Week 1: How are local banks doing?

I recently reported (for ABC 6 News) that a local bank was given a “Cease and Desist” order by the FDIC. 

I didn’t have a good handle on what that meant – I knew it was not a good thing but didn’t know if it meant the bank was close to failing. 

Wanting to learn more about that and about what’s happening with our local banks, I was lucky enough to have two very smart local bankers agree to sit down with me to discuss the banking situation here, and how things work fundamentally.

I learned some things that I’ll share here.  

A “Cease and Desist” order does not mean a bank is failing, but it’s also not the first contact that’s been made between a bank and their regulators.

It’s a serious step, and one made well after regulators have “spotted issues.”  Still, it does not mean a bank is destined to fail.

Banks have their finances reviewed regularly; for example, Eastwood Bank gets reviewed every 18 months.

Banks pay into an FDIC insurance fund. 

It’s the pot of money in the federal treasury that’s designed to cover depositors’ losses. 

There’s plenty of money in the account when banks aren’t failing. 

But after about 100 bank failures in 2009 across the US, there’s more money coming out of the account than going into it. 

In early 2009 the FDIC requested a “special assessment” – a fee – and later this year banks will (likely) have to prepay 3 years of FDIC insurance to keep enough money in the account. 

This puts additional pressure on banks at a time when they’re already under pressure. 

Eastwood Bank President Paul Tieskoetter (pronounced teece-cutter) says FDIC wants to keep their financial issues internal; they don’t want taxpayers to have to bail out more banks. 

Tieskoetter and Merchant’s Bank President John Doyle say that yes – local community banks are stressed and have more loan losses on their balance sheets than is typical, but they will survive.

Most banks are under stress, but the types of stress varies depending on which market banks are in; and you can even spot some differences just among banks here, in southern Minnesota.

In Rochester: From 2002 to 2007, Rochester was expanding.
There is more residential and commercial development done in Rochester than other local communities. 

The problem right now is that since 2007, developers have built homes that haven’t sold and commercial space that isn’t being rented. 

That means revenue is not coming in for the developers – which can cause trickle-down problems for the banks. 

In St. Charles:  Many of the bank loans in rural towns like St. Charles are Agri-business: farm loans. 

Farmers are under a lot of financial stress right now, too – and that tracks down to banks.

In Winona: Most loans here are commercial business loans, construction loans and things like auto and boat loans. 

There’s not as much commercial or residential development in Winona as there is in Rochester.

Tieskoetter and Doyle say Rochester is blessed with stellar employers – (Mayo Clinic and IBM) because these businesses fuel other new businesses and residential developments. 

They also say the diversity of southeast Minnesota businesses benefit the banks because they don’t have all their financial eggs in one basket.

When asked hypothetically…had they been able to foresee 3 years ago that the economy would tank – would they have done things differently?  They say no. 

They say they were being prudent back then. 

A fun fact that you may not know about: Where does the money YOU borrow for your home mortgage come from?  NOT HERE. 

These two bankers say more than 90% of your home mortgage money comes from “the secondary market”  The secondary market is, for the most part – investors who are putting money into investments that fund mortgages, which are backed up by Fannie Mae and Freddie Mac. 

Both Tieskoetter and Doyle are quick to point how important Fannie Mae and Freddie Mac are, to YOUR ability to get great terms on your home mortgages:

That’s because local banks (for instance Eastwood or Merchant’s Bank) couldn’t offer mortgage holders long-term, low-interest rate mortgages, because they’d get burned when interest rates took a hike. 

They say mortgages funded by investors and backed by Fannie Mae and Freddie Mac are largely responsible for the type of 30-year, 5-6% fixed rate mortgages people have become accustomed to.

Doyle and Tieskoetter say right now the failing banks have some things in common. 

Their loan portfolios are not as good in quality, some banks are not diverse enough and some didn’t maintain high enough capital levels. 

It’s just like with individuals, they say. 

If two people get laid off, and one has no savings and the other has a year’s salary – the one with the year’s salary will survive better. 

Technology has made it easier for regulators to keep closer tabs and respond quicker now to internal bank problems than they used to be able to. 

They say this is a good thing. 

Interesting tidbit: If banks are shut down, it happens on Fridays.

That gives the new bank time to switch everything to their system, so customers have a seamless transition from one bank to the next.

FDIC insurance means your money is safe. 

As long as you have no more than $250,000 in any one FDIC-insured bank, you’re fine. 

If you’ve got concerns or questions, go visit your banker, they can help.

Paul Tieskoetter (pronounced teece-cutter) is President of Eastwood Bank in Rochester.  Eastwood is a Minnesota bank.

John Doyle is President of Merchant’s Bank in Rochester.  Merchant’s Bank is a national bank.

Here’s some audio clips:

1 minute: The money you’ve borrowed for your mortgage is (90+ % of the time) NOT local.  John Doyle, Merchant’s Bank – Rochester, MN

1-minute: Why it’s important, and a good thing, that the money in your mortgage IS NOT local.  Paul Tieskoetter, President, Merchant’s Bank, Rochester, MN. 

Tieskoetter about community banks.

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