Spring flooding was on the minds of Gov. Kim Reynolds and Secretary of Agriculture Mike Naig as they updated bankers on conditions on the ground in southwestern Iowa during the 26th annual “Day with the Superintendent,” held April 18 in Des Moines. The event was hosted by the Iowa Division of Banking.
Flooding began March 13, and Gov. Reynolds said the state was able to secure a presidential disaster declaration within two days, a historical record. “It’s a testament to the people on the ground getting us the information we needed,” she said, adding that the state had just received $9 million from the U.S. Department of Transportation to start to get roads opened in flood-ravaged areas.
Gov. Reynolds said she has asked the state legislature to appropriate $25 million for infrastructure repairs and to accelerate housing improvements.
There have been 50 levees breached in Iowa this spring, she said. One was more than 70 feet deep and 500 feet wide, she said. With nearly 250 miles of levees impacted, 25,000 homes destroyed or having major damage, and more than 4,200 businesses affected, “we have a significant challenge ahead of us,” the Governor said.
“Our people and our communities are resilient and there is no doubt in my mind that we will recover as a state,” Gov. Reynolds added.
Sec. Naig recounted a recent visit to a John Deere dealership in Pacific Junction, Iowa, that had eight feet of water in its building. “The levees aren’t repaired and yet they’re making business decisions on how to serve their customers,” Naig said. “So there is a real urgency about those massive breaches.”
Naig said the debris field left behind as the floodwaters have receded is four to five miles wide. Reports indicate 1.2 million bushels of corn and 400,000 bushels of soybeans being stored in bins were destroyed by flooding. Even grain that has since dried has been adulterated and must be destroyed, Naig said. “There’s no coverage for those losses.”
The last time this part of Iowa saw flooding was in 2011, when climatologists were able to provide residents with a three to four-week notice. This year, the flooding occurred with less than three-days notice. “It’s a dire situation economically for our producers,” Naig said.
Whistlestop for FDIC chair
Jelena McWilliams, now 10 months into her job as chair of the FDIC, told Iowa bankers she has both the will and the vision to change things at the regulatory agency. Her first change was to flatten the organizational hierarchy and bring local decision-making to the regional directors. To that end, she’s started scheduling meetings with regional directors without their division directors present so she can hear “what’s going on without their bosses hearing,” she said.
When polling the audience on institution size, McWilliams seemed genuinely surprised that there was little to no representation in the room from banks in the $5 billion to $10 billion range.
“You are very small,” she said. “I think for a long time we have regulated you like you are much bigger.”
To her point, a banker from a $70 million, 11 person bank, pressed McWilliams about the problem of regulations based on asset thresholds.
“I don’t like numerical thresholds for regulation,” McWilliams said. “It’s an easy way to regulate, but it takes away your ability to be looked at based on your risk profile.”
No one in the room was there to disagree.
“Thresholds are what they are and we deal with them,” she said, adding that she’s empowering examination staff needs to look at institutions on a more individualized basis and use their “discretion.”
Acknowledging the competitive disadvantage community banks face in a market dominated by big banks, McWilliams offered empathy: “We can’t do a lot about industry consolidation because the economies of scale don’t work to your advantage,” she said. “You have to invest in IT and cybersecurity, both of which are very expensive. AML/BSA are very expensive. You have three or four different compliance regimes you have to invest in, almost as much as much larger banks, and those costs, you cannot spread them the same way as larger banks. So on a pure cost basis, you can’t compete.”
This competitive disadvantage is leading to industry consolidation, of course, and McWilliams recognizes it and wants to encourage a change to the regulatory framework and reduce the barrier of entry facing de novos. “We’re making the [de novo] process better for you,” she said, touting changes made to the application process and the agency response.
Finally, McWilliams defended the community bank leverage ratio — proposed at 9 percent — calling it “a clean ratio without too many caveats.”
Tracy Bergmann, chief examiner with IDoB said the top three regulatory hot buttons are legal lending limit violations with agricultural borrowers who are related and sharing land and equipment; liquidity issues, and cybersecurity.
On liquidity issues, Bergmann said bankers should expect examiners to look at:
- Limited balance sheet liquidity
- The bank’s reliance on non-core funding
- If the bank is at risk of falling below well capitalized
- Does it have asset quality problems.
“The more of those things you have, the higher the risk profile you have,” Bergmann said. “If you’re approaching or getting closer to 10 percent liquid assets to total assets (or below) you’re getting on our radar.”
A bank relying on 30 percent or more of non-core funding will also attract examiner attention, Bergmann said. The state does have banks with more than its fair share of problem borrowers, Bergmann said, without providing exact numbers. “Asset quality is still holding pretty well for the most part,” he added.
On cybersecurity, recent findings show audits aren’t being done by banks in a timely fashion, nor are audits covering new products and services or high risk areas. “A lot of people are putting in new products and services as they consider getting new technology out to their customers,” Bergmann said. “Some of that is just not being considered when you’re doing your audits.
“Also, disaster recovery and business continuity testing and training just hasn’t happened as frequently.”
Superintendent of Banking Ron Hansen said the IDoB will be conducting a review of the Iowa Banking Act, in order to update or modernize it to reflect changes to federal law. The Act’s 17 divisions have been broadly lumped into five categories and meetings have been scheduled.
Hansen encouraged bankers from the state’s 265 state-chartered institutions to participate in the scheduled sessions.