Stability, Resilience, Adaptation and Keeping Customers First

Do you remember when the New Orleans Hornets were the Charlotte Hornets? Or the Utah Jazz was the New Orleans Jazz? For the average sports fan it was hard enough to track the players that bounced from team to team, but then it spread to the franchises. If you found that confusing, you may wonder about the rash of mergers and acquisitions that have dotted the financial landscape. To a certain degree, banks buying up other banks have been as common as trading baseball players after the All-Star break, but the level that has happened in the last few years is different than anything in our collective memory.

Reshuffling the Deck

Back in 2008, Wells Fargo and Co. purchased Wachovia Corp., which still has the largest market share in Brevard, according to the latest FDIC data. It boasts twenty branches and just shy of $2 billion in deposits in the Space Coast, giving it an impressive 26 percent market share. Since 2005, Wachovia has closed just one branch in Brevard.

In the same year, the Office of Thrift Supervision seized Washington Mutual Bank. The FDIC then sold them to JPMorgan Chase, which operates their former banking assets as a part of JP Morgan Chase Bank. Since the consolidation, JP Morgan/WaMu has actually opened two new branches in the county, bringing its total to twelve. The bank has $393 million in local deposits and a 5 percent market share.

Branch Banking & Trust Co. (BB&T) took over the six Brevard locations of Colonial Bank to bring their total to eleven branches locally. Before this acquisition, BB&T had five local branches. With this combination their deposits in the county swelled to $611 million and almost 8 percent of the market, making it the fourth largest bank on the Space Coast.

TD Bank or Toronto-Dominion Bank, the second largest bank in Canada, who also owned TD Waterhouse before selling it to Ameritrade, took over Riverside National Bank this year, after the FDIC closed the company and transferred the operations to TD Bank. They now have fourteen branches in Brevard, $541 million in deposits and enjoy 7 percent of the market.

PNC Financial Services was originally created by the merger of Pittsburg National Corporation and Provident National Corporation. When they acquired National City Bank in 2008 they became the sixth largest bank (seventh according to some accounts) in the U.S. and fifth largest in number of branches. They now have nine locations in Brevard, two less than their peak and over $430 million in deposits.

Regions Bank merged with AmSouth in 2006 and continued its march towards dominance in the Southeastern U.S. It is ranked seventh locally, but is fourth in the state. Regions Bank has 13 branches and $356 million in deposits.

Rounding out the field on the Space Coast is the largest bank in the country, Bank of America, which has eighteen branches and ranks second with 16 percent of Brevard’s banking business. They are followed by SunTrust Bank headquartered in Atlanta, which has almost $1.1 billion in local deposits and is third in market share with 14{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2}.

The strength and stability, along with the consumer services of these large national banks allow them to command a significant share of the banking market in our area.

Financial Regulatory Reform

The Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed into law by President Obama in July of this year. The bill is 2,319 pages long (compared to most Tom Clancy novels that are less than 700 pages). Even the most abbreviated synopses are far longer than the United States Constitution. But of course the Founding Fathers weren’t dealing with hedge funds or electronic trading.

Most experts acknowledge the complexity of the issues and therefore the complexity of the legislation that it is designed to address. They are also uniform in agreeing that we won’t know the real impact until the regulations that implement the law’s provisions are defined. Christine Harper, writing in Bloomberg Businessweek, said the legislation “Will help curb risk-taking and boost capital buffers” but won’t “fundamentally reshape Wall Street’s biggest banks or prevent another crisis.”

Even so, banking leaders on the Space Coast were cautiously optimistic about the law. They recognize the need to tighten certain areas of oversight, yet were unsure what the ramifications or actual costs were going to be. As with any regulation there is an expense attached to its implementation and that cost will likely be passed on to the consumer in one form or another, even though it is the consumer that the legislation is attempting to protect. For instance, the Wall Street Journal reported that Wells Fargo expected the Bill to cost them $530 million in lost revenue this year.

Drawing Conclusions

These changes – which are designed to protect the economy and the consumer – come with a price tag. There is more government-mandated oversight and therefore a larger government bureaucracy that must be paid to be the watchmen. Additional regulation will cost banks additional money to be in compliance. Plus, with the loss of certain revenue streams like fees, these costs will have to be passed on to the consumer somewhere for banks to maintain their level of services.

Mary Lu Carnevale described the legislation in the Wall Street Journal as “a chain of intricate compromises tied up in 2,000 pages of complexity so dense that it willfully defies comprehension.” She then added, “maybe the most optimistic way to think of this bill is as a stimulus program to create jobs for securities lawyers — they’ll be chewing on it for decades to come.”

Like Social Security – which was developed when the average lifespan of an American working man was less than 60 years, but today is over 75 and for women is over 80 – markets and methods have changed radically in the last half century. The diversity of investment forms and their interrelationship is staggering. If nothing else, we have seen how a breakdown in one sector of the economy quickly spreads to others like a malignancy and is soon circling the globe.

What is more, the average consumer’s understanding of how the markets operate often prevents them from understanding either the problem or the cure. For instance, according to one local bank president, most of the federal bailout money that was given to the large banks was to ensure they were able and willing to continue loaning money to the smaller local banks to ensure their solvency. This is a practice the average bank patron doesn’t even know goes on a daily basis.

What It Comes Down To

According to reports by the Federal Reserve, the national banks are still loaning money. However, what many fear may slow the recovery is their biggest customer is the federal government, not business. As federal deficits soar, loans to businesses, which the Federal Reserve tracks as compared to the previous year, are at a 50-year low. Nevertheless the banks are stabilizing and growing.

Bank of America and JP Morgan Chase, both reported profits earlier this year and felt these were signs of recovery. BOA, CEO Brian Moynihan said in a statement, “the 2010 story appears to be one of continuing credit recovery, and our results reflect a gradually improving economy.” Later, his counterpart at JPMorgan Chase, Jamie Dimon, said the economy is showing “clear and broad-based improvements.” Most of the national banks, Wells Fargo, BB&T, Regions and others also showed encouraging signs of profitability.

Interestingly, the local representatives of the large nationwide banks agree that most of these national and global financial fluctuations have profound affects, but are not what drives their success on the Space Coast. Rather it is the fiscal integrity, along with the personal connections they have with the people that trust them with their deposits or to extend them a loan and the level of customer service that they are able to deliver which sustains their market share.

Steve Loso of Regions Bank commented that it is the combination of the strength and resources of the national bank with the ability to deliver personalized service like a community bank that is the foundation for their growth and success. In spite of the fact that they are one of the largest banks in the country, he said he realized when he started working for them that the core values they had as a company weren’t a cliché or words on a plaque but the operating system that ran the company.

As large and complex as banking is, prognosticator John Naisbitt’s assessment that in the ever more sophisticated “high tech” world, the human need for personalized attention and service, what he called “High Touch,” still makes the difference.

Highlights of the Wall Street Reform and Consumer Protection Act

Credit and Lending Revised. In addition to requiring originators of residential mortgages to disclose any conflicts of interest, the lenders are also required to improve their due diligence in determining the borrower’s ability to repay the loan. This seems especially important since many believe the recent financial debacle can be traced to sub-prime lending encouraged by Fanny Mae and Freddie Mac, which spiked from 10{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} before 2004 to 20{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} by 2006. Income, credit history and other factors will be more strictly scrutinized, which could have an impact on the self-employed or others whose income isn’t based on a scheduled salary.

One of the responses to the current rash of foreclosures is the provision that allows homeowners – who can’t make their mortgage payments due to job loss or a medical condition – to apply for up to $50,000 in loan assistance through HUD’s Emergency Mortgage Assistance Fund.

Deposit Protection Increase Becomes Permanent. During the financial crisis the FDIC, which insures bank deposits, temporarily increased the amount they would insure from $100,000 to $250,000 in FDIC-insured banks. Thus, couples with separate accounts as well as a single joint account could qualify for up to $750,000 worth of protection.

Transparency and Accountability in Investments and Services. For the person whose financial acumen is limited to mutual funds, IRA’s and a few real estate holdings, the particulars of certain investment vehicles like “derivatives” and hedge funds are where the world of finance tends to follow the track of theoretical physics or the fictional antics of Dan Aykroyd and Eddie Murphy, staging a financial coup on pork belly futures, in the movie, Trading Places. It is also one of the factors that affect the larger market and so is a concern to investors and government regulators alike.

The accountability for these and other forms of investment has increased. Also, securities based on sub-prime mortgages will be overseen by the Securities and Exchange Commission (SEC).

Reducing Risky Business at Banks. Banks will be required to hold additional capital to cover potential losses and some securities are no longer acceptable vehicles for capital reserves held by large banks. Banks will have to hold 5 percent of their loans on their books if the loan is sold and or repackaged with other loans or securities. Also banks will have to set up separate operations to handle their most risky derivative trades and will be permitted to invest no more than 3 percent of its core capital in hedge funds or private equity.

Monitoring Future Hazards. A new Financial Stability Oversight Council is responsible to assess and manage risks that could threaten the entire U.S. financial system. This authority includes the ability to fire corporate management responsible for the failure and prohibiting any payment to shareholders until certain other claims are paid. Also the FDIC will oversee the liquidation of a bank whose failure the Treasury Secretary determines would disrupt the stability of the nation’s financial system. “We have an obligation of speed,” Treasury Secretary Timothy F. Geithner said in a speech at New York University. “When the Financial Stability Oversight Council first meets, we will establish an integrated road map for the first stages of reform and put that in the public domain.”

For the Consumer. Many of the new regulations that directly affect every consumer cover things like how overdrafts are handled on your account – whether you will have money transferred or your bank will cover an ATM overdraft for a fee. On credit cards there are tighter controls on raising interest rates, greater restrictions on service fees, issuing credit cards to students and minors and to extend the period before gift cards expire.