A Small Iowa Bank Provides Big Lesson in Tackling Problems

Northwest Bank & Trust is tiny by assets — $198 million. But the Davenport, Iowa, bank wields a big stick in the business of administrating sweep accounts for other banks.

In a wide-ranging discussion, Chief Executive Joe Slavens discusses how Northwest is creatively dealing with weak loan demand in the Quad Cities area of Iowa and Illinois, his outlook for mergers and acquisitions in Iowa and how the possible end of the Transaction Account Guarantee (TAG) program could affect Northwest's subsidiary that provides sweep-account management.

The following is an edited transcript of that discussion:

What kind of loan demand are you seeing at Northwest?

JOE SLAVENS: Most of the loan demand we see is a reshuffling of the deck. There is not of lot of adding cards to the deck. We're working with people who are unhappy with their current provider. Some assets are being purchased at a discount, and we're financing a significant amount of that. We're seeing banks push good credits out because they have to restructure their balance sheets.

We do see some heightened activity to get transactions closed before the end of the year, as a result of the perceived risk in tax rates. But on the flip side, a lot of people are waiting to see what's going to happen with the fiscal cliff [the federal spending cuts and expiration of tax cuts that could take effect Jan. 1]. There are a lot of mixed signals right now. It's a very weird time.

Northwest Bank & Trust has a 61% loan-to-deposits ratio. Can you discuss that ratio?

If you go back several years, we were more in the 70% to 75% loan-to-deposits range. Then we saw significant contraction in our marketplace. Our competitors, for the most part, dropped 10 to 15 basis points, as well. We had a significant base of consumer lending, but consumers are not borrowing right now and they are also accelerating prepayments on loans. On commercial loans, we've had a significant reduction on substandard classified assets being paid off, but we've also seen fewer new deals and people are paying down lines of credit because they're not doing business.

Are you getting a boost from mortgage refinancings?

Yes, we were burning the midnight oil to help people get refis. But that was mostly in the late third quarter and early fourth quarter. It has already peaked.

How is your bank affected by the local economy?

Cities have struggled the most in Iowa because we're where the consumer is located and the white-collar areas [are]. Banks in rural areas in Iowa have done very well. We haven't seen farmers overadvance on farm land, and we've seen them use forward contracts and crop insurance.

There has been some M&A activity in Iowa. Heartland Financial USA (HTLF), a $4.4 billion-asset bank in Dubuque, Iowa, has made several recent acquisitions. Will your bank be looking for a buyer, or making acquisitions itself?

We're a family organization, and we think we're very capable at dealing with the economics. We feel good about our ability to manage the business. Our trust department has assets under management that are about the same size as the bank's assets. We also have our business Stratman Solutions [which provides administration of sweep-account products to other banks and credit unions]. We're more than a one-trick pony of a net interest margin bank. We're taking advantage of the needs of other banks.

As for M&A activity in general, I'm sold on the idea that there will be fewer community banks in this country, because of the compliance burdens, as well as the advantages that credit unions have. In our area, we're not going to have the large banks come in and buy up $100 million to $300 million rural banks. In Iowa, we'll see more partnering among community banks themselves to create branch networks to cover multiple county seats.

I have concerns for the long-term viability of the community banking business. Most of the world has large banks and local co-ops that are like credit unions. As we become more like the rest of the world, I think we'll migrate more to the model of fewer banks, and small community banks will have a hard time competing against credit unions.

Can you talk about your family's ownership of the bank?

Most of the value of the bank sits in a trust that will end up in my mother's estate. When she passes away, where we're headed from an estate tax standpoint will affect what happens. How do we effectively transfer ownership to the next generation when there is a significant estate tax burden on community bankers? I'm going to have to borrow money when my mother dies to pay the government. A lot of [other community bankers] won't want to do that, and that will generate additional sales of community banks.

Can you discuss how the potential end of the Transaction Account Guarantee program (which provides unlimited insurance on noninterest-bearing deposits) might affect other community banks, as well as your own business?

If TAG is extended, then banks won't need our sweep account management program. But if it's not extended, banks are going to need it. The bank provides collateral, and their deposits are taken off their books and put into a sweep account. Banks can do this for accounts that have deposits in excess of the $250,000 FDIC deposit-insurance limit.

We are the market leader in sweep accounts. We have banks as small as $50 million of assets and as large as $12 billion in assets. We have about 300 active customers nationwide. We're in discussions with about 30 banks right now that are waiting to purchase the product, based on what happens with TAG. This allows banks to manage the process. The only thing the bank has to do is sign off and provide collateral.