhere should look for other solutions to their local challenges.


Local Difference

Chicago bank’s donation helps kids cope with cancer

Great Lakes Bank of Chicago

recently donated hundreds of toys, gift

cards and $100 to the Pediatric Oncology

Treasure Chest Foundation’s Orland

Park, Ill., facility. Great Lakes Bank

Foundation facilitated the donation

from the bank which has been serving

the Chicago Southland community since

1896.

“Because of the generosity of the

Great Lakes Bank Family the Treasure

Chest Foundation will be able to present

toys and gift cards to children and teens

undergoing years of medical procedures

while being treated for cancer,” said

Colleen Kisel, founder of the Treasure

Chest Foundation. “Great Lakes Bank

brings joy and hope to children going

through a difficult time.”

The POTCF is a non-profit

organization that provides comfort and

distraction from painful procedures

to children and teens diagnosed with

cancer.

Banker saves doctor on basketball court with AEDIn 2005, BANKWEST of Rockford, Minn., donated

$12,000 to help place Automated External Defibrillators in

public buildings throughout Wright County, including three

schools. The AEDs are used to restart a person’s heart. The

bank even offered training to teach people how to use the

machines. “This project has been a great opportunity for us to live the bank’s mission

of building a legacy of caring,” bank President Steve Huston said at the time.

Fast forward seven years to January 2012. Huston and a group of guys were

playing basketball in one of the schools with an AED. One of the players collapsed

during the pick-up game. The victim, 32-year-old Dr. Frank Anderson, went down and

his heart stopped beating. Huston grabbed the AED off the wall and used to it restart

Anderson’s heart. Huston applied the AED’s electrical pads onto Anderson’s chest as

shown in the unit’s pictorial directions; the machine delivered a shock and his heart

started up again. Emergency personnel who arrived minutes later said Huston likely

saved Anderson’s life.

Anderson, who is married and has three children, said he is glad he collapsed

where he did because most other places would not have had the emergency

equipment so readily available.

Anderson is actually the second person to recently be saved by one of the AEDs

in Wright County. Later this month, the local health foundation is hosting a “survivors”

event to honor the two who were saved by people who used the machines.

Michigan bank harbors customer after devastating fireWhen a fire laid low the Sarkozy

Bakery in Kalamazoo, Mich., owner Judy Sarkozy found Keystone Community Bank ready to lend a hand. On the morning of February 25, a fire reduced her store to a pile of rubble. “Everything was totally destroyed; I have no records, nothing,” Sarkozy said. Even the original written recipe for the Sarkozy bread – long a staple at local food markets – was lost.

Sarkozy went to the bank thinking it would freeze her account. When she approached Tom Schlueter, president of the $256 million bank, “he cut my loan payment in half by letting me go on interest only,” she said. Sarkozy didn’t have an office she could use to

start over. “I told Tom I had nowhere to work; he told me he would see what he could do. The next thing I know I have an office at the bank,” she said. Sarkozy also lost her computer in the fire. “I told him I didn’t have a computer and an employee of the bank brought in a private computer for me to use,” she said.

Sarkozy Bakery has been a part of the Kalamazoo community since 1978 and has donated bread daily to the Kalamazoo Men’s Gospel Mission. “She walked in Monday morning with no place to go. We took her to an open office, gave her a laptop and gave her time to figure out what she wanted to do. It was the right thing to do,” Schlueter said.

Spring 2012 5

Local Difference

Bankers join construction crew in the Dominican Republic

First Bank & Trust of Sioux Falls, S.D., sponsored one of its

employees on a mission trip to the Dominican Republic. Bryan King,

retail manager, spent from Jan.28 to Feb. 5 on the island nation with

nine other people to help construct a church building.

The crew, which also included fellow Sioux Falls banker Dave

Rozenboom, First Premier Bank, put on a roof, poured a cement floor

and completed other tasks on the 20-foot by 40-foot structure.

The trip was organized by a Sioux Falls group called The

Dispatch Project, which encourages businesses to engage their

employees in volunteer and philanthropic projects.

“My experience was nothing short of amazing. I can tell you that

after helping the poor community in the Dominican Republic, not only

do I have a desire to go back, but I also have a desire to continue

extending that helping hand in the Sioux Falls community and hopefully

encourage others to join me,” King recently wrote on the bank’s blog.

King said he and other project participants are visiting many of

the service clubs in Sioux Falls, talking about their experience and

encouraging others to take on similar projects.

Montana bank teaches mini-banking

Students become “mini-bankers” in a program supported by First Interstate Bank of Billings, Mont. The bank’s “mini-bank” program promotes financial literacy and develops savings skills in students. The idea behind the mini-bank program is to get the students involved in educating their peers about saving. Currently, there are 21 mini banks across Montana and Wyoming. The program’s strategy has been fruitful; students have opened 1,406 savings accounts and saved $1.1 million since the program began in 1999. First Interstate has kept the savings rate for accounts opened through the program at 4 percent, even as interest rates have bottomed out in recent years.

With the support of First Interstate, the students operate a school savings bank. Four students make up a board of directors for each bank. These students run, market and name the bank. They also make their own brochures and come up with strategies that encourage students to save. First Interstate provides a laptop, a printer, a cash drawer and training on how to fill out a deposit slip.

The board of directors receives real world experience in the financial industry. In the spring, the mini-bank board members appear before First Interstate’s board in their bank uniform of navy blue pants and a mini-bank shirt. “We learned that running a bank is not just about providing a service to the community; a bank has to make money somehow,” the students told the board.

Bank major sponsor of Nebraska’s newest sports arena

Pinnacle Bank is putting its name on the new sports arena in

Lincoln, Neb. Mayor Chris Beutler, Pinnacle Bancorp Chairman Sid

Dinsdale and Pinnacle Bank President Mark Hesser announced the

naming rights agreement at a news conference in Lincoln.

“Pinnacle is a top-notch Nebraska company, and we are excited that

the Pinnacle name will now be associated with Lincoln’s new top-of-the-

line arena,” said Mayor Beutler. “This partnership is a positive reflection of

Pinnacle Bank, the new arena and the future of our community.”

“Pinnacle Bank has been serving Nebraska and Lincoln for many

years, and we are excited to support progress that will have a positive

impact on our state and local economy,” Dinsdale said. “We are proud

to be part of the arena, which will help bring jobs and entertainment to

Lincoln and the state for years to come.”

The $179 million arena project was approved by voters in

2010. Pinnacle Bank Arena is expected to open in the fall of 2013.

University of Nebraska-Lincoln basketball will be the main tenant of

the 470,400-square-foot facility, which will hold nearly 15,000 fans for

Husker hoops.


Although he mAkes his living as a banker, Jeff Gerhart views his work to be more vocation than labor. As owner and president of the only bank in tiny Newman Grove, Nebraska, Gerhart knows that his actions do more than represent the interests of employees and customers — they speak to the whole community and the broader financial services indus-try as well. “We like to see people succeed… some-times we take chances,” Gerhart said of his commit-ment to his neighbors. He said this country was built on character loans that some investors avoid.

Gerhart’s drive to see his neighbors realize their potential gets him out of the bank often, such as when he led an effort to erect a band shell in the city park. Gerhart also added the bank’s support to that of several leaders who are pushing to open a new steak house in Newman Grove, a town of 800 peo-ple. And, the 59-year-old banker helps local farmers become smarter about funding their operations. “If they come in with a loan request that doesn’t make sense we sit down and try to figure out a way to im-

Nebraska banker builds on a legacy of service to community, industry

prove their idea,” Gerhart said.It’s this sort of commitment to civic success that

distinguishes community bankers. For Gerhart, sound banking practices, civic involvement and ser-vice to industry come naturally; he’s simply carrying forward a tradition set for him by ancestors who toiled for the benefit of Newman Grove with equal zest.

A legacy of industry activismThe line of Gerharts involved in Newman Grove

banking extends back to 1898, when Jeff’s great-grandfather, E.H. Gerhart, took a position as ca-shier at the original Bank of Newman Grove, then called Citizens State Bank. E.H. bought controlling interest in that bank in 1909 and was president un-til his death in 1944. During that time, he served in the Nebraska legislature and served as president of the Nebraska Bankers Association.

H.L. “Buzz” Gerhart had been working at the bank and became president in 1944. Like his father, he served in the Nebraska legislature and served as president of the Nebraska Bankers Association. He died in 1989. His son, H.L. “Bud” Gerhart, Jr., start-ed working in the bank in 1953 and became presi-dent in 1967. He served as president of what was then called the Independent Bankers Association of America in 1972-73.

Jeff joined the Bank of Newman Grove in 1977 after graduating from the University of Nebraska-Lincoln and working in banks in Colorado for two years. When he returned to the bank, he worked side by side with his father and grandfather. His father still works in the bank, though he winters in Arizona.

Jeff Gerhart was elected to the executive coun-cil of the Nebraska Bankers Association in 1987, and served as president of the Nebraska Indepen-dent Community Bankers in 1989-90. He has been active in the Independent Community Bankers of

National Voice; Local Perspective

Spring 2012 7

America since the mid-1980s and became its chairman this year. Gerhart said speaking for ICBA comes naturally as he feels as though he “grew up around the organization,” given the involvement of his father.

From modest surroundings, clarity of messageNewman Grove is nestled in a valley about

two hours west of Sioux City, Iowa. It’s a town typical of its size, with a grocery store, bowl-ing alley, insurance agency, community-owned medical clinic, and one bank. There’s also a 34-bed nursing home and an 18-bed assisted living facility, built partially with money Nebraska won in a multi-state lawsuit against the tobac-co industry. There’s a weekly newspaper, six churches, and the City Café where they don’t take credit cards. Most mornings, Gerhart goes to the café to visit with locals. “The men sit on one side of the café, the women on the other. It’s just like a high school dance,” Gerhart joked.

The town also features a lumber yard, and grain storage for the corn and soybeans grown in the region. Feeder cattle operations surround the community for miles in every di-rection. The town is proud of its K-12 school, although enrollment is declining and next year the football team will have to pair with a neighboring school district because Newman Grove by itself won’t be able to field enough players for a team. There were 20 seniors in the 2011 graduating class.

The town shows some wear but even more promise. For example, an old motel was turned into a public storage facility by an en-terprising business owner. A garage was ex-panded to accommodate a small engine repair shop. Locals maintain a nine-hole golf course with sand greens.

The Bank of Newman Grove, which was built in 1913 and remodeled in 1991, keeps pace too. It is a humble, single story building. The $35 million bank has remained stable over

the years, growing about $7 million in the last 20 years. Given weak loan demand and compe-tition from Farm Credit Services, earnings are modest — a phenomenon Gerhart said “we can work through.”

Although the banking industry has been the lifeblood of the Gerhart family for four gen-erations, Gerhart doesn’t take industry viabil-ity for granted. The president/CEO of the Bank of Newman Grove said bankers need to work hard to make sure they have an industry to pass along to their children. “I am a fourth gen-eration banker with the fifth generation serv-ing on my board. Bankers are good stewards of the industry,” he said. “That is what ICBA is all about, being a good steward of the industry.”

As chairman of the Independent Commu-nity Bankers of America, Gerhart is one of the industry’s lead spokespersons. From his high-visibility post, Gerhart will represent thou-sands of community bankers who also want to have something to pass along to their children. It’s a serious mission for Gerhart, whose two children, Patrick, 30, and Kyle, 28, along with Gerhart’s wife, serve on the bank’s board of di-rectors. “It is not a given that the industry is go-ing to be there tomorrow as it is today,” he said.

Gerhart sees industry activism as central to preserving the community bank franchise and he cites ICBA’s work during the post-fi-nancial crisis legislative debate as an example of what community bankers can do when they band together. “We got the deposit insurance limit increased to $250,000, the formula for figuring the deposit insurance premium was changed to an asset base, and the Federal Re-serve remains our regulator,” he said. These are all victories, he said, but more is needed. “We need tiered regulation; if the rules make the same demands of me as they do the biggest players, I won’t be here tomorrow.”

And if the Bank of Newman Grove went away, the town would notice. n

National Voice; Local Perspective By Tom Bengtson


eith Schoon is a small-business man with a big heart. As the owner of a bicycle repair shop in West Fargo, N.D., Schoon fixes old bikes in his garage and donates a large number of

them to needy children. But the clutter of bicycle parts strewn about a garage recently put Schoon on the wrong side of a local ordinance. A costly fence was needed in order for Schoon to comply.

The funds for that fence — and for extra tools and supplies and bike racks — came from State Bank & Trust, though not by way of a loan. Instead, news of Schoon’s trouble reached the employees of State Bank & Trust, who are empowered by bank management to make a difference in the lives of their neighbors by directing bank profits back into the community. The directive for employees to use bank funds for outreach is at the heart of the Fargo-based bank’s “Pay it Forward” outreach program, which the $2 billion bank rolled out in 2007. Since the program was launched, more than $2.4 million in employee-directed donations have occurred.

Richard and Michael Solberg, the father and son leadership team at State Bank & Trust, say a focus on attracting and retaining great people starts by creating the right culture. “Every business, every bank, every church, every group of people has a culture,” commented Michael Solberg, the bank’s president

Leading with PurposeBankers support employee-directed giving program

K

By Tom Bengtson

State Bank & Trust

Chairman Richard

Solberg (left) and

President/COO

Michael Solberg

empower their

employees to direct

a portion of bank

profits to citizens in

need through the “Pay

it Forward” program.

Keith Schoon (above)

recently benefited

from the program.

and chief operating officer. “We work very diligently to create a culture that isn’t just talk. All banks call themselves the employer of choice. Our focus is to make sure we live that.”

State Bank & Trust focuses a great deal of generosity on its employees as well; it sets aside 5 percent of its annual earnings to fund year-end bonuses to every employee, from tellers up through executive ranks. Bonuses in 2011 came to 6.75 percent of salary for most employees. The bank also has a qualified retirement plan, determined by a performance-based sliding scale. That resulted in an additional 18 percent of salary. “These come with a serious cost but we know the benefits far outweigh the costs when it comes to investing in our people,” Michael Solberg said.

Extreme generosity is not often equated with banking. State Bank & Trust Chairman Richard Solberg explained: “The art of banking is managing risk; we are in the risk business. We

have credit risk and interest rate risk. If you take no credit risk you aren’t going to make very much money. And yet if you take too much risk, you are going to get yourself in trouble. Knowing where the line is, is what I call the art of banking.”

Michael Solberg says that with bank products across the industry being largely indistinguishable, the way for a bank to set itself apart is with its people. The way to attract great people, he says, is by creating the right culture. And you could argue the Solbergs treat their 640 employees like celebrated artists. Bonuses are generous, no one is required to sign a non-compete employment agreement, and the bank encourages employees to take time off for family.

But it’s the Pay it Forward program that has brought attention to the bank and its leadership. Although the Solberg’s say they never expected any attention from the press, soon after the program

went public, calls came from CNN, the BBC, CBS News, People magazine, Good Morning America, and others. Oprah Winfrey even contacted the bank about having the Solberg’s on her show (although a day before a scheduled taping, they were bumped and never rebooked). Michael Solberg said the magic of the program is that employees can donate to anyone. “It doesn’t have to be a recognized 501(c)3 charitable organization,” he explained. “That means if an employee knows a family with kids who aren’t going to get Christmas presents that year because the parents are down on their luck, they can donate the money to parents so they can buy some presents.”

The bank produces an annual report that summarizes how the money is used. The reports feature individual photos of hundreds of the bank’s employees. The 2011 report says bank employees gave away a total of $480,000, with $20,000 going to churches, $167,000 going to organizations or projects, $216,700 going to individuals and families in need, and $1,500 going to the arts. The bank also recently announced a “fans’ choice” component to the program where customers will be given the opportunity to direct bank giving.

“Seven or eight years ago, we developed a very simple mission statement: Happy Employees! Happy Customers!” said Richard Solberg. “That means that if we focus on our employees as a company, and make sure they really like their jobs, we will end up with happy customers. That is certainly how it has turned out.” n

Spring 2012 9


Industry Buzz

WeAk loAn demAnd And An increasingly oppressive regulatory en-vironment are adding pressure to the community banking industry across the country, but experts remain con-fident community banks will continue to be essential players on the financial services landscape. Two major industry meetings were conducted earlier this year, one in Palm Springs, Calif., and the other in Nashville, Tenn., where thousands of bankers shared stories and experts described a hopeful if not challenging future.

At the California meeting, one ex-pert noted the number of banks in the United States has declined by 51 per-cent since 1990; she predicts 40 percent further shrinkage in the next 10 years, down to 4,600 charters.

But no one predicted community banks would go away. In fact, the con-sensus seemed to be that local banks offer what customers want – high-touch service. Ken Schmidt, a market-ing expert who helped engineer the success of Harley Davidson, told bank-ers in Nashville they have the passion that customers want.

“In a world that is devoid of pas-sion, passion stands out,” Schmidt said. Showing a picture of a heavily tattooed man, Schmidt said people crave atten-tion. “They are saying, ‘React to me!’ People want to be validated, acknowl-edged,” Schmidt explained. A business

High-touch approach strengthens community banks’ prospects

model based on customer relationships instead of merely transactions will suc-ceed in this environment, he said.

Camden Fine, president and CEO of the Independent Community Bankers of America, declared: “As long as this coun-try produces entrepreneurial men and women with a will to succeed there will always be community banks.”

The Missouri-born former banker said ICBA “recognizes that we have two very different business models within the banking sector. The relationship-based model, favored by Main Street banks, and the transaction-based mod-el favored by most Wall Street firms. One model is based on each individual customer, the other on mass produc-tion.”

While banks of all sizes have chal-lenges, Fine was particularly bullish on smaller banks. “It was community banks that rebuilt the nation after the devastation of the Civil War. It was community banks that made vigorous western expansion possible. It was community banks that kept much of the nation going in the Great Depres-sion, just as you did during this most recent crisis…

“We make getting big possible be-cause it takes Main Street to create a Wall Street. Without community banks to take a chance on incubator compa-nies, single-owner start-ups, small businesses, and dreamers, there are

no small businesses to grow into huge companies,” Fine declared.

Bankers who had gathered in peer groups at the American Bankers Asso-ciation-sponsored conference in Cali-fornia shared numerous challenges. At a session for bankers in institutions with fewer than $250 million in assets, participants asked:

• How to retain highly-talented employees?

• How to deal with ever-expanding technology?

• How to distinguish yourself from the competition?

• How to make more money from the investment portfolio without tak-ing excessing risk?

• How do you find good lenders to hire?

• And where do you find experi-enced people to manage the compliance obligation?

One Midwest banker commented that good lenders are particularly dif-ficult to find. He said years ago, the region’s largest banks trained bankers as lenders. Smaller banks frequently had the opportunity to hire these folks. “That’s just not the case anymore,” he said.

Experts encouraged bankers to make the most of technology to miti-gate the regulatory challenges and to level the playing field against much larger competitors.

Surviving – thriving – into the future

By Tom Bengtson

©iStockphoto.com/Francesco Ridolfo

Spring 2012 11

Technology guru Scott Klo-sosky described technology as a kind of “X” factor that can help smaller banks compete. Klososky urged bankers to use the social media tools they have available to them, such as Twitter, Facebook, LinkedIn and others. Even though these tools have been available for some time, he said few banks are producing robust streams of infor-mation through these channels.

Klososky said people of all ages are growing addicted to social media and other electronic means of communication. He said it is not the electronic device which capti-vates them, but the opportunity to connect with other people. “Web 2.0 technologies provide a new way to connect. We have never seen the level of connectivity that we have now,” he said.

In our chaotic economy, “fric-tionless” connection may give bankers the opportunity to win new waves of customers and better serve the customers they already have. Klososky said the technology appeals to all ages, with the earli-est adopters falling in the “young person” and “retired” age cohorts.

Schmidt said commercial businesses generally do a good job of moving customers along ef-ficiently, but he said humanity has been sacrificed. He said people feel ignored and they have turned to Facebook in a desperate attempt to get noticed. Community bank-ers, he said, offer the service model that people crave more than ever.

Even the regulators said they see the community banking sector as something special, something worth protecting and preserving. “When the world went mad all

around us, you did not stray from your traditional model of stead-fast customer service and concern for long-term relationships,” said Richard Cordray, director of the Consumer Financial Protection Bureau. He spoke to bankers in Nashville.

Saying that community bank-ing did not cause the financial crisis, Cordray said: “Our job is to protect all those who serve con-sumers well in the financial mar-ketplace. You are the ones who do that best.

“Hundreds of millions of Americans depend on you every day,” Cordray said. “They place their trust in you and they know that you have earned their trust. This is about far more than mere economics. It is about human be-ings depending on one another. When people entrust you with their money, they are entrusting you with their hopes for the future, with the claim they are staking to the great American dream.”

Martin Gruenberg, the acting chairman of the Federal Deposit Insurance Corporation, shared a fact which illustrates the impact community banks have on the economy. “Community banks play a crucial role in the financial sys-tem of the United States,” he said in Nashville. “Community banks with assets of less than $1 billion account for a little more than 10 percent of the banking assets in our country but provide nearly 40 percent of all the 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 eas-ily fill that critical credit need if community banks were not there.”

John Walsh, former Acting Comptroller of the Currency, also speaking in Nashville, also stressed the key role community banks play. “We at the OCC believe it’s vital to our financial system that commu-nity institutions not only survive, but that they grow and thrive,” he said. Walsh said the OCC devotes “significant resources” to the com-munity bank sector.

Federal Reserve Board Chair-man Ben Bernanke also validated the community bank business model. Speaking to the Nashville audience via recorded video mes-sage, Bernanke praised commu-nity bankers. “Community banks remain a critical component of our financial system and our econo-my,” he said. “They help keep their local economies vibrant and grow-ing by taking on and managing the risks of local lending, which larger banks may be unwilling or unable to do. They often respond with greater agility to lending requests than their national competitors be-cause of their detailed knowledge of the needs of their customers and their close ties to the communities they serve.”

Bob Rutten, president of Citi-zens State Bank of Arlington, S.D., was one of those bankers who par-ticipated in the peer group discus-sions for banks with less than $250 million in assets. He said that de-spite all the challenges, communi-ty banks will thrive. “This room is full of survivors,” he said standing among a couple of hundred peers. “No one here is talking about quit-ting or getting out.” n

Those with something to say about com-munity banking include: The CFPB’s Rich-ard Cordray; ICBA’s Camden Fine; former Acting Comptroller of the Currency John Walsh; Federal Reserve Board Chairman Ben Bernanke; FDIC Chairman Martin Gruenberg; and technology guru Scott Klososky.


Interview

Q. What do you think is the most beneficial part of the Dodd-Frank Act, the sweeping banking law that was passed in the wake of the financial crisis?A. The most creative outcome was the Office of Financial Research, which is housed in the Treasury Department. It is positioned to play an important role by gathering and analyzing data about systemic threats to the U.S. financial system. We have not had a government agency focused on these macro-economic imbalances other than the Fed and the issues are sufficiently important that policy decisions should benefit from additional points of view. The lack of careful analysis is one reason, I believe, that the financial crisis was unfairly blamed on banks. In fact, the crisis was largely caused by non-banking institutions and by macro-imbalances that arise from governmental actions and inactions. A failure to spot the housing bubble and deal with it in the mid “aughts” was a serious error by government. If the Office of Financial Research operates correctly, it should be able to identify bubbles and give regulators and policy-makers incisive infor-mation to shape their decision-making. That’s a very good thing.

Q. How is this office different from pre-existing offices? A.Each one of the governmental financial agencies that exists has a very different kind of focus. The Federal Reserve is centered on mone-tary policy and inflation. The Council of Economic Advisers responds to economic matters that by nature tend to be shorter-term and with an inevitable focus on how they affect the presidency. Banking agen-cies are of course prudentially and institution-by-institution focused, but have done a much better job for the consumer than is commonly believed. The Office of Financial Research has only one responsibility

Eugene A. Ludwig (left) is founder and CEO of Promontory Financial Group. He was U.S. Comptroller of the Currency from 1993 to 1998. Promontory, based in Washington, D.C., is a global financial services con-sulting firm. He was interviewed by Local Banker writer Justin Dullum.

and that’s to address bubbles that can affect the economy and create systemic harm. That is a plus because they will begin to think about systemic issues in ways that the other agencies just have not had the responsibility to do.

Q. Oversight by the new Consumer Financial Protection Bu-reau is limited to banks with more than $10 billion is asset, yet some community bankers fear inevitable ‘regulation creep’ means smaller institutions will be affected. Should community bankers worry?A. Community bankers by their nature have a strong orientation to-ward consumers. They could not exist in the communities in which they operate and be successful if they didn’t offer consumers a value-added relationship. That’s the nature of their business. They don’t need a lot of rigmarole. They don’t need a lot of government regulations and examinations to treat the consumer well. While I believe they have consumer responsibilities, they should not be burdened by the same kind of mechanisms that are in place for the largest institutions. Dodd-Frank was right to draw a line, and it’s everyone’s responsibility to make sure that line doesn’t involve regulation creep. Smaller banks have made mistakes, but bank regulators currently have the tools to deal with the mistakes.

Q. Are there any reasons for community bankers to be wary?A. Community bankers have a right to be concerned. It’s up to those who run the CFPB and the bank regulatory agencies to honor the will of Congress to have a robust community banking sector that is not treated the same way as much larger institutions. Bank trade associa-tions, too, have a role in helping to ensure for their memberships that congressional will is followed here.

Q. If I were a compliance officer, what friendly advice would you give me as I work to keep up with the changing rules? A. Compliance officers at community banks ought to be work-ing with their trade associations to make sure rules are crafted that are appropriately sized for community banks, if needed at all. I was cheered to see that Acting Chairman of the FDIC Marty Gruenberg has begun to focus more and more attention on the need for regula-tory reform and right-sizing for community banks. I’d say when rules come out that are inappropriate and unfair compliance officers should work directly with trade associations and regulatory agencies to make sure they are appropriate for community banks. Being constructive and providing examples of how rules impact efficiency and service is a powerful approach. I think the heads of the banking agencies all are in favor of balance, and a compliance officer can play a very useful role in drawing to the attention of the banking agencies and others instances when there are burdens where there needn’t be. n

Financial Research office promising, CFPB should focus on non-banks, former Comptroller says

Spring 2012 13

Local News

PeoPLe who woRk in Banking are re-thinking their careers in light of the ever-increasing regulatory burden, said Ron Hansen, president of the $125 million Liberty Trust & Savings Bank in Durant, Iowa. Hansen was one of four bankers who spoke on industry challenges at the FDIC’s Feb. 16 “Future of Community Banking” conference. Pan-elists voiced examples of the regulatory burden and offered advice.

Compliance demands in bank operations are pushing talented staff out of the industry, said Han-sen. The trend for college graduates to seek employ-ment in larger cities has created further difficulty for rural community banks to attract new and talented staff, Hansen said. In one Iowa bank, more than 50 percent of the management staff would leave the in-dustry if the opportunity presented itself, Hansen said, reading from a letter authored by a peer. The “mounting regulatory environment, and pressure to comply with it, is slowly sucking the life and joy out of the work. I honestly don’t know how much longer they can keep it up,” Hansen quoted.

Community banks need to be allowed to contin-ue their relationship-oriented business model. “We

Milwaukee bank to leverage grant to grow its businessNorth Milwaukee State Bank

plans to use a $500,000 grant it

received to grow its loan portfolio

by $5 million. The bank received

the award through the Communi-

ty Development Financial Institu-

tions Fund which is administered

by the Department of the Trea-

sury. The CDFI runs a Bank En-

terprise Awards program which,

on an annual basis, recognizes

community banks that provide

vital investments to distressed

neighborhoods and generate sig-

nificant impact for their commu-

nities.

Since its creation in 1994, the

CDFI Fund has awarded almost

$1.3 billion to financial institu-

tions. In 2011, awards totaled nearly $22 million. North Milwau-kee was one of 82 applicants to receive an award.

North Milwaukee State Bank was selected to receive the award for providing small business loans, home improvement loans, afford-able home mortgage loans, and commercial real estate loans in distressed communities in Mil-waukee. The bank had to show year-over-year increases in loan volume in these areas to qualify.

The bank expects the grant to improve the bank’s risk position in addition to helping it generate new loans. The bank began a new job creation and retention pro-

gram called “Let’s Work Wiscon-sin.” The initiative collaborates with larger, local companies to create relationships with suppli-ers. The bank’s borrowers will have contracts with these suppli-ers. The idea is that the size of the suppliers will ensure the bank’s borrowers have demand for work and that they have secure cash flow.

The grant will also help North Milwaukee State Bank address unemployment in its community.

“We received our grant so that we can target the job situation in Wisconsin, and Milwaukee in particular,” said Ebert Johnson, president of the $91 million bank.

The bank expects to be able to

lend $5 million as a result of the

$500,000 injection of new capi-

tal. Johnson said he expects that

to translate into the creation of

some 3,000 jobs. “We have a

loan we are reviewing now for

$100,000 that is going to employ

six to eight people,” Johnson said.

The bank expects approximately

every $100,000 to generate or re-

tain six to eight jobs.

“Our mission has always been to

work in the community. We be-

lieve this is the approach we need

to take,” Johnson said.

By Matt Doffing

Speaking on FDIC panel, Iowa banker voices frustrationsneed to have as little regulatory burden as possible. If we can’t make mortgage loans…that would be a real shame in our rural communities,” Hansen said.

“If compliance is so difficult today that we can’t get exam reports back on a timely basis then I think we have a problem,” Hansen said. Referring to a colleague whose bank was examined in October, Hansen said, “they still do not have a final report. They don’t even have any indication of when they will receive their final report.”

Compliance puts local banks on uneven footing with large banks

“When I started my career I worked for a bank in California in a formal management training pro-gram. We always had the home office to call if we had something that was outside our normal scope,” Han-sen said. Community banks have to rely on outside resources like their trade associations, he said.

“I would ask the regulators to join forces with the banks and go to the legislators and say ‘this stuff you guys are proposing is ridiculous,’” Hansen said. The legislative process, more than the regulatory process, is a big part of the problem, he said. n

“Compliance

demands

in bank

operations

are pushing

talented staff

out of

the industry”


FAiRMoNt, MiNN., is A town of 11,000 people that still offers a zero percent loan program to encourage local shopping during the holiday season. The local Chamber of Commerce spearheads the program. Bob Wallace, president of the chamber and former local merchant, says the program has been around for at least three decades.

“The idea behind the program is to keep the money in the community,” explained Wallace. Members of the chamber sign up to participate. Once the merchants are on-board, customers can go to one of the area’s four participating banks beginning November 1 and apply for a loan ranging from $300 to $1,000. If the loans are not repaid by May 1, Wallace said each bank handles it differently, but typically the loans default to a credit card rate. The certificates expire December 24, but any extra certificates can be applied to the outstanding loan amount if redeemed by December 31.

“Repayment of [the loans] is very good,” said Starla Chubaty, loan officer at $95 million State Bank of Fairmont. She estimated that about 99.9 percent of the loans have a “really good repayment level.”

“Do we make a lot on them? No, it’s more goodwill than fee income,” Chubaty said. “I think it helps us stay

involved in the community to help our customers out a little at Christmas time.” She said most people come in for the loans with the expectation they will pay them off with tax refunds.

Once customers receive the loan check made out to the Fairmont Area Chamber of Commerce, they go to the chamber office where they are given $10 certificates up to the amount of the loan, unless the customer wants to buy a big-ticket item. In that case, a larger certificate can be written directly to that merchant. The certificates are signed by the customer upon receipt, and then signed again upon redemption.

The merchants receive 94 percent of the certificate amount. Two percent goes to program overhead such as advertising and printing costs, and four percent goes to the bank making the loan. This was a change from years past where each merchant paid a flat fee. “The beauty of this is it doesn’t matter if you’re a large business or small business, the percentage is the same,” Wallace said. But now new hurdles have appeared.

“The most difficult part of the last few years is that lending criteria has changed. This was never intended

Chamber’s no-interest

loan program

encourages citizens to

to be a holiday giveaway program so if you’re a bad credit risk, you’re not going to get a loan,” Wallace said. “But today it’s even harder because of all the regulations, so the program is not as robust as in the past because the banks can’t make the loans they normally would have made.”

Another challenge has been gaining the participation of a department store or general store. In the past, Kmart, ShopKo and J.C. Penney had participated. Now, the local Kmart is shuttered, and the participation of other department-type stores is sporadic. The program was suspended in 2009 due to a lack of participation by area merchants.

“We had to educate the merchants and show them what kind of exposure they would get by participating,” Wallace said. Even if a participating store receives no certificates, its name is in every piece of advertising which appears in the town’s daily newspaper and weekly shopper, as well as on air at the local radio station.

The program returned in 2010. “The total gross was the lowest ever at only

$34,800. I think that was because the momentum was lost by skipping 2009,” said Dennis Trushenski, vice president at the $84 million First Farmers & Merchants, a subsidiary of the 215 Holding Company. That was down from the program’s peak in 2000 of more than $140,000.

Participating merchants are still enthused about the program and want it to continue. “Fleet & Farm has been a participant every year it’s been offered,” said Bonnie Vetter, store co-owner. Vetter said 2011 was better than 2010 which brought in $2,020.

“I think it’s a wonderful thing for the community,” Vetter said. “There’s not much of a down side; we pay a percentage, but that’s not enough for me not to participate.”

Lisa Dahl, owner of On the Wall framing and home accessories, also said she likes the program. She has been participating in it for her shop’s entire 28 years. About a decade ago, On the Wall saw its best participation with about $5,000 in certificates being redeemed. In 2010, the shop brought in between $2,000 and $3,000 and Dahl says 2011 was on par with that. n

By Liz Wheeler

Community Focus

Spring 2012 15

SURVEY OF STATES22The number of states that require a high school course in economics to be taken. This is one more state than 2009.

14The number of states that require a course in personal finance to be offered. One fewer than in 2009.

-3 Decrease from 2009. Change in the number of states that require student testing in economics.

PERSONAL FINANCE AND ECONOMIC EDUCATION CHALLENGES

• College seniors who graduated in 2010 owed an average of $25,250 in student loan debt, up 5 percent from 2009.

• 49.7 percent of the U.S. adult population cannot define “budget deficit.”

RESEARCH RESULTSStudents from states where a financial education course was required had the highest reported financial knowledge and were more likely to display positive finan-cial behaviors and dispositions. Compared to other students, these young adults were:

• More likely to save

• Less likely to max out their credit cards

• Less likely to make late credit card payments

• More likely to pay off credit cards in full each month

• Less likely to be compulsive buyers

• More likely to be willing to take aver-age financial risk.

Financial Literacy

What does the landscape of financial education look like? The Council for Economic Education conducts a survey every two years to find out. Here is what they found out:

View the complete report, click on Survey of the States at: www.councilforeconed.org

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