Weekly Update - by Mark Sievewright Posted by AVCU on 1:06 PM

Industry analyst and Fiserv Executive Mark Sievewright provides a weekly financial services update, of which we’ll post highlights here. Mark is a well-known speaker in the credit union industry and has been featured in AVCU events.

Market News

• 2010 bank failures increase to 16 - On Friday, the Minnesota Department of Commerce closed 1^st American State Bank of Minnesota, Hancock, Minnesota ($18.2 million in assets). The FDIC entered into a purchase and assumption agreement with Community Development Bank, FSB, Ogema, Minnesota, to assume all of the deposits of 1^st American State Bank of Minnesota which was the 16^th bank to fail in 2010.
• Obama provides detail on $30 billion community bank program - President Obama’s $30 billion program to help small businesses receive loans from community banks will not carry the same restrictions as the TARP, including warrant and executive compensation requirements. The proposal seeks to tie capital rates to lending performance by improving the attractiveness of terms as small business lending increases. The White House plan is proposing that banks of $1 billion or less in assets can receive up to 5% of risk-weighted assets. Those banks would initially pay a 5% dividend rate, but would see that drop if they can prove their lending increased. For example, banks that boost lending to small businesses by 10% over a baseline in 2009 could pay a dividend rate as low as 1%. Banks with between $1 billion and $10 billion in assets would be eligible to receive up to 3% of risk-weighted assets through the program. The proposal calls for giving banks a 1% point decrease in their dividend rate for every 2.5% increase in incremental business lending they achieve over a two-year period, down to a minimum dividend rate of 1%. Banks would realize this reduction in dividend rate sooner if they make early, but consistent progress towards increased lending. For purposes of the program, banks would be able to receive the incentive on the basis of new lending beginning Jan. 1, 2010. After five years, the dividend rate would be increased to encourage timely repayment.
• Volker calls for bank limitations - Prohibiting commercial banks from some high-risk trades should be an essential component of broader financial regulations and would cut back on institutions deemed "too big to fail," former Federal Reserve Chairman, Paul Volcker, said last week. Volcker testified before the Senate Banking Committee, pushing new bank limitations on behalf of President Obama. The Obama administration wants to add the restrictions on trading to legislation that would overhaul financial regulations. "Hedge funds, private equity funds and trading activities unrelated to customer needs, unrelated to continuing banking relationships, should stand on their own, without the subsidies implied by public support for depository institutions," Volcker said.
• PNC to repay TARP funds, sell global investment business - PNC Financial Services Group will pay back $7.6 billion in bailout funds to the U.S. government, a sign of confidence in the financial system. PNC received approval to redeem the preferred shares held by the government under the Troubled Asset Relief Program (TARP). To fund the repayment, PNC plans to offer $3 billion of its common stock and senior notes of up to $2 billion. PNC will also use cash raised through a $2.3 billion sale of its global investment servicing business to Bank of New York Mellon Corp., which was announced last week.
• New plans could mean higher premiums - The Obama administration proposed last week to raise the required level of reserves at the FDIC to more than $80 billion - a move that would require banks to pay much higher premiums. In its proposed 2011 budget, the White House - citing the insolvency of the Deposit Insurance Fund - said that allowing the ratio of reserves to insured deposits to fluctuate in a range of 1.15% to 1.5% has proven "inadequate to handle the unexpected risks and losses that come with a downturn in the economy." However, the administration did not ask lawmakers to act but merely said "it may be appropriate" for Congress to consider raising the reserve level.”
• Treasury to help financial firms in distressed areas - The Treasury Department will invest up to $1 billion from the federal bank bailout fund in small banks and credit unions that make loans to small businesses in some of the communities most ravaged by the economic downturn, officials announced on Wednesday. About 210 institutions will be eligible for low-cost capital under the Troubled Asset Relief Program. The eligible institutions are 60 banks and thrifts with a total of $21 billion in assets and 150 credit unions with a combined $5 billion in assets. They are among 834 certified by the Treasury as community development financial institutions, meaning that they make at least 60% of their small-business lending in low- and moderate-income areas.
• Credit unions top Forrester’s “Customer Advocacy” rankings -Forrester Research's annual Customer Advocacy rankings placed credit unions ahead of banks after about 70% of members surveyed said that their credit union puts their interests first. The survey reported that credit unions were ranked higher than banks because they have a different operating model and they emphasize customer service. The bottom seven institutions in this year's rankings were all big banks - Bank of America, JP Morgan Chase, Capital One, TD/Commerce, Fifth Third, Citigroup and HSBC. Forrester's rankings are based on a survey of 4,500 consumers, who were asked if they agree with the statement: "My financial provider does what's best for me, not just its own bottom line".
• Corporate credit unions report losses - Western Corporate FCU (WesCorp) reported a $335.3 million write down for other than temporary impairment (OTTI) charges during December, bringing its total OTTI losses for 2009 to $1.2 billion. Wescorp’s total OTTI charges for both 2008 and 2009 total $6.8 billion. Several other corporate credit unions are also reporting losses for 2009: Southeast Corporate FCU told members its losses totaled $45.8 million; Southwest Corporate FCU reported a $226 million loss; and Corporate One FCU, a $43.3 million loss.

Economic News

• U.S. job losses slow, unemployment falls to 9.7% - The pace of U.S. job losses in the private sector slowed in January as employers reported the smallest payroll decline in nearly two years. A report by ADP Employer Services showed 22,000 private sector job losses last month, smaller than the 61,000 jobs lost in December. The overall U.S. unemployment rate declined to 9.7% in January from 10%, the Bureau of Labor Statistics reported on Friday.
• Home loan demand increases - Applications to buy homes and refinance loans jumped last week to mid-December levels as average 30-year mortgage rates held near 5%, the Mortgage Bankers Association (MBA) said on Wednesday. The MBA's mortgage index jumped 21% last week, fueled by a 26.3% leap in demand for refinancing as purchase loan requests increased 10.3%.
• Home sales show further marginal improvement - The National Association of Realtors reported its index of sale contracts rose 1% in December. It was the ninth improvement over the past 10 months.
• January retail sales show improvement - According to Thomson Reuters, the retail sector collectively posted its strongest results since April 2008 - a 3.3% sales increase at stores open at least a year, a measure of retail health known as “same-store sales”. In January 2009, retailers had a 5.6% decline in same-store sales after a brutal holiday shopping season.
• Auto sales rebound - The U.S. auto industry rebounded from last January's sales collapse with one exception: Toyota, which lost an estimated 20,000 sales after it stopped selling eight models because of defective gas pedals. Last month, U.S. sales of cars and light trucks to consumers rose 6% from a year earlier. Big winners included General Motors, Ford, Nissan and Hyundai, which all posted double-digit sales increases.
• Bernanke earns second term - Ben Bernanke was sworn in last Wednesday to his second four-year term as chairman of the Federal Reserve.