Bank

What a difference a few years make! 2010 saw 157 bank failures, more than at the height of the savings and loan crisis. A few years later we are down to only five bank failures so far in 2016.  That’s progress. This past month state regulators closed down a small bank (Allied Bank) in Mulberry, Arkansas. The Arkansas banking commissioner stated ‘This was the result of poor quality loans and bad business decisions’. 

The profitability issue of the Independent Banker had several great articles. Their research has shown that the average efficiency ratio for a community bank is 73%. But there was an article ‘A Great Measuring Stick’ that stated that the goal of a bank should be an efficiency ratio of 50% or less. This is quite a difference. Controlling costs (overhead) is not an easy job, but very profitable when done right. Check out this article for more details. https://independentbanker.org/2016/08/a-great-measuring-stick/

In July the ICBA’s (Independent Community Banker Association) IB Independent Banker publication listed River Valley Bank of Wausau WI as a Top Loan Producer. These are banks that serve their community by having the highest loans-to-assets ratios. The IB selects nine banks to highlight out of these top loan producers to profile, and River Valley was one. Make sure you read about their success in the July issue of the Independent Banker. 

The Federal Reserve has reported that the number of individuals under the age of 35 (Millennials) who own a credit card has dropped to its lowest point since 1989. It seems that millennials are concerned about getting over their head in debt! What a radical idea! They have seen their parents lose jobs, and sometimes their homes and aren’t about to place themselves into that situation. Congratulations to this group of savvy financial individuals.

There is an increasing discussion happening around the financial regulatory community that the banking industry (the community banker specifically) is relaxing credit risk standards, and making higher risk loans from just a few years ago.

Both Thomas Curry, the Comptroller of the Currency, and Julie Blake, Assistant Deputy Comptroller commented in industry speeches that credit risk decision making has moved to the top of the OCC’s priorities. Regulatory publications have made comments that regulators are seeing an increasing risk management issue.

With these rumblings in the public sector it is important the community banks enhance their risk practices. 

FEMA has proposed new regulations that would require new construction projects in flood zones to build on higher ground, sometimes as much as two feet higher than the 100-year flood plain. This makes sense to me. Why build on a site that you know floods every 100 years on average?  The link to the FEMA notice is below. 

Check it out - https://www.federalregister.gov/articles/2016/08/22/2016-19905/proposed-flood-hazard-determinations

Freddie Mac announced in their Primary Mortgage Market Survey that average fixed rate mortgages declined after three weeks of increasing rates. Here are the results:

15 year fixed rate mortgage – averaged 2.73 %

30 year fixed rate mortgage – averaged 2.74%

A lot of borrowers are still taking advantage of these rates by refinancing. The Mortgage Bankers Association shows refinance activity has increased 55 % from last year at this time. 

The Federal Reserve District (Chicago) has released its survey results of farmland values for the second quarter of 2016. Overall land values have decreased by 1% from the second quarter of 2015.The ranges of the different reported states are; Iowa ranged from -3 to -10%, Illinois +7 to -3%, and Michigan, Wisconsin, and Indiana all having insufficient data and possibly remaining static.

The June rally for soybean and corn prices was great, but farmers (and bankers) are looking at a record corn harvest and a near-record soybean harvest. It’s up in the air where the commodity prices will land, but it has a heavy cloud over it at this point.

Compliance is costly, but it’s more critical to the bottom line than ever before and can save lenders big dollars in regulatory scrutiny. Strict Fannie/Freddie requirements are forcing many lenders to identify and eliminate mistakes in home loans. 

A community bank should be aiming for a loan defect rate of just 1%.  That means just 1% of the bank’s loans would be considered high risk (unable to be sold to Fannie/Freddie).  There was a time when a 10% number seemed reasonable to most bankers, but the GSE’s are demanding that lenders produce higher quality loans with few mistakes.  

The ICBA Independent Banker had an impactful article in June of this year.  It was titled ‘Secrets to Steady Success’ by Kevin Tweddle of Fiserv.  Fiserv conducted a study that reviewed the performance metrics of more than 5700 community banks in all asset sizes.  This study examined these banks’ risk-based capital ratios, growth rates, return on assets and return on equity over a five-year period. As Kevin Tweddle stated ‘The results were surprising, as only 266 banks, less than 5 percent of the banks analyzed were good enough to be classified as a Proven Performer bank.”  

This study found that strong and growing banks fulfilled four key attributed: a low-cost foundation, revenue efficiency, above-average lending growth and high-quality loan assets.