The Impact of Regulatory Reform on Community Banks - Mike Jacobson, Nebraska Bankers Association
In an exclusive interview on the state of banking in the New Year, Jacobson discusses:
Jacobson is chairman, president, and CEO at NebraskaLand National Bank in North Platte, Nebraska. His service to the Nebraska Bankers Association began in 1984 when he became a member of the NBA Correspondent Committee. Since then, he has served on the NBA Executive Council/Board of Directors, Administrative Committee, Government Relations Committee, Lending Committee, Ag Issues Task Force, Kansas/Nebraska Schools of Banking Board of Directors, and the Nebraska Bankers Insurance & Services Co. Board of Directors. Jacobson has been a part of TEAM 21 and served as an NBA Contact Banker for several state senators.
At the national level, Jacobson has served on the ABA Government Relations Council, the ABA Credit Union Task Force and Advisory Group, and the ABA Agricultural Banking Advisory Work Group.
TOM FIELD: What is the state of banking in the State of Nebraska?
Hi, this is Tom Field, Editorial Director with Information Security Media Group. I am talking again today with Michael Jacobson, who is the Chairman of the Nebraska Bankers Association. Mike, it is a pleasure to talk with you again
MICHAEL JACOBSON: Hey, great to be with you again.
FIELD: I don't often get a chance to come back and speak with people that I have spoken to previously. Now we first spoke about a year ago in the Fall of 2008, and I think that you would agree that was not the best time for banking institutions.
JACOBSON: We were not having a lot of fun at that time, no.
FIELD: Well, I guess that's the question--are you having fun now? And I will ask you the question that former President Reagan once asked of former President Carter: Are Nebraska banks better off now than they were a year ago?
JACOBSON: Well, that is an interesting question, and I guess it kind of depends on who you ask in some cases. I would tell you as a general rule, Nebraska banks have really dealt with the recession, the national recession, very, very well. And I think as I told you last year, we are very fortunate that we are a very heavy agriculture state, and back in the 80's when it was really a problem, we got hit with both barrels, and this time around the primary impact in the ag banks has been in the area of livestock -- particularly those who are financing hog producers and some cattle producers, and certainly dairy has been a really problem this past year.
That has somewhat been a function of the national economy, lack of demand for some of the product. From a grain producer's standpoint, prices are down significantly from a year ago, but they are at very strong levels. We had very good yields generally across the state of Nebraska in all of the crops, and I would say that most of your crop producers are feeling very good, and land prices are firm to maybe even a little stronger than what they were a year ago.
I think when you look across at Nebraska banks, if you will look at those that are specifically in agriculture areas and have stuck to doing ag work and aren't heavily involved in certain livestock operations, I think they would have to tell you that they are doing as well as they were a year ago, probably a little better. The only hesitation I would give with that is the fact that FDIC insurance assessments were kind of a blow, along with the new prepaid, along with a lot of pressure from regulators, no matter what kind of bank you are, to fund more money into the reserves.
And so if it were not for those impacts, I would tell you that with very few exceptions banks across Nebraska are doing better than they were a year ago, but I think given the fact that the FDIC insurance assessment was a very large hit -- I mean, it was a big number, and I think as banks have beefed up their reserves, some by their choice and some by regulators being nervous about just generally raising reserve levels, that is probably what has made this past year [one] where banks wished they could have made a little more money than they did.
FIELD: But I guess what is encouraging is we look around and we see that the FDIC has closed down close to 150 banks this year, and Nebraska really hasn't taken that big of hit there, isn't that right?
JACOBSON: No, we have escaped all of those closures. There has been only one bank in Nebraska that has closed since this recession began, and that closure was really totally unrelated to the economy and really was not a gauge of what is happening in Nebraska. I think the only banks you will find today that are having any kind of significant pressure would be those who have gone outside the state and originated loans outside the state of Nebraska, perhaps in areas where the national economy has been much weaker. Some of those have been impacted, but if you look at our large markets, Omaha and Lincoln, they really have faired really well compared to the national markets. That is not to say that there aren't some difficulties there; certainly there are CRE loan issues in those markets and construction and land development loans have been stressed, and office product and retail product has been stressed. But not anything like it is in the major cities, and so there is no place like Nebraska when it comes to banking today compared to the rest of the country.
FIELD: Now one of the things that impressed me in our conversation last year was how close you are to your customers. So I have got to ask you, how do you describe the level of customer confidence in their banks this year versus last year?
JACOBSON: I would say that's a huge plus. I think customer confidence is actually higher this year than it was a year ago, and I think largely because they were able to sift through all of the national media attention to the problems and then relearn that (a) FDIC insurance is real, and for those that are in the transaction account guarantee program, which most of us are, even our large transaction accounts are fully insured.
And in spite of the concerns about where fund levels are, I think everyone recognizes two things. They recognize that the FDIC is backed by the full faith and credit of the government, and that no one has ever lost a penny in an FDIC insured institution. And I think with that in mind, they recognize that things are going to fine form that standpoint.
I think they also have a lot of confidence in the fact that Nebraska banks have generally remained stronger than banks across the country. We have a lot of smaller community banks across Nebraska, and our capital ratios are very high compared to a number of the larger banks, and that is generally just the fact that most community banks, smaller community banks, tend to have much higher capital percentage ratios, and that really works well in these kinds of economies.
FIELD: Now, one of the big stories that emerged early in the year was the Heartland Payment Systems breach. How were your institutions and customers impacted by that breach?
JACOBSON: Well, I think that it would be rare for a bank in Nebraska to have escaped the impact of Heartland because most banks in Nebraska do issue debit cards, and so the breach did impact us, our bank, as well as most every Nebraska bank that issues debit cards would have had some degree of impact. Some of the banks that I spoke with have had very large impacts.
We were fortunate that we just had to reissue virtually our entire card base, and so it was the cost of reissuing the cards and going through the process of explaining to customers what happened and why it happened. We were very fortunate that we didn't have any losses in our customers, and our customers never sustained any losses that ultimately would have come back to us. So in this case there was a breach, we had to reissue cards, but fortunately there were no fraud losses that our customers took. I think there were a few instances where there were fraud losses, and of course at the end of the day the bank ends up absorbing that loss, and so significant impact in terms of frustration, cost of replacing cards, minimal impact in terms of fraud losses.
FIELD: Much like we have seen elsewhere. A couple of the trends that we have seen recently are attacks on ATM fraud, and then ACH fraud as well.
FIELD: How have your institutions been affected by that? And I guess the follow up would be; What have been the major security threats that your banks have been faced with this year?
JACOBSON: Well, I would say at this point we have not seen any significant increase across the state. I think there have always been those threats with ATM's, and of course the ACH fraud, and when you get into difficult economies, we tend to see those attacks on the rise.
By and large we have not seen any significant cases. I am not aware of any significant losses in those areas, but I would tell you--that are increased from prior years, but certainly fraud losses are something that continue to occur in Nebraska and everywhere else in the country.
It is a very large problem nationally, and frankly it is one of my frustrations when we start hearing Congress start talking about limiting what we can charge for interchange fees and limiting what we can do at the ATM, because the banks are the ones who get stuck with all the fraud loss, and the banks are the ones who have to man those machines and put them out there and service those machines. And in the case of our debit cards, we are issuing those cards, we are processing those cards, and yet there is a big push to limit interchange fees, and you really can't have it both ways. I think that is a concern.
FIELD: Sure. Taking you in another direction here, Mike, mobile banking -- that has been a bigger trend than ever in 2009. What do you see happening within your own state in terms of mobile banking?
JACOBSON: Well, I think what you are finding is like many of the new products that come out. We are just launching mobile banking in our bank now. We are approximately a $300 million dollar bank ,and what we have found is where we seem to never be on the bleeding edge of new technology, we like to see some people try it and make sure it is working.
And then what is kind of amazing is that the people that are the leaders on the front end tend to pay that very high cost ,and they have to learn the tough lessons on the front end, and then those that seem to follow tend to get the benefit of learning from their mistakes and the problems that they have encountered, and we're able to get the product, the software, a lot cheaper, and that is seemingly what is happening now.
So we have recently added it, and it is a fairly inexpensive software compared to what it would have been a couple of years ago. So I think it is a growing trend, and I think most banks our size, and many of them much smaller than ours, will be seeing that as a staple product.
FIELD: Mike, where do you see the customer demand coming from primarily? Can you pin it to a particular demo?
JACOBSON: I would say it is primarily the younger group. I think that what we find -- and it is interesting when you really look at the demographics because, you know, I look at my own children who actually know what a checkbook is, but write very few checks and use everything on the debit card and of course, with the iPhones and so on, mobile banking really works well with what they are doing there. So, give them a debit card, and now give them mobile banking, and they don't have much use for a checkbook.
When you get to the older demographics, those are people that still want their checkbook, and I know there are some customers that don't even want a debit card because that is just too high-tech for them, and so generally speaking what we are finding is the real demographic would be that younger group.
FIELD: Now another topic, regulatory reform: We have had a lot of noise about that from the Treasury Secretary, from the House, the Senate, from every which way. Where do you see regulatory reform shaking out in this new year?
JACOBSON: Well, I think there will definitely be a bill. Obviously, the House has passed a bill that is being debated in the Senate now. My greatest concern and certainly that of the Association, the NBA and the ABA, is that the consumer financial protection agencies are a real problem for community banks. It is really a problem for all banks, but certainly for community banks and you know, there are so many exemptions out there. I mean right now they have exempted out all of the insurance companies, they have exempted out the foreign credit system, and a number of other business to get the support that they needed.
There seems to be a lot of confusion out there as to what happens to banks under $10 billion dollars in assets, and there is a trade association out there suggesting that they are exempt. We're really not exempt from the rule making of the CFPA if it is created, which I believe it will be. We are simply exempt from them directly coming in and being the primary regulator of those banks.
And so I don't see that as any kind of a major victory in terms of where we go with that agency. We are still going to be stuck with their rules, and that is going to create enough of a significant amount of new financial and regulatory burdens for banks of all sizes, and generally community banks have a disproportionate cost because we are less equipped with staffing to be able to do that. And so had there been a full exemption of community banks under $10 billion from the CFPA's rule making, I don't think you would see any community banks arguing with what that bill has produced or what is in the House bill.
My concern is that this bill is a bad bill as long at CFPA is still involved with it, and I think it is clear that the Administration and Congress want to see it in there, and I just don't think that is a good thing for community banks. And I think it will have a restraint on credit in that a lot of community banks already with the new RESPA rules have suggested they won't be originating mortgages anymore because they are not really equipped to do the escrows and the new requirements that are outlined by the fed's new RESPA regulations.
FIELD: Mike, one last question for you as the chair of the Association. As you look into the new year, what do you see as being the major issues for your state's institutions to deal with?
JACOBSON: Well, I would say the major issues are still probably seeing where the new regulations come in. This bill is not completed yet, and I think there will be a lot of--or a potential amendments that can be hung on the regulation restructuring bill, and so I think that is probably going to be the biggest thing that we are going to deal with on the front end of the year as we see where that comes to in terms of a conclusion and where it goes.
I think from there we need to continue to look at the fact that the FDIC fund will have to be rebuilt, and I think although it is backed by the full faith and credit of the United States government, we know that banks are the ones who fund it, and as the reserve levels go lower and now in theory negative when you take out what has been reserved for future failures, it is the banking industry that will have to repay and rebuild that fund and we all know that.
I think we are all recognizing that we are going to be faced with fairly large FDIC assessments for many years to come as we rebuild that fund. So the real question is how quickly will the economy recover, how costly will the new regulations be for us to deal with on top of the fact that we are going to have to rebuild the FDIC fund and try to get through some weakened financial statements of customers, as they have had to deal with the economic recession?
FIELD: Well, Mike, as always I appreciate your time and your insight, and I wish you the best in the New Year.
JACOBSON: Okay, thanks a lot.
FIELD: We have been talking with Mike Jacobson, the Chair of the Nebraska Bankers Association. For Information Security Media Group, I'm Tom Field. Thank you very much.