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Consumer Credit Up 7.5 Percent in 4th Quarter 2011 

The Federal Reserve released consumer credit statistics for the end of 2011 last Tuesday showing that U.S. consumers are opening up their wallets again.

Monthly debt rose 9.3% in December after a 9.9% increase in November. In fact, November’s jump was the largest increase in a decade.

U.S. consumers diligently  reigned in their debt, particularly credit card debt, after the financial scare of 2008. But old habits die hard as we see that trend reversing in 2011.

Much of this new credit, however, is not being granted by banks. While consumers are expressing a  bout of confidence, banks are proceeding cautiously.

The nation’s banks are beginning to turn the corner and lend (which bodes well for CD investors down the line) but the largest increase in consumer lending came from good old Uncle Sam.

At the end of 2007, the federal government held less than $100 billion in consumer debt. By the end of 2011, that figure was over $425 billion.

The government does not get involved with credit cards or other revolving types of credit, but it has increased its holdings of non-revolving consumer debt (i.e. Student Loans) by over 300% in the past four years.

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From: Jumbo Rate News 29:06 - February 6, 2012

Housing Market Showing Signs of Improvement 

We know it’s difficult to grasp  that the economy is getting better when all you hear about is layoffs and bankruptcies. We'd  like spread some good news.

We took a look at the ten banks with the largest dollar volume of residential real estate loans to see how they are faring as compared to last year. Overall delinquent loans have fallen nearly 20% at those banks.

Not only have total delinquencies declined, bad  single family debt has decreased from last year as well. A backlog in paperwork and a moratorium on foreclosures may have helped the OREO go down. But the fact that delinquency levels have also declined, in spite of the slower-than-normal route to repossession, indicates that problems in the single family home loan sector are indeed on the mend.

The chart below denotes the actual dollar amount of bad loans. When comparing percentages: the percent of delinquent single family loans has decreased from 10.8% to 10.4% while repos have gone down from 0.48% to 0.37% at these ten banks. No matter how you slice it, the housing market is showing improvement.

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From: Jumbo Rate News 29:05 - January 30, 2012

Interest Rates to Remain Low Through 2014 

The Federal Reserve’s new policy of transparency makes its projections for interest rates painfully clear. The Fed Funds rate will stay where it is (at near zero) until the end of 2014. That’s 18 months longer than  previously projected.

The Fed also reduced its economic growth projections for this year. It now expects the economy to expand between  2.2% and 2.7% - down from 2.5%-2.9% in November.

This lowering of growth expectations is why the fed wants people (and businesses)  to know that borrowing costs will remain low for an extended period but it really doesn’t make any sense. What we need is borrowing to happen now, but nothing the Fed can do will make that happen.

So, they use the only tool they have. They keep rates low and make savers and people on fixed incomes suffer. Nice work, Ben.

Barbara Rehm took on the subject in the American Banker last Wednesday and hit the nail on the head when she said, “Three-plus years of ultralow rates hasn’t exactly jolted the economy to life.”

She goes on to talk about the effect of low rates on interest margins, which is certainly a concern. If banks feel too much pressure, layoffs and other cost-cutting measures may need to be taken. Looking at those margins in a historical context, it really depends on the bank size.

September 30, 2011: net interest margin at all insured banks was 3.56%; three years earlier (9/30/2008) it was 3.37%; three years before that (9/30/2005) it was 3.50%.

The margin for banks with less than $100 million in assets, however, really took a hit: from 4.25% at 9/30/2005, to 3.98% at 9/30/2008, and now just 3.94%. These are the banks most at risk. 

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From: Jumbo Rate News 29:04 - January 23, 2012

 Little by Little,  Piece by Piece 

Talking about doing things piecemeal. Proposed new capital-adequacy stress tests will be required for all state-chartered banks that are not members of the federal reserve and state chartered savings associations that have total consolidated assets of $10 billion or greater; all 23 of them.

Stress Test: “A process to assess the potential impact of economic and financial conditions on the consolidated earnings, losses and capital of the bank over a set planning horizon, taking into account the current condition of the bank and its risks, exposures, strategies, and activities.”

It’s a good idea to conduct stress tests—and we’re not just saying that because we’ve essentially been doing that exact thing since 1983. The difference is, we do it quarterly while the FDIC is only going to require them once a year (based on September data).

The covered banks would be required, as per Dodd-Frank, to publish a summary of the results for the public by early April each year. These summaries will most likely be published on the banks’ website but don’t have to be; as long as they are “reasonably accessible” to the public.

This new proposed rule comes right as a Final Rule is approved for banks with $50 billion or more in total assets. These 37 banks will have to submit periodic contingency plans to the FDIC to assist in their orderly resolution in the event of failure.

This final rule, effective April 1, 2012, is a complement to one approved last September that requires certain systemically important non-banks to prepare their own resolution plans, often referred to as living wills. So, little by little, piece by piece, regulators are covering the basic requirements set forth in Dodd-Frank aiming at preventing another crisis down the line. 

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From: Jumbo Rate News 29:03 - January 17, 2012

ABA Reports Consumer Delinquencies Fall. Yes, BUT... 

The American Bankers Association (ABA) reports that consumer delinquencies were down in most categories based on September 30, 2011 financial data. That’s true. But  most still have a long way to go to get to pre-crisis levels.

Credit card loans in particular have improved dramatically since the end of 2010:

Credit card charge-offs were cut nearly in half—from 10.08% at 12/31/2010 to 5.83% at 9/30/2011. However, if you compare to the charge—off rate of 5.44% at year-end 2008, we still have room for improvement.

Taking credit cards a step further, we do see signs of hope for the future. Those that are 30-89 days past due are now at just 1.71%; so are those that are 90 days or more past due (noncurrent). At year-end 2010, those numbers were 1.93% and 2.21%, respectively. That indicates we now have fewer problems lurking for future quarters. Compare that to the higher numbers of 2.88% past due and 2.73% noncurrent at 12/31/2008.

Single family housing has not improved as much as we would like. With 2.55% of 1-4 family housing loans past due and 9.07% noncurrent, the fact that only 1.25% have been charged off speaks more to the problems facing the mortgage originators than it does to the actual loan quality. We can still see some sign of progress, however, in the fact that the past dues have improved from 2.84% at 12/31/2010 and from 3.27% at year-end 2008.

Noncurrent loans, those that are 90 days or more past due but have not yet been foreclosed, have just recently begun to see signs of decline. It was 4.64% at the end of 2008; 9.44% at the end of 2010 and now stands at 9.07%.

Percent of Loans 30-89 Days Past Due          

Percent of Loans Noncurrent

Percent of Loans Charged-Off 

Loans Outstanding (in billions) 

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From: Jumbo Rate News 29:02 - January 9, 2012

Choosing Battles Proves Tricky Business 

While a controversial appointment to head the CFPB (Consumer Financial Protection Bureau) stole headlines this week, a much less publicized regulatory issue raised our dander. A Wall Street Journal article on January 3^rd leads the reader to believe that the FDIC is sleeping on the job by leaving faltering banks open much longer than they would have in the past. We disagree.

The FDIC is mandated to resolve banks in the least costly manner possible. Sometimes that means closing the bank and selling it to the highest bidder. Other times it means allowing the bank enough time to solve its own problems or find a suitable acquirer on its own. In times of economic decline, the first option is more likely simply because it is more difficult to find help when everyone is feeling pinched. But in times of recovery, even limited recovery such as we have now, it is prudent to go with option two if at all possible.

The article uses a six month old Government Accountability Office (GAO) report that was designed to assess the effectiveness of the Prompt Corrective Action Rule (PCA) to substantiate its claims. The GAO report does find that PCAs are inconsistent and need to be improved. We must agree with that assessment. However, one cannot automatically project the same assessment onto failures, especially knowing that PCAs are usually a last-ditch effort to save the bank. In fact, many failures take place without a PCA being in effect.

Let’s look at the most recent PCA made public by the FDIC: First Capital Bank, OK has been rated Zero-Stars for four consecutive quarters and is Significantly Undercapitalized by regulatory standards. The FDIC issued its notice of intent to issue a PCA to the bank on September 30, 2011 to which the bank responded on October 14^th, two weeks later. There was nothing unusual in the order. It gives the bank 30 days from the date it was signed, November 14^th, to raise enough capital to be deemed “Adequately Capitalized”. The thirty days have now elapsed and there’s a good likelihood that the bank will fail.

 Whether or not that’s the case, however, we submit that the likelihood has not changed over the past three years as the WSJ article suggests. Here’s why:

At year-end 2009 there were 44 critically undercapitalized banks: 88.6% failed. Of those that did not fail, one merged without assistance and four still exist – two are operating at well-capitalized levels and one is adequately capitalized. Only one remains undercapitalized today. In  addition,  103  undercapitalized banks that  were  not critically undercapitalized were taken over, closed and resolved by regulators.

The following year (12/31/2010) 34 banks were considered critically undercapitalized. Of those, 88.2% failed. Again, one merged on its own. Of the three that remain, one is now well-capitalized. On the other hand, 51 banks with capital below the adequately capitalized threshold and above the critically undercapitalized line were also shut down. As of September 30, 2011, the most recent data available, there were 27 critically undercapitalized banks. Over half have already failed as well as three that were categorized significantly undercapitalized. These numbers do not suggest leniency or hesitation on the part of regulators. Rather, they support the GAO findings that PCA directives should not be based solely on capital levels. It also underlies BauerFinancial’s long held doctrine that looking solely at capital levels is insufficient in assessing a financial institution.

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From: Jumbo Rate News 29:01 - January 3, 2012

Passage July '10, Propostals Dec. '11, Implementation ??. The world of banking was packed full of excitement in 2011. We witnessed Corporate Credit Union consolidations, grassroots attempts to shun big banks, a permanent increase in deposit insurance coverage to $250,000, and an alleged new era of openness at the Fed. But no change in the Fed Funds rate. It still stands at between zero and 1/4%, the same place it’s been for the past three years.

Arguably though, the most significant event in the world of banking in 2011 is still unfolding and will continue to do so well into 2012 and beyond. We are referring to Section 165 of the Dodd-Frank Act which seeks to minimize risks to the U.S. financial system from large interconnected financial institutions. It took a full year and a half to get a proposal written down and the Federal Reserve Board is now seeking comments.

The proposal includes rules to implement the requirements under section 165 related to (i) risk-based capital and leverage; (ii) liquidity; (iii) single-counterparty credit limits; (iv) overall risk management and risk committees; (v) stress tests; and (vi) a debt-to-equity limit for covered companies that the Council has determined pose a grave threat to financial stability. The proposal also includes rules to implement the early remediation requirements in section 166 of the Act related to establishing measures of financial condition and remediation requirements that increase in stringency as the financial condition of a covered company declines.

The proposal covers bank holding companies with total consolidated assets of $50 billion or more (including  any foreign organizations that have U.S. banking operations as long as their consolidated assets total $50 billion or more.) 

Under the proposal, these companies will have to demonstrate to the Board that they have “robust, forward-looking capital planning processes that account for their unique risks and that permit continued operations during times of economic and financial stress”. To do this, the board proposes a two phase approach. Phase 1: develop an annual capital plan that includes a tier 1 risk-based capital ratio equal to or greater than 5% even under stressed conditions.

(For the record, the average tier 1 risk-based capital ratio at U.S. banks as of September 30, 2011 was 13.135%. The average for largest ten U.S. banks was 11.487%. Even the banks on Bauer’s Troubled and Problematic Bank Report average 10.304%. We don’t see how 5% is going to demonstrate a robust anything.)

The second phase will be based on Basel III requirements which is where the proposal leads in its multi-phased liquidity requirements as well. Basel III liquidity rules are currently being observed to assess potential impact of the rules on various markets. They include a Liquidity Coverage Ratio (LCR) to assess cash out-flows for a 30 day period under a stress scenario and a Net Stable Funding Ratio (NSFR) to do the same for twelve months.

Perhaps the most important part of the proposal, however, is that it limits these large companies from having credit exposure to any unaffiliated company that exceeds 25% of its capital stock. If you’d like to learn more, visit http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20111220a1.pdf.

From: Jumbo Rate News 28:48 - December 19, 2011

It’s a Small World After All.

As banks in the European Union find themselves desperately in need of fresh capital, the stringent capital requirements at U.S. banks that were once thought to be archaic are now paying off. While capital isn’t everything, it does provide a much needed cushion in times of financial woes and uncertainty.

While you may think the EU banks are relegated to the EU and can’t touch us here, you are only partially correct. Correct in that, regardless of who owns a bank, if it is chartered in the U.S. and carries FDIC insurance, the bank is subject to the  same rules as any other U.S. bank. These rules  provide  barriers to protect insured depositors, regardless of the parent’s position.

The December 9th American Banker listed several EU lenders  in need of a capital boost. At least eight U.S. banks are owned by these foreign lenders. Some you would recognize right away by the name but others may surprise you. For example: 

Banco Santander, S.A., of Spain (parent of   ****Sovereign Bank, Wilmington, DE), reportedly needs to raise 15.3 € billion .

Banco Bilbao Vizcaya Argentaria, S.A., of Spain needs 6.3 €  billion. It owns  ***½ Compass Bank, Birmingham, AL and ***Banco Bilbao Vizcaya Argentaria, Puerto Rico.

BNP Paribas, Paris, France, the owner of both ***½ Bank of the West, San Francisco and First Hawaiian, Honolulu, is short 1.5  €  billion. 

And, of course Deutsche Bank is the parent of two namesake banks in the U.S....both 5-Stars.  

From: Jumbo Rate News 28:47 - December 12, 2011

FDIC Budget Confirms Brighter Future Expected

We reported last week that our Troubled and Problematic Bank Report had shrunk to 844 institutions. What we failed to mention was that, probably for the first time ever, Bauer’s list has the same number of banks as the FDIC’s “Problem List”.

As you know, Bauer’s list is generally larger than the FDIC’s due to the forward trend analysis we perform. The fact that this is no longer the case is further evidence that the worst of the financial crisis is behind us.

The following compares the five states that currently have the highest percentage of problem banks and how that list has changed since a year ago.

State	Sept. '11	State	Sept. '10
GA	38.4%	AZ	45.2%
FL	37.3%	GA	42.1%
AZ	31.3%	FL	38.4%
SC	28.8%	WA	36.6%
PR	28.6%	NV	33.3%

Recommended Banks (those rated 5-Stars or 4-Stars) showed similar improvements:

State	Sept. '11	State	Sept. '10
NH	91.3%	NH	78.5%
VT	85.7%	VT	81.0%
LA	83.3%	LA	81.5%
AK	83.3%	NE	85.7%
NE	81.9%	WV	78.5%

So, it should come as no surprise that the FDIC’s budget proposal for 2012 is 15.4% lower than  this year’s budget.

The FDIC will reduce staff by 565. Over one-third of the 2012 staff will be temporary workers hired to assist with bank closures, asset sales and other follow-up work needed when a bank fails.

There were 157 bank failures in 2010 and so far “only” 90 in 2011. That number is clearly expected to keep dropping along with the operating budget. 

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From: Jumbo Rate News 28:46 - December 5, 2011

Third Quarter Fins Looking Up, Four Banks Re-Qualify

U.S. banks reported net income of $35.5 billion in the third calendar quarter; that’s the highest since the second quarter of 2007. What’s more, the industry’s average ROA is finally back over 1% (1.03% to be exact.) Compare that to 0.85% last quarter or 0.72% a year ago.

The percentage of banks earning Bauer’s recommended ratings of 5-Stars or 4-Stars continues to rise as the percentage on our Troubled and Problematic Report continues to decline. Over  42% of U.S. banks have earned our highest rating with the latest data; 63½% are recommended. The last time we had percentages that high was the first quarter of 2008. Currently, 844 banks are rated 2-Stars or below (less than 11½% of the industry).

We wish we could say that would translate into higher CD rates, but it won’t. In fact, with all the turmoil in overseas markets more money is flowing into U.S. banks that were already flush with deposits. Eventually, they will start lending again. Until then, the CD rate outlook remains dismal.

From: Jumbo Rate News 28:45 - November 21, 2011

How Much Will Your Turkey Dinner Cost This Year?

If you haven’t started shopping for it yet, you may be in for quite a surprise.

If you follow the financial news, you may have noticed recent headlines that the Urban Consumer Price Index (CPI-U) declined slightly in October. The media are reveling in this 0.1% drop since it’s the first drop in four months and they are thirsting for good news. A closer look into the Labor Department however, reveals  that the all items index increased 3.5% over last year (unadjusted).

When we look just at food prices, there is no decline to be found. In fact overall food prices are up 4.7% over last year. While eating out has only increased 2.7%, putting food on the table at home has jumped 6.2% in the past 12 months.

Narrowing that even further, an informal survey by the American Farm Bureau Federation puts the price of a classic turkey dinner with all the trimmings up 13%  over last year. JRN will be taking next week off so we can digest both this news and our turkey dinners. Happy Thanksgiving!

From: Jumbo Rate News 28:44 - November 14, 2011

Social Media Making Big Fans for Small Banks, CUs

Now that Big Banks have alienated themselves from the general population, it will be interesting to see what rabbit they pull out of their hats next. Whether or not a debit fee was intended to repel small (i.e. unprofitable) customers, it surely was not intended to create the  backlash that it did. Social media is a powerful tool. We all know that now. The trick is to make it a friend rather than a foe. Now that Big Banks have done the latter, we are concerned about the pressures to their Net Interest Margins (NIM). 

We won’t be able to quantify the extent to which Bank Transfer Day affected Big Banks bottom lines until year-end data becomes available (early next year). However, we can take a look at their past NIMs in an attempt to justify the debit fees that initiated the runoff.

The net interest margin is the difference between interest earned on interest-bearing assets (loans and investments) and interest paid to depositors and other creditors, as a percentage of average earning assets. While it is one measure of profitability, it does not take into account fee income. If NIM goes down, banks will try to find a way to make money elsewhere. With no sign of a rise in lending rates, fee income was the natural choice.

At June 30, 2011 nine out of ten of the nation’s largest banks reported lower NIMs than at year-end 2010. Interestingly, the exception was Bank of America. Yet, Bank of America was the major impetus leading up to Bank Transfer Day. You may ask why it is more important for Big Banks to be profitable than for smaller banks.

Every bank wants to be profitable. The difference is in the business model. Big Banks have big stock-holders whose primary concern is dividend payments. Smaller banks’ stock-holders tend to be locals and therefore more concerned with the communities they serve.

As you can see from the graph, this community-centrism has paid off. The smallest banks in the nation (roughly 38% of the industry) have the highest NIM. Don’t pay too much attention to the black line indicating all banks; it is skewed due to the Big Banks.

Big Banks represent less than 2% by count but control 78% of the industry assets. We have always been big fans of small banks because of that commitments to their communities. Now it seems we have a lot more company.

From: Jumbo Rate News 28:43 - November 7, 2011

Mortgage Rates Don’t Matter if you Can’t Qualify

We came across a particularly ominous outlook recently, and  while we cannot substantiate it, it did give us fuel for thought.

First, consider this: Consumer confidence is at one of its lowest points since 1967 (aside from the worst months of 2008-09). When you combine high unemployment with flat wages and low consumer confidence, it should translate to lower consumer spending. That has not been the case.

The hypothesis we found suggested that instead of paying their mortgages, home-owners (if you can call them that) are spending that money on other things and living rent-free waiting for their homes to be taken back by the mortgager.

With unemployment still above 9%, winter closing in, consumers unable to refinance because they are under water, and a decidedly anti-bank attitude  burgeoning, this may indeed be a factor.

If so, we are setting ourselves up for yet another kind of housing bust. Now the Fed is predicting that unemployment will remain high longer that it previously thought—maybe 8.6% by the end of next year and 8% in 2013.  And no matter how much the Fed says it still has tools in its box to help spur the economy, we doubt they have anything that would counteract this.

The Fed’s latest move, Operation Twist, hasn’t had the desired effect. At least not yet. (See page 2.) QE3 is on the table but would face sharp opposition; its efficacy is also questionable.

The answers may lay outside of the Fed. For example, the Federal Housing Finance Agency’s (FHFA) recently announced expansion of the Home Affordable Refinance  Program (HARP) shows some promise. If handled judiciously, it could be a way to help homeowners get out from under.     Without job creation, however, any improvement will be limited.

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From: Jumbo Rate News 28:42 - October 31, 2011

Colorado in Second Place for % of Failed Banks in 2011

Three former JRN listees from Georgia have been shut down in the past two weeks: Community Capital Bank, Jonesboro (dropped JRN24:35), Decatur First Bank, Decatur (dropped JRN 26:11) and Piedmont Community Bank, Gray (dropped JRN 25:47). All were rated zero-stars long before they were closed. So far this year, Georgia has lost over 8% of its banks to closure; 22 of the 266 Georgia banks that existed at year-end 2010 have failed.

It may surprise you to find out that Colorado has lost the second highest percentage of banks this year with 5.1% as six of its 117 banks were shut down by regulators through October 27th. Three of the six banks closed had in excess of $1 billion in assets. Only four other banks of that size have closed this year. It is no wonder that the state of Colorado wanted to keep zero-star Community Banks of Colorado, Greenwood Village up and running (American Banker October 24, 2011).

The Federal Reserve issued a Prompt Corrective Action (PCA) against Community Banks early this year. According to the PCA, the bank had 90 days to raise enough capital to make it “Adequately Capitalized”. (At the time Community Banks was “Significantly Undercapitalized”.) The bank continued to deteriorate and became “Critically Undercapitalized” on July 29th.

By law, once a bank becomes “Critically Undercapitalized” it can remain that way for a maximum of 90 days. Theoretically, the troubled bank had until October 29th to find a solution. Which it did. On August 8th NBH Holdings of Boston, MA agreed to buy 16 branches from the struggling bank. That would conceivably have been enough to keep it afloat. Regulators did not approve the transaction. Instead, two months later, they closed the bank and sold all 41 of its branches to the same NBH Holdings of Boston.

Regulators knew they had an interested buyer so speculation abounds that other factors may have come into play. That’s not for us to say. All we know is that the state of Colorado did not want to lose another bank and believed this one could be salvaged. The Federal Reserve thought otherwise and, as the primary regulator, shut the bank down.

Based on June 30th financial data, 34 U.S. banks were “Critically Undercapitalized”; all but four have been closed. We are often asked what constitutes a “Well-Capitalized” bank and what makes a bank “Critically Undercapitalized”. The Federal Reserve Bank of Saint Louis put together this nice little chart (below). But remember, capital is NOT everything.

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From: Jumbo Rate News 28:41- October 24, 2011

Wildfire Set to Grassroots Banking

While we won’t have hard evidence for several months, a strong case can already be made that consumers are benefitting in new ways from the strong roots of our nation’s community banks and credit unions.

A grassroots movement has declared November 5th to be “Move your Money Day” or “Bank Transfer Day”. The idea is to encourage consumers to “move their money” out of Big Banks and into smaller banks and/or credit unions.

Rep. Brad Miller (D-NC), has introduced a bill intended to make switching banks easier (Freedom and Mobility in Banking Act). Some smaller banks and credit unions are having a heyday with a certain Big Bank’s proposed $5 monthly fee on debit cards by  paying $5 a month for new accounts.

A report released this week by the Pew Health Group highlights the significance of the fee issue in retaining customers. The group reports that 32% of the “newly unbanked” surveyed cite “unexpected and unexplained fees” as the reason for their departure.

Given the grassroots discussions, we thought we would revisit some quotes published in our May 1998 edition of Bauer’s Community Bank Advocate:

“Bigger is not always better, bigger is just bigger”, Warren Buffett.

“Bigger means bigger risks”, Standard & Poor’s analysts describing mega-banks.

“I don’t think bigness is a strategy”, Douglas A. Warner then-chairman/CEO of J.P. Morgan & Co.

And our favorite, “Smallness is a virtue, too”, George W. Hamlin, President, Canandaigua National Bank, NY. New Bank Fees Taking Shape

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The Incredible Shrinking Banking Industry

Three years ago, there were 8,446 U.S. banks. At June 30, 2011, that number was down by almost 1,000—to 7,487. And it’s no wonder. In 2009, there were 140 FDIC-insured bank failures. Compare that to just 31 new charters. That had been the smallest annual total since 1942—67 years earlier.

Last year, 157 banks failed; only 11 new reporting banks were chartered. That was the smallest annual total in the FDIC’s 77 year history… until now. So far there have been 76 bank failures this year, while only three new reporting banks have been chartered to date... and none of their own volition. In each case,  the new charter was created to assist the FDIC in resolving failing banks.

The chart shows trends over the past several years. No wonder  the industry is shrinking.

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From: Jumbo Rate News 28:39- October 11, 2011

The Incredible Shrinking Corporate CU System

Ten years ago there were 35 active Corporate Credit Unions; five years ago that number was down to 31. It is now down  to 26 and continues to shrink:

January 2011: Corporate America CU and Louisiana Corporate began talking merger. Although there has not been much news of it lately, the plan is moving forward.

5/16/11: Volunteer Corporate FCU and West Virginia Corp. FCU announced merger plans. The timeline is not yet clear.

8/31/11: After successfully raising $71 million  in new capital, Members United was reorganized and renamed. It is now Alloya Corporate FCU.

9/6/11: Georgia Corporate and Southwest Bridge Corporate merged to become Catalyst Corporate Credit Union.

9/13/11: Southeast Corporate FCU announced it will merge with Corporate One FCU of OH.

9/16/11:Treasure State Corporate CU and Kansas Corporate CU announced their intention to merge.

10/17/11: Ballots will be mailed to VACORP members to vote on a proposed merger with Mid-Atlantic Corporate. NCUA approval is expected on October 27th with completion by March 31, 2012.

With all of the consolidation, it’s no wonder many WesCorp members have not rushed to join another Corporate. No telling how many will be left by the time WesCorp is laid to rest.

NCUA held meetings October 3rd with potential bidders for both WesCorp and U.S. Central. Their hope is to find buyers willing to absorb the entire operations... not be an easy task in the best of times. WesCorp’s  greatest expense, its fixed rate CDs, are now being redeemed.

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From: Jumbo Rate News 28:38- October 3, 2011

New Bank Fees Taking Shape

We said it: “People love their debit cards! With direct deposit and a debit card there is little need to carry cash anymore. Yet, most consumers are unaware of the legislation that could change their debit card habits for good.”    -JRN 28:20 May 23, 2011

We warned that in its effort to protect consumers and retailers by limiting the amount that banks can charge to use their debit  cards, the “Durbin Rule”, (part of the Dodd-Frank Act) could end up on our dubious list of “Legislation with Unintended Consequences”. Now, with Bank of America’s announcement that it will begin charging $5 per month to anyone who uses their debit card for purchases, that seems to have come to fruition.

Banks need their fee income, and one way or another, they will find a way to get it. Bank of America was an early critic of the Durbin rule so it comes as no surprise that it is among the first to find a way around it.

By limiting the amount that Big Banks (those over $10 billion in assets) can charge for debit card transactions, Bank of America estimated that the Durbin Rule could cost it as much as $2.6 billion per year in fee income. To make up for this loss, a $5 monthly fee will be assessed ($60 per year) per debit card user.

Other banks are sure to follow suit. So how can you avoid the fees? One way is to avoid banking at the Big Banks. As of June 30, 2011 there were only 106 U.S. banks with more than $10 billion in assets, the other 7,300 U.S. banks are exempt from the Durbin Rule. (The 106 are listed on page 2 of this week's issue.)

While these 106 may be the first to assess new fees, through debit fees or other avenues,  smaller banks (and credit unions)  could join in as well. Since they are exempt from the Durbin Rule, however, fees at smaller banks are apt to be less extreme.

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From: Jumbo Rate News 28:37- September 26, 2011

Twisted Logic at the Fed 

The Federal Reserve somehow believes that lowering mortgage rates will help would-be home-buyers overcome the fact they are unemployed. At least that’s what its latest move would have us think.

Since low short term interest rates have not been enough to spur loan demand, let’s sell $400 billion of short term treasuries  and reinvest them in long term treasuries. Theoretically, this greater demand will drive down the price of those long term securities, which will then lead to lower mortgage rates.

This was the premise of “Operation Twist” as it was first dubbed in the early 1960s. And it’s the premise again today. We see several problems with this tactic: 

1)  Unemployment is over 9%. It doesn't matter how low mortgage rates are pushed, if you don’t have a job, you aren’t going to get a mortgage. And 9% doesn’t even count all those people who have stopped looking or are underemployed. The real unemployment rate could be as much as double that. That’s a huge chunk of the population that won’t be affected by any amount of twisting maturity dates.

2) The Federal Reserve is still paying banks to keep their reserves. If banks can make as much on their investment by doing nothing and leaving it on deposit at the Fed, they have no incentive to go through the trouble or risk of lending it. So when talking about what tools the fed may or may not have left in its toolbox, this is a mighty tool that seems to have been forgotten.

3) Keeping rates artificially low, like any price-fixing, has risks of its own. In this case, seniors (and anyone else who depends on  interest income to survive) will suffer. As Jumbo CD investors, you already know how difficult it is. Staying ahead of inflation has become a distant memory, let alone actually earning money for  letting a bank use it. If they don’t want it, the exercise becomes counterproductive.

4) But our biggest problem with “Operation Twist” is that its success in the early 1960’s was questionable at best. The exercise did flatten the yield curve and if that had been the ultimate goal, it would have been successful. The problem was that it flattened it by raising short-term interest rates. It did nothing to lower long term rates.

In 2002, our esteemed Fed Chairman, Dr. Ben Bernanke honored the great economist Milton Friedman at his 90th birthday. In his remarks, Bernanke referred back to Friedman’s works which concluded that the Great Depression (or Great Contraction as Friedman called it) was “the product of the nation’s monetary mechanism gone wrong”.

Bernanke summed up his take on Friedman’s work:

“monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman’s words, a ‘stable monetary background’ —- for example as reflected in low and stable inflation.

...You’re right, we did it. We’re very sorry. But thanks to you (Milton Friedman), we won’t do it again.”

We would invite Dr. Bernanke to look back at these words and we pray he still means them.

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From: Jumbo Rate News 28:36- September 19, 2011

The State of Banking by the Numbers 

The latest star-ratings, based on June 30, 2011 financial data, show the highest percentage of top rated banks since September 30, 2007 with 40.7% of the nation’s banks earning Bauer’s highest 5-Star rating! The percentage of recommended banks (those rated either 5-Stars or 4-Stars) is now at 62% of the industry. These numbers indicate that we are definitely headed in the right direction.

At the other end of the spectrum, the banks on Bauer’s Troubled and Problematic Bank Report (i.e. rated 2-Stars or below) still represent over 12% of the banking industry. Currently at 902 institutions, this category is also showing improvement. In fact, the last time we had this few banks on the Troubled & Problematic Report was the first quarter of 2009.

While healthy banks are showing improvement in everything from capital ratios to delinquent loan levels and profitability, much of the headway is attributable to the large number of struggling banks that have failed and are no longer engorging the Troubled and Problematic (T&P) Report.

The banking industry in the U.S. has contracted by 815 institutions in the 2½ year period ranging from year-end 2008 to June 30, 2011. Of that contraction, 345 were failures. Removing that many banks from the T&P status (and another 23 that have failed since June 30th) is bound to skew things a bit.

At 40.3%, the state of Florida now has the dubious distinction of having the highest percentage of banks still on the T&P. A year ago, that honor went to Arizona at 42.9%. Last quarter it was a tie between Arizona and Georgia,  which each had 40.5%. Regulators have been working diligently to find suitable acquirers to resolve the lowest rated institutions. In fact, since year-end 2009, 65 banks have failed in the state of Georgia alone. Another 54 have failed in Florida and while only 11 failed in Arizona during that time-frame, Arizona started off with very few (57) home grown banks to begin with. It is now down to 35.

Vermont and Alaska are the only two states not represented on T&P at all. They are also very small in terms of the number of banks headquartered there (Vermont-14; Alaska-6). But they still deserve props. Neither has seen a bank fail in over a decade.

Six states have greater than 80% of their banks listed on our Recommended Bank Report (rated either 5-Stars or 4-Stars). New Hampshire has the highest percentage at 91.3% followed by Vermont-85.7%, Louisiana-83.7%, Nebraska-81.9%, Iowa-81.5% and North Dakota-80.4%.

Puerto Rico has no banks rated highly enough to be on the Recommended Report. In addition to Arizona, Florida and Georgia, the only other state with less than 30% of its banks on our recommended list is Oregon at 26.5%. That’s down from 30.6% a year ago.

Two other states caught our eye when comparing last June to this June:

California has made considerable progress. Its recommended percent has gone up from 34.1% to 40.8% while its T&P has gone down from 21.2% to 17.2%.

North Carolina is headed the other direction. Its Recommended went down from 43.7% a year ago to 35.4% and its T&P went up from 16.5% to 22.2% during the year.  

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From: Jumbo Rate News 28:34 - September 26, 2011

Does Barney Frank Read JRN? 

We can’t say for sure; there were reportedly at least 50 other organizations that voiced objections to the Capital One acquisition of ING. But just three days after our story was published (JRN 28:31), Rep. Frank (D-MA) called for more consideration of the deal, specifically regarding systemic risk. The Federal Reserve seems to be listening.

Three public meetings will be held on the transaction, September 20th and 27th in Washington DC and Chicago, respectively, then October 5th in San Francisco; the comment period has been extended through October 12th.

The hearings will focus on whether benefits to the public (greater convenience, increased competition, gains in efficiency)  will outweigh negatives (undue concentration of resources, decreased or unfair competition, conflicts of interest, unsound banking practices, and/or risk to the financial system).

Both are online banks so the convenience factor is moot. Competition will be decreased in areas of both deposit gathering and lending. And as far as gains in efficiency, let’s just say there are limits to economies of scale. With nearly $200 billion  in total assets, Capital One Financial is already the 13th largest bank holding company in the nation.  Gaining efficiency beyond this point would be difficult.

That being said, unless there is a tremendous public outcry, we expect the transaction will be approved. Not because it makes sense but because the Fed has already given its unofficial nod. Then we’ll have one fewer bank to list on our rate pages. 

Credit Card Delinquency Rates Down, But...

TransUnion, one of the Big Three credit bureaus, reported on Tuesday, August 16, 2011 that credit card delinquencies at U.S. households have hit a 17-year low.

Ezra Becker, vice president of research and consulting in TransUnion’s financial services division, cites the recovering economy as contributing only indirectly to the phenomena. More important factors, according to Becker, are:

-Consumers tightening their spending and using credit cards more responsibly;

-Many delinquent accounts have already been charged-off; and

-Lenders are being more  conservative in their underwriting.

From where we sit, we are not so sure. Our data doesn’t track household spending, but the trends at federally insured banks and thrifts lead us to some different conclusions.

Overall lending at U.S. banks and thrifts has decreased. That’s for sure. In the two year period from year-end 2008 to year-end 2010, overall outstanding loans at the nations’ FDIC-insured institutions fell by $500 billion—from $7.880 trillion to $7.378 trillion. Part of that is a result of tighter underwriting, but not all.

When we break out credit card debt we see a different story. Many people needed to use credit cards to help them through those rough two years. As a result, outstanding credit card debt increased from $444.7 billion at year-end 2008 to over $700 billion at year-end 2010. At March 31, 2011 that number was down to $663.2 billion but that’s still almost 150% higher than at the height of the financial crisis.

So, while it’s great that a lower percentage of credit card loans are delinquent, the dollar value of those that are 90 days or more past due is higher than it was two years ago ($13.6 billion at 3/31/2011 as opposed to $12.1 billion at 12/31/2008).

The percentage of credit card loans that were 30-89 days past due peaked in the third quarter of 2009. Those noncurrent (i.e. 90 days or more past due or non- accruing) peaked the following quarter. But look at the charge-offs. Credit card loans that banks have given hope of collecting on peaked at over 13% in the first quarter of 2010 at $94 billion and still remained high at 6.7% or $44.4 billion at March 31, 2011.