View from Main Street: Interview with Michael Jacobson, Chair of the Nebraska Bankers Association
Community banks make up more than 90 percent of the nation's 8000-plus banking institutions, and it's important to hear from their senior leaders on such topics as safety and soundness, customer confidence and business/security objectives for 2009.
In this exclusive interview, Michael Jacobson, CEO of NebraskaLand National Bank and chair of the Nebraska Bankers Association, discusses:
- The impact of global economic events on his institution and customers;
- How community banks such as his are dealing with the customer confidence challenge;
- The immediate business, regulatory and risk management priorities for Main Street institutions.
TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. The topic is the banking industry, and we are talking today with Michael Jacobson, President of the NebraskaLand National Bank and Chairman Elect of the Nebraska Bankers Association. Michael, thank you so much for joining me today.
MICHAEL JACOBSON: Great to be with you today.
FIELD: Michael, tell us a bit about Nebraska's banking institutions in general and yours in particular. How were you impacted by the recent global economic issues that we are all aware of?
JACOBSON: Well, Tom, I would tell you that there is about 245 banks across Nebraska ,and we are all of the banks in Nebraska about 90% of them are considered ag banks, where at least 25% of our portfolio is committed to agriculture. Our bank is a little less than that; we are not considered an ag bank per se, even though we are in west central Nebraska, we have about 15% ag in our portfolio. Amazingly, we do have a higher level of commercial real estate loans in our portfolio, but we have been able to fair really quite well.
If you look across Nebraska, our economy the last couple of years has been very strong; largely driven by commodity process, grain prices in particular, land prices are up significantly, cash grants on farmland is up, and that is creating more deposit volume because we've got a lot of retired farmers, and widows of farmers who are landowners who are benefiting from the higher cash grants and the higher farm income and that's coming into greater bank deposits. But I would tell you that what we are seeing is that we are more driven by the agricultural economy as a state than we probably are by some of the other things that are going on in Wall Street.
We do have a few banks who have higher concentrations that did go outside of the Nebraska market and have gotten involved in some, with some LPO's in other markets that had some exposure to residential real estate, and they've seen some impact from the downturn certainly in the housing. But I would say as a general rule, Nebraska banks are all very highly capitalized as a group and have faired extremely well up to now.
FIELD: Now Mike, how do you gauge the level of customer of customer confidence in your institution, and has it changed at all in the past year?
JACOBSON: I would say that the customer confidence has remained very strong, and I think a lot of that is the benefits that community banks have. Community banks have a much closer relationship with their customers. I can tell you that I get a number of our larger customers who will just stop by my office and ask how things are going. They know that as one of the pinnacle shareholders of the holding company, I've got the bulk of my retirement invested in this bank and in this holding company and they are--so I think they know that I've been around here. I've got a keen focus on what's going on, and they've seen the growth of the bank, and they've seen our lack of losses on the credit side as a very good indication that the bank is being managed well and that we are not getting involved in products and assets that could be problematic for us in the future.
And so I feel like that the confidence level is very high and that it has remained that way even though I continue to get more questions along the way on how is everybody doing, but I think that is pretty indicative of what happens across the state of Nebraska in the bulk of our institutions because the bulk of the banks across Nebraska still have $100 million dollars in assets.
FIELD: Now just for context here, give a little bit of background on sort of the origins of your institution and how it has grown over what, about a decade?
JACOBSON: Yeah, we were chartered; I charted this bank 10 years ago. I put an investor group together and we raised $3 million dollars to capitalize the bank initially. Two years later I bought out two of the original primary shareholders and brought in several smaller shareholders, and so there are two of us now who are the principal shareholders and then we've got a number, about 30, minority shareholders as well.
We formed a holding company six years ago, and we, the bank, has grown from this particular bank, NebraskaLand National has grown from really from zero and we are sitting at $225 million in total assets today and have about $190 million dollars in loans.
Two years ago, we chartered another new bank in Rock Springs, Wyoming, that we call Commerce Bank of Wyoming. We went to Rock Springs because a good friend of mine is a build-to-suit developer and was building a new building out there for Halliburton. That Rock Springs area is very big in natural gas, and the economy is growing very, very rapidly there, and we've seen tremendous growth there. That bank now is about $65 million in assets and so on a combined basis our holding company is just under $300 million in assets today.
FIELD: Now you've gotten advantages you were saying because a lot of your customers can drop in, speak with you, you see them on the streets; I'd be curious, what specifically do you hear from customers who are watching the news reports and what do you say to them?
JACOBSON: Well, I think one of the questions I get a lot is they want to know what is going on. There are a lot of questions about these derivatives and what are derivatives, and all they hear about derivatives is that they are bad, and I am there to kind of explain to them to keep in mind that we are in farm country here, and I explain to them that if you have corn and you sell corn to a local grain elevator for a future sale, that grain elevator is going to get on the board of trade and they are going to sell that corn on the board of trade, and so that grain elevator is entered into a derivative because they are entering into a contract for a future delivery, which is really what a derivative amounts to.
Now keep in mind then that when you start looking at the kind of derivatives that have been thought up on Wall Street, they get very, very complex, and that is what has created some of the problems is that there are counter-party risks that haven't been measured as well, and I try to help explain to them that the regulated industries out there, commercial banks and the insurance companies, have not really gotten themselves in trouble.
The problems have been more in the area of the investment banks who had much laxer regulation minus more limited regulation and were able to leverage themselves much higher than what commercial banks have been able to do and what insurance companies have done. And the large money center banks that have run into some issues have primarily been because they've been financing, been involved in the financing or the purchase through their trading accounts in some of these sophisticated CEO's in particular, that have created problems for them and that when you really boil it down to the community banks, we've continued to be involved in really our bread and butter kind of basic lending, lending to Main Street, lending to agriculture and having some exposure to commercial and residential real estate development.
FIELD: Mike, is it over-generalizing it to say that a lot of what you've had to do is sort of differentiate between what happens on Wall Street and what happens on Main Street?
JACOBSON: There is no question about that. I have really had to help explain to them that what is going on on Wall Street at this point has been largely contained to Wall Street, but over time if the financial rescue plan was not passed and if the financial rescue plan does not get implemented quickly and doesn't work, that then we could see much bigger impact in the Midwest.
I many times I refer to this as the hurricane approach; in a lot of ways I see us in the Midwest as being 200 or 300 miles inland from a coastal area that got hit by a hurricane. The coastal area being Wall Street gets hit by a hurricane and it creates a lot of damage where the eye of the storm hits. When you get 200 or 300 miles inland, you might get a little rain and you might get a little breeze, but you don't get the impact of the brunt of the hurricane. But if that hurricane is big enough and lasts long enough and goes far enough inland, we are actually going to start feeling those impacts inland.
And I think that's how I see the economic environment today is that if we can contain the damage quickly and limit the amount of damage that occurs on Wall Street, I think we will see a very muted impact on Main Street in the Midwest. The longer the problems persist and the more we see the economy slow down, we will start feeling it more in the Midwest.
FIELD: Now we've already seen, even the FDIC is starting to become victim of phishing attacks. Do you find that some of your Nebraska institutions, given the economic conditions, are more susceptible now to phishing or social engineering or some of these other vulnerabilities?
JACOBSON: We think that that's continued to be a problem. I haven't seen significant changes as a result of the economy at this point. Probably the bigger concern that we've had is that there have been some individuals, you hear isolated cases where you've had people get nervous and start withdrawing cash out of the bank and literally burying in their backyard or buying a safe and putting it in the safe, and we've really been cautious to remind people that the safest place for your money is in an FDIC insured institution.
And in this checkless society that we are moving to today, your access to cash and your ability to pay bills online, over the phone, using a debit card, using a credit card, there is not a lot of need for this cash and you've got to remember that if the FDIC, or if you have concerns about the federal government's ability to support the institutions, those green dollars aren't going to be worth anything if the government is not there. And as long as the government is there, and I believe they will be, the FDIC is going to be there and your insured deposits will be there.
And so the biggest thing I have found is reassuring people and making sure they understand that carrying a bunch of cash on your person or in your home makes you more vulnerable and not less.
FIELD: Well you make a good point about outreach. How is it that you and your bank are able to reach out to customers? Do you have sort of formal ways that you have been doing it?
JACOBSON: We do it a couple of ways. We send a quarterly newsletter in our statements to our customers, and amazingly we get a lot of feedback from the quarterly newsletters. And so it is an opportunity to share with them current topics, what's happening. Then we also will do some statements stuffers, as we need to to get more current information out to customers.
We also have electronic message centers at all of our main facilities that we can also communicate messages that way. And then we also do a lot of surveying of our customers and get their feedback. What is kind of remarkable is we just completed an annual survey that we do with our customers, and we had a 75% response from the surveys that were mailed out. So I find that as an incredible response and that a lot of the surveys have places for where you fill in the blank, and it is rare that you don't see them filling in the blank and giving us feedback that way.
So, we feel that we've got a very close connection with our customers. It is one of the greatest advantages that community banks have -- it's that close contact, that personal contact that we have with our customer base, and it really helps us in these kinds of times to communicate very quickly and very succinctly to our customers and they can see and feel what is going on.
FIELD: Given the economic conditions, what would you say your top two or three business objectives are right now? Do you plan on any further expansion or new services?
JACOBSON: I would tell you that right now I've probably always been a pretty conservative banker. If you look at our loss history here ironically and it is kind of hard to believe, but we've written off less than $100,000 dollars in loan loss collectively over the last 10 years, well between the two banks now, about $225 million dollars in gross loans. The way we have done that is we've been very cautious about the kinds of loans we make, the kind of concentrations, the kind of exposures that we take on.
Right now, I think our view is that we have very strong capital -- we've got almost 10% tier one capital, we are running close to 12% risk-based capital -- our view is we want to continue to grow our capital in these times by retaining the earnings. We are intentionally probably going to slow our growth over the next couple of years to continue to build the war chest of capital and continue to build reserves. And so we think that there will probably be some opportunities for growth, but I will probably look more on the back end of the crisis of what we are going through today rather than getting too anxious on the front end.
So we think that we will be continuing to look for opportunities but we want to make sure that we are I a position to serve all of our relationship customers, but we are probably going to be less interested in doing an outreach to go to non-customers, particularly those that might be outside of our immediate trade territory.
FIELD: Now how about in terms of regulatory compliance and risk management, some of the things that you have to do. What will be some of your priorities there?
JACOBSON: Well, we're a national bank and I can tell you that the OCC I've always felt tends to paint their banks with one brush, it doesn't matter how big you are, these are the requirements that we have and as a little bit of a credit to the OCC: I think they saw the commercial real estate and the residential real estate problems coming much earlier than some of the other regulators did. However, at the same time, the OCC becomes almost punitive when it comes to some of the reporting that they are requiring.
As you can imagine, looking at our capital levels and looking at our asst quality, we have a very good rating with the OCC. With that said, I still find that there is an incredible amount of reporting that they want to see us doing, and a lot of it is things that we are doing, we were doing anyway, but there is the degree to which they want to see us move it further; and what I am talking about there is when you are starting to look more at global cash flow analysis of your guarantors right on down to verifying liquid balances that they show on their personal statements, doing portfolio stress testing, individual stress testing.
Many of those things we were already doing, but I think that the degree to which they want to drill down and get it portfolio-wide has really caused us to increase some of our staffing, increase some of our time commitment, really just to making certain that we keep in compliance with all of the expectations. I by nature am very focused on compliance. We don't really do compliance with the regulators; we do it for ourselves. But we are finding that what the regulators want to see in compliance, that bar has been raised significantly and it is taking more time to completely be in compliance with everything they want.
FIELD: Now Michael, you're the chairman elect of the Nebraska Bankers Association so I wanted to ask you, going forward, what do you see as some of the best ways that banking security executives can enhance and maintain this customer confidence that we have discussed?
JACOBSON: Well, I think the one thing is that we need to lead by example. I think it behooves us to really take good care of our institutions, which really means that we have got to recognize that if we've got bad assets we've got to deal with them and deal with them early. We need to keep strong capital.
I think for most of us if we are really looking at if we had any expansion plans, now might be a time to shelve those expansion plans and really focus on making sure that base is absolutely strong and solid and can sustain any future downturns that we might see in the economy if things don't turn. And certainly that is the approach we have taken here.
Safety and soundness is of the utmost importance to us, and we've really re-doubled our efforts to identify any potential weaknesses in the portfolio and deal with them very early and very decisively and I think the best way to build customer confidence is to be able to reflect solid numbers with solid capital.
And again, as I look across Nebraska, if you go look at the numbers you are going to find that Nebraska banks historically have been very, very strongly capitalized, and I am talking that many on average, most financial institutions, banks in Nebraska would run far above 10% tier one capital in their banks, and many of them have capital that approaches 20%. So that kind of capital strength will take us a long way, and if you really look in Nebraska at the number of problem loans that were reported and you look at the amount of collective loan loss reserves in all the banks, you could write off 100% of all the problem assets that were reflected on Nebraska banks balance sheets on June 30, and there was enough collective money in the loan loss reserves, if there was 100% loss on those loans, and there would still be money left in the reserve without even touching the capital accounts.
So Nebraska bank are very, very strong, and I think we have got to continue to keep that message out there with our customers to understand that the banks themselves are strong, that the FDIC is strong, and there is really no reason to be afraid about putting your money into a Nebraska bank. And instead of chasing treasury yields that are less than 1%, you can get into banks today and earn in the mid-3's for that same money and have it just as safe as you would in a United States Treasury Bill.
FIELD: Very good point. One last question for you, we saw yesterday nine major banks received about $125 billion, what do community banking institutions like yours need, if anything, to move forward?
JACOBSON: Well, I think that the steps that have been taken, particularly yesterday with the unlimited FDIC insurance coverage for non-interest bearing accounts, was big. That was one of the things that we've looked at as it relates to we've got a title insurance company that's got an account here that keeps major balances, and yet they of course when it's in a trust account they would like to have it all insured or covered up with a deposit guaranty bond. They are non-interest bearing accounts so that really fixed that problem for us.
If there was anything that I would probably have on my wish list right now, it would be that the FDIC would 100% insure public funds on accounts with banks even the interest-bearing public funds. If that could happen, that could free up the pledging that we--free up our bond portfolio that currently is used to pledge for those public funds. That would free up some additional liquidity and because I think for community banks our big issue is to continue to maintain liquidity. We think that will probably be solved as we see more and more flight to quality and more and more customers probably getting out of the market and going into an FDIC-insured deposit.
Raising deposit levels to $250,000 dollars is good, and it has helped, but I would tell you that the concern there is the sunset on December 31, 2009 there are a lot of questions out there today if a customer comes in today and writes a two-year CD for $250,000, it is going to mature after the December 31, 2009 sunset on the coverage level, so the question is will that CD be insured after that time or not? And those are questions that the FDIC is not in a position to answer today, and so I think if we could clear up more of the uncertainty that lies in those areas that would give more sense of confidence on our customers' parts.
So those are the areas I guess I would look at as maybe getting all public funds covered just as the no-interest bearing funds are and bringing some more clarity as to what happens at the sunset. It would seem to me that if I wrote a five-year CD today or w two year CD today for $250,000 that as long as it was written before the December 31 sunset that it would be completely insured to maturity. And I think that would help clarify some of the questions in customers' minds today.
FIELD: Makes sense. Michael I appreciate your time and your insight today. It has been very helpful.
JACOBSON: Thank you very much.
FIELD: We've been talking with Michael Jacobson. The discussion has been about the banking industry and confidence. For Information Security Media Group, I'm Tom Field. Thank you very much.