EVP & Chief Credit Officer
Iowa Bankers Association
By CBJ Editorial Board
With one-party rule under Republican leadership at both the state and federal levels, financial regulations implemented in response to the 2008 financial crisis are under close scrutiny.
Shortly before President Donald Trump issued an executive setting the stage for a full or partial repeal of the Dodd-Frank Act, the Corridor Business Journal sat down with Iowa Bankers Association President John Sorensen and board member Kent Jehle, executive vice president and chief credit officer at MidWestOne Bank, to discuss those regulations and recent trends within Iowa’s banking industry. The following is an edited transcript of the conversation.
CBJ: What are some of the overall challenges banks in Iowa presently face?
Kent Jehle: Part of what all banks look at is, with the level of regulatory burden that’s moved toward us, we’ve had to grow, because you have to spread that out across a larger base. … As we continue to see things come at us that we know we’re going to have to comply with, what does that mean internally? Because it’s not like we’re adding a commercial banker who’s going to go out and bring business in. It may be an operational position, because we have more reporting requirements and things we have to work through to generate that information. So that’s always a concern.
The other thing, when you look at rural Iowa … there’s not as many folks getting into the banking industry. We’re trying to generate younger folks’ interest in banking, because now you start looking at who’s going to be in that next generation, who is going to be in those executive roles. If you look at a lot of the executives throughout Iowa in community banks, especially smaller ones, there’s a lot of gray hair. There’s also a lot of gray hair in the boardrooms – what are they going to do as they start looking to plan for their future?
Talk to us about the prospect of potential changes to banking regulations.
John Sorensen: It’s always been an important topic for us since the financial crisis and Dodd-Frank, but it’s become an even more important topic now. The environment has changed in Washington and so we’re frankly optimistic that we’re going to be in a better position to serve our customers going forward, which is what it has to be. It has to be smart regulation, so it doesn’t get in the way of serving Iowans.
With more than 300 chartered banks in the state, Iowa is among those with the most banks per capita in the U.S. What is it about the state’s regulations or makeup that’s led to so many?
JS: It’s probably the agrarian economy, [which is a] very de-centralized economy in Iowa, whereas in many other states, you have more urbanized [populations], especially when you go to the coasts. They have a small number of banks, and most of their population is more urban, so it’s somewhat a reflection of the Midwest. But I think Iowa is even more decentralized from an economic standpoint, traditionally.
Now, we’ve had kind of the rural-to-urban migration that used to occur, which impacts consolidation in our industry. So there are a few things driving consolidation: It’s the rural-to-urban migration, it’s investment to be part of technology, and regulation, where you have to have scale in order to comply with all the regulations.
Some bankers in the state have commented that they feel Iowa is “overbanked.” Does that worry you?
JS: When you talk about new entrants in any industry, it’s important to the vitality and innovation in an industry. In Iowa, we’re pretty unique in the number of financial institutions that are chartered here. So it’s a pretty competitive environment, and that helps consumers more than it helps [banks].
One of the things that has worried us – one, we want to preserve that competition we have here, but nationally, the number of new banks that have been chartered really came to a halt after the financial crisis and Dodd-Frank. And part of that was the regulatory pressure. They raised the requirements when it comes to capital, liquidity and regulation, that I think they actually discouraged new entrants. So instead of having 100, 200 new banks come into the industry each year, we’ve probably had three in the last five years, and that’s a worry from an industry vitality standpoint. … We want that vitality to continue. We think Iowans are well-served by a diverse industry.
How has banking changed for millennials, or those between the ages of about 19-35, and how are banks responding to things like online-based lenders and declining homeownership rates?
KJ: On the technology side, we have a virtual bank team where we actually track the amount of activity in those non-lobby related activities and how that’s growing. And from a transactional standpoint, we’re seeing that shift from the lobby to the virtual bank areas that we have. But we still really need to get that person in our lobby to open an account, just because of what we’re required to put in place to verify that account. So that’s one area where I see, at least in our shop, a struggle or a disadvantage where they can go to some other online avenues with that [ability].
JS: Really, millennials are delaying home purchasing. … With my generation, you bought a home fairly soon after you graduated from college or got your first job. What we’re seeing with millennials is they’re delaying that home acquisition, and as a result, pretty soon that generation will become homebuyers, because they’re going to be forming families and doing things that historically we’ve done as Americans. So that’s not going away. It’s just going to be a few years later than we anticipated.
The USDA forecasts that net farm income this year will decline by 8.7. percent, the fourth consecutive year of declines after reaching a record high in 2013. What’s been the effect of those declining values locally?
KJ: It’s on the operating-income side that we’ve seen the stress the last few years. And going back to 1985, I was a state bank examiner in northeast Iowa and remember those days. The key is, if you look at real estate values, to be careful not to assume land values will stay at the level they’re at today. And yes, we’ve seen a bit of a dip. But it was significant in the 1980s, and I think one thing bankers relied on was [the belief that], ‘Oh, we can just put it against the farm ground and we can work our way through it,’ and that didn’t happen because of a lot of dynamics.
We have seen a lot of farmers reach out and want to renegotiate cash rent, which is a function of this as well. A lot of the land that’s owned today is by folks that are in nursing homes, frankly, and there is going to be a transition over in the coming years as well in that arena. But there are things being done … to adjust to what we’re seeing on the revenue side to work our way through.