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Revolving Door at Federal Reserve

A few weeks ago(JRN 34:37) we wrote, “When Yield Spread is Slight, Volume is Key”. That’s true if most of your income comes from interest on loans, which includes 98% of U.S. banks. The other 2%, however, get the majority of their income from non interest avenues (service charges, transaction fees, NSF fees, inactivity fees, etc.).


For these banks, (the top 50 of which are listed on page 7) the Fed Funds rate, and who is heading the Fed’s Open Market Committee (FOMC), are of lesser importance than to those that rely on the interest rate spread to stay liquid. So,  if you are in that 2%, you may not care what happens to interest rates. The rest of us do. And… what happens at the Federal Reserve affects interest rates.


You probably already know that President Trump has nominated Jerome “Jay” Powell to be the next chairman of the FOMC. This is the first time in nearly four decades that a new president has bypassed the incumbent, but that isn’t a surprise. Trump has said he wants to leave his mark on the Central Bank.


As we noted three weeks ago (JRN 34:41) when we reported on the President’s short list for the job, Powell provides continuity. “He has largely agreed with Yellen on Monetary Policy since she took the helm in 2014, (Powell has been there since 2012) but, he is a Republican (that shouldn’t matter, but who are we trying to kid) and his perspective of regulation (or over-regulation) aligns closely with Trump and Mnuchin.”


If confirmed by the Senate (and we see no reason why he would not be), Powell will likely take the reins in February with a pretty strong economy, relatively low unemployment and booming stock and housing markets. In other words, a lot better than what Yellen inherited in 2014.


Like Yellen, Powell leans toward the Dove side and will not be in a hurry to raise interest rates, although we do expect another quarter point increase in December under Dr. Yellen. In fact, Yellen will have one more opportunity to strike her gavel as Chairman when the committee meets January 30-31, 2018.


When at capacity, the FOMC has twelve voting members: Seven members of the Board of Governors of the Federal Reserve System (BOG), the president of the Federal Reserve Bank of New York and four presidents from the other 11 Federal Reserve Banks, which rotate annually.


Although Dr. Yellen’s term as Chairman expires at the end of January, her fourteen year term as a member of the BOG runs through January 2024. She has not commented publically as to whether or not she will continue on when her Chairmanship expires, but with three positions already vacant, unless or until we hear otherwise, we assume she will stay on, at least for now. Chairman or not, the BOG is a high-stress job, often relinquished before 14 years expire.


If she decides to leave, the BOG would be down to three members. As all BOG members are nominated by the sitting President, this would give President Trump even greater opportunity to  “make his mark”. Of course, Congress has to confirm his choices.


In October, Trump successfully filled a vacancy left by Daniel Tarullo, an Obama appointee who stepped down in April, with Randal Quarles. This essentially replaced a pro-regulation member with a low-regulation one. There is no question where he is headed.

At about the same time that Quarles was confirmed, Stanley Fischer, another Obama appointee, submitted his resignation. His departure in mid-October created the third vacancy… again.


Additionally, William Dudley, president FRB NY, announced he will be stepping down in mid-2018. Unlike the BOG, Federal Reserve Bank presidents are not appointed by the President; a search committee is underway to find a suitable replacement.


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Payday Alternative Loans

Anti-predatory payday lending sounds like an oxymoron, which is why most big banks exited payday lending four years ago. That, and because they could not figure out how to make money at payday loans without the appearance of being predators. It is a conundrum.

Federal Credit Unions don’t have that problem, though. Over 500 Federal Credit Unions issued at least one Payday Alternative Loan (PAL) to their members during the first half of 2017. (Those listed on page 7 and the supplement to this week’s issue issued 100 or more.) In fact, credit union members took out nearly 90,000 PALs between January and June totaling $62.81 million and averaging roughly $700.

Credit unions main objective is serving their members, not making money. PALs were designed to provide an alternative to high-cost payday loans that are available elsewhere. PALs have specific criteria prescribed by the National Credit Union Administration (NCUA) to protect both the borrower and the lender. These include:

  • Loan amounts must be between $200 to $1,000.
  • The borrower must be a member of the federal credit union for at least one month.
  • The term of the loan must range from 1 to 6 months.
  • The federal credit union can charge an application fee only in the amount needed to recoup the actual costs associated with processing the borrower’s application, up to $20.
  • The PAL cannot be rolled over.

The interest rates charged on the PALs  issued in the first half of 2017 range from 4% to 28% Annual Percentage Rate (APR). On the surface 28% looks pretty high, but remember these are short term loans, generally paid back in weeks so the 28% APR is a little misleading.

To put it into perspective, interest rates and fees charged on loans issued by other payday lenders can reach as high as 400% APR. President Obama addressed the issue while he was in office, “At first it seems like easy money. But the average borrower ends up spending about 200 days out of the year in debt.” Excerpts from a speech at Lawson State Community College in Birmingham, Alabama while he was in office also included, “payday loans trap borrowers in a ‘cycle of debt.’  You take out a $500 loan at the rates that they’re charging at these payday loans — some cases 450 percent interest — you wind up paying more than $1,000 in interest and fees on the $500 that you borrowed.”

Credit union PALs cannot be rolled over,  but other payday lenders depend on rollover income. According to the Consumer Financial Protection Bureau (CFPB), 75% of their fee income derives from borrowers who take out more than ten loans a year.

Last month (October 5, 2017), the CFPB finalized a new rule intended to put an end to payday debt traps. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.” - CFPB Director Richard Cordray.

If big banks follow the new rule and use the federal credit union example, they should be able to make a modest amount of income while protecting customers from predatory lenders. But in order to succeed, they must carefully screen the applicants.

Most of the Federal Credit Unions that offer PALs have also run into a problem with delinquencies on them. At June 30, 2017, there were 2,290 PALs that were 60 days or more delinquent with loans exceeding a million dollars. There were also $2.27 million in year-to-date chargeoffs as well as year-to-date recoveries totaling $516.468.


The ten FCUs charging the lowest APR on PALs are listed below. While two of them are too small to be rated by Bauer, the majority are in Superior financial condition proving Anti-Predatory Payday Lending is possible.
Payday Alternative Loans

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How do I Spend Thee bank Equity Capital

Today’s banks are flush with capital and there is no shortage of ideas on the best way to make the most of it. The banks listed on page 7 and in this week’s supplement all increased their net worth by more than 25% from June 30, 2016 to June 30, 2017. Here are just some of the ways those banks are putting that capital to use.

The first bank on the list, a very small community bank, increased its net worth by almost 2000%. After more than 100 years serving the residents and businesses of the small town of Oakwood, Texas,  *****Oakwood Bank just opened up a second office in Dallas. (When we say small, Oakwood’s population was 519 in the 2010 census.) We are seeing more and more of this—rural banks opening up branches in nearby cities to take advantage of technologies that are not otherwise available to them.

The second bank, while also a very small, community bank, has a very different story.  **First State Bank, Danville, Virginia, has a long and rich history. It was originally established in 1919  by and for African-Americans who had been marginalized by other banks. Before long, the bank was rebranded and began providing access to credit to people who had been denied elsewhere. That took a toll.

In August, former NFL tight-end and Super Bowl winner, Casey Crawford, became the majority shareholder in an effort to save the bank. He was responsible for injecting new capital and giving it a fresh name:  Movement Bank. Its mission remains the same: to love and serve people. (Yes, love! You don’t often hear that from a bank. Fond of, perhaps, but we digress.)

*****Home SB, Youngstown, Ohio, the third bank listed, is a $2.5 billion asset bank, dwarfing the first two.

Its enormous change in equity (and assets) is a little misleading, though. While Home SB has been growing (acquiring Premier B&T, North Canton, OH in January) the drastic change in equity and assets is because it retained Premier B&T’s certificate number. Had it kept its previous certificate number, its equity growth would have come in at 16.3%.

We do still find it worthy of this article, though. In 2016, Home Savings formed Home Savings Insurance Group and has acquired two Ohio insurance agencies.

Another interesting fact about Home Savings: In 1998, it converted from a mutual to stock form of ownership and simultaneously created Home Savings Charitable Foundation. Since then, it has contributed more than $15 million to non-profits in its market area.

That’s just the first three banks. All three have very different stories. By far the most common storyline for the rest of the group is mergers and acquisitions. Some are on the hunt and others are already in the process.

Pinnacle Bank (#10 on the list) is both. It acquired BNC Bancorp and its $7.4 billion asset Bank of North Carolina in June and is reportedly interested in an acquisition in the Atlanta metropolitan area.

This industry consolidation is a byproduct of the housing crisis and subsequent regulatory environment. In fact, in the past ten years, the number of U.S. banks reporting has decreased by nearly one-third (31.5%) from 8,451 to 5,787. Granted, over 500 failed. That means 25% were lost to M&A.

Earlier this month, the Fifth Annual Community Banking Research and Policy Conference was held at the Federal Reserve Bank of St. Louis where they released a 2017 National Survey of community bankers, including their concerns as well as their hopes for the future. According to this survey, in the past two years alone, compliance costs are estimated to have risen over $1 billion. That means they now account for 24% of community bank net income. Also, according to this survey, nearly all of the banks that considered an acquisition offer in the past year, cited these rising costs as the primary reason.

Some respondents also expressed optimism. These optimists were split into two groups:  some believe the initial compliance costs were much higher than the costs will be going forward; others believe that consumers feel a need for community banks, and that bodes well for the survival of those that have made it this far. We hope so, but it’s a little hard to hear that optimism over all the M&A chatter that we hear so loud and clear around us.

Bank Equity Capital

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Chair for Community Banks

The way we see it, President Trump has two paths to choose from when selecting the next Chairman of the Federal Reserve: Change or Continuity. Then, depending on the path he prefers, he has already cherry-picked two contenders to meet with.


The top prospects on the Change side are:


Kevin Warsh, a former Fed Governor who is currently a fellow at Stanford’s Hoover Institute. After working at the White House for President George W. Bush, Mr. Warsh became the youngest Fed Governor in 2006. While there, he made such an impression on the chairman, Ben Bernanke, that he became one of his most trusted inner circle.


Mr. Warsh reportedly opposed Quantitative Easing and believes too much emphasis has been put on theory and not enough on the actual markets. The 47 year old Warsh met with President Trump and Secretary of the Treasury, Steven Mnuchin on September 28th.


John Taylor, a top economics professor at Stanford and father of The Taylor Rule, a mathematical formula designed to take the guesswork out of Fed Funds movement.


According to Taylor’s equation, the Fed, under Alan Greenspan, was a major contributor to the housing  bubble by keeping interest rates too low for too long. In fact, the Fed Funds rate was lowered to 1.00% in June 2003 where it remained for a year. Beginning in June 2004, the FOMC found itself having to play catch-up as it raised the rate a quarter point at each of its meetings for the next two years. By that time, Ben Bernanke had been heading the Fed for five months.


Taylor met with the President on October 11th. He believes the recovery would be more robust today if policy decisions were based on his rule. (Interest rates would almost certainly be higher.) Bauer gives Taylor a slight edge over Warsh if the president elects Change. But that’s a big if. The dollar is strengthening, inflation is picking up and the Dow Jones Industrial Average just topped 23,000 for the first time ever. Continuity is looking pretty good.


The top two contenders for Continuity are:


Jerome (Jay) Powell, who is currently a member of the Board of Governors of the Federal Reserve System and whose term doesn’t expire until 2028. Appointing Mr. Powell, who met with the president in late September, has its pros and cons from the White House standpoint.


He has largely agreed with Yellen on Monetary Policy since she took the helm in 2014, (Powell has been there since 2012) but, he is a Republican (that shouldn’t matter, but who are we trying to kid) and his perspective of regulation (or over-regulation) aligns closely with Trump and Mnuchin.


That’s the positive. The biggest negative is it would leave another vacancy in the Board of Governors, which is already down by two.


Or, of course, Chairman Janet Yellen could be nominated for a second term. Most first-term presidents would go this route, but  Trump is anything but typical. After criticizing  Ms. Yellen on the campaign trail, he has since publically acknowledged she was doing a good job. Not to mention, Trump wants to keep rates low and that’s what she’s been doing. Her latest meeting to discuss a reappointment with the president was October 19th.

Regardless of who leads the Fed for the next four years, we do believe the issue of regulation has to be addressed, especially when it comes to community banks.


James Bullard, president of the Federal Reserve Bank of St. Louis told the American Banker last week that community banks (in this case, Bullard is referring to banks with less than $1 billion in assets) in his region estimate their compliance costs post Dodd-Frank are about 9% of total expenses whereas banks with assets between $1 billion and $10 billion believe their compliance costs are about 3% of expenses.


That is a huge difference and puts community banks at a decided disadvantage. These banks were not the cause of the financial crisis but they are paying the ultimate price for it.  Many have found the only way to stay in business with all of these rising costs is to merge or find an acquirer.


Some community banks are finding a way to maximize efficiency in spite of the regulatory challenges. The community banks listed on page 7 (and the attached supplement) fall into this category. They all have more than $10 million dollars of average assets per employee and although some have more than $1 billion in assets, they are all considered community banks by the FDIC definition.

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Consumers Taking on More Debt

Consumer debt in the U.S. hit an all-time high on June 30, 2017 and while mortgage debt is the largest component of that debt, this week we are focusing on other facets, credit cards in particular.

In this country, we need consumers to spend as they account for nearly 70% of all economic activity. The fact that confidence was high enough to keep taking on debt is a good prognosticator. But… that debt was taken on prior to Harvey, Irma,  Maria and Nate, and prior to the wildfires that are ravaging California. We don’t know yet how these developments will affect us.

But, take a look at the largest eight credit card banks in the country (below). Only one, Bank of America, increased its credit card lending at a faster pace in the 12 months ending June 30, 2017 than its past due credit cards grew. A combination of BofA being more cautious than its peers when growing these loans and  a relatively low past due rate for the industry to start did the trick.

Largest Credit Card Banks We know jobs will be created, but jobs will also be lost. Insurance checks will come in to spur spending but will likely not cover all of the debt incurred by Mother Nature. And, the holidays are coming, which is a time we see jacked up credit card usage. Fortunately, consumers had paid down much of their debt after the housing crisis.

So, is the glass half full, or half empty? Only time will tell. The banks listed on page 7 increased their consumer lending prudently during the 12 months ending June 30, 2017. We can use them as a barometer to see how they fare over the next 12.

These charts depict:

 A: The amount of debt reported by U.S. banks at June 30th for loans to consumers, excluding those secured by real estate. The bottom number is credit card debt, which is roughly half of the total amount. Since June 30, 2013, credit card debt has increased over 16%; while other loans to consumers (auto loans,  RVs, student loans, etc.) has grown over 24% for combined growth of roughly 20%.

B. The second chart indicates that, while the quality of those loans had been improving, the percent of total loans that are now reported as at least 90 days past due or that have already been charged off, is now on the rise. The second quarter numbers for 2013 and 2017 are remarkably similar with one key difference. In 2013 they were headed down. Today they are heading up.


 

Consumer Debt and Delinquencies

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Bank Deposit Growth

Let’s take a walk back about 23 years. During most of the 20th Century, banks were not allowed to cross state borders without chartering another bank.  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 put an end to that, but with a caveat.  No bank could control more than 10% of the nation’s deposits.


For the next 13-14 years, this deposit cap was carefully considered when banks, especially big banks, submitted applications to acquire other banks, although, to the best of our knowledge, organic growth was never formally halted. When the housing crisis hit (2007-2008) regulators were willing to overlook this restriction to  limit disruption. Bank of America was allowed to acquire the failed Merrill Lynch and Wells Fargo, Wachovia.


Today, according to newly released FDIC Summary of Deposit data, almost 1/3 (31.9%) of the nation’s bank deposits are concentrated in the largest three banks. With the help of the internet, all three shed branches in the 12 months ended June 30, 2017 while simultaneously increasing market share.

****JPMorgan Chase Bank, N.A., OH increased its deposits by 10% from June 30, 2016 to June 30.2017, thus giving it 10.71% of deposit market share nationwide. It did so while decreasing its branch network from 5,413 to 5,284.


****Wells Fargo Bank, N.A., SD increased its deposits by 8% from June 30, 2016 to June 30, 2017, bringing its market share up to 10.44% nationwide. It did so while eliminating 126 branch offices.


****Bank of America, N.A., NC’s deposits increased by 5% during the twelve month period. It also exceeds 10% deposit market share at 10.71%,  up slightly from 10.68%, even though it eliminated 150 branches.


Systemically Important? You better believe it. If anything were to happen to any of these three banks, the ripple effects would be huge (which is why the restriction was there in the first place). But there are thousands of other banks, community banks, that are also growing their deposits. And, they are doing so without adding undue risk to our financial systems.


All of the community banks listed on page 7 have more than doubled their deposits in the twelve months ended June 30, 2017. we would like to see that growth continue. Here’s a look at how they are doing it.


New Core System and Use of Technology

***Bank3, Memphis, TN, the first bank on the list, had one branch, $12 million in assets  and no web presence when new management took over what was then Farmers Bank, Woodland Mills, TN. Today, in addition to a new name and look, that $12 million bank has $97.6 million in assets, four branch offices, and its deposits have grown by almost 400%.


Lynn Carson, COO of the bank, told the American Banker, “I’d rather be small and profitable and servicing our clients than be large, not service  my clients and them not have a good experience.” Kudos!


Mergers and Acquisitions

A year ago, ***½ Security Bank of Kansas City, KS, the second bank on the list, had just nine offices, $853 million in assets and less than $650 million in deposits. But, at  the end of 2016, it acquired not one, not two, but six community banks. (All six were part of the same holding company, which merged the six charters into one.)  That may be a lot to swallow at one time, but Security Bank has made it work. Its asset quality is better, its capital ratios look good and it’s profitable.


Start-Up

We haven’t see many of these lately… but Primary Bank, Bedford, NH was established on July 28, 2015 and has been growing completely organically. Its assets reached $100 million by March 2017 and continue to grow at a near record-breaking speed. Even more importantly, it is doing so while managing its bottom line and underwriting.


Brokered Deposits

While growth is normal and desirable, if an institution has to depend on high-cost  or volatile deposits to facilitate that growth, the strategy can increase risk. Therefore, brokered deposits do count in the star-rating process.


****Great Plains State Bank, Petersburg, NE has been growing its deposits with the use of brokers, sort of. In the past year, brokered deposits at Great Plains State Bank have increased from 18.8% of total deposits to 41.1%. Its total loans have increased over 70% in the same time-frame, indicating these deposits are probably funding those loans. While this can be an expensive way to fund growth, in this case, most of those brokered deposits were through CDRS, a much lower cost alternative to traditional brokers.

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Stormy Weather, Boon or Bust for Banks

It was a good run. Almost 12 years since a major hurricane made landfall in the continental U.S, that  was Wilma in October of 2005. But that all changed when Hurricane Harvey came barreling onto the Texas coast on August 25th. The category 4 storm decided to hover there for almost a week leaving flooding and destruction in its wake.

It wasn’t long before Irma, an even stronger storm set its sights on the US, first on Puerto Rico and the Virgin Islands then on Florida and points north. Irma was brutal in Florida, particularly in the area around the middle and lower Keys. But even with bridges out of commission, these islands are relatively easy to get to. The same cannot be said for Puerto Rico and the U.S. Virgin Islands.

Making matters worse, these Caribbean territories got hit again 14 days later by Maria, a category 5 hurricane. Jeremy Peters of The New York Times wrote, “Hurricane Maria drowned what Irma didn’t destroy” - 9/27/2017. Peters was specifically writing about the Virgin Islands, which has Red Cross aid but has been lacking the press and support that Puerto Rico has been getting. Perhaps even more disheartening is that these islands (St. Croix, St. John and St. Thomas) rely on Puerto Rico’s ports to receive their own supplies and relief.

As of Thursday, 9/28/17, there are at least 85 bank branches out of 329 (26%) open in Puerto Rico, although the hours have been shortened:

Puerto Rico Bank Branches Open for Business

And more are being added every day. There are also hundreds of ATMs working across the island, although power is spotty and there have been issues with the machines running out of desperately needed cash. (Many of the grocery stores that are open are only accepting cash at this time as they are unable to process credit or debit cards or welfare payments.)

We are only aware of two (one bank and one credit union branch) open in the Virgin Islands.

The Federal Reserve Bank of New York is working to make sure Puerto Rican banks have what they need to get and stay running.

“The Federal Reserve Bank of New York's cash operations in Puerto Rico are working, and we have adequate inventory to meet demand from depository institutions on the island.”  -New York Fed 9/27/2017

We have not seen any such statement yet regarding the U.S. Virgin Islands, which are also a part of the New York Fed’s district.

Once basic needs are met and people have time to recover from the shock, we have seen, and history has shown, the process of rebuilding will begin. This regrowth, while grueling, has the potential to be a boon for local financial institutions. Of course, if not handled prudently, it could also be a bust.

Here are some things we will be looking for:

  • There is the obvious need for construction loans, both commercial and residential. Institutions that make mortgage loans that qualify for guarantees from government sponsored enterprises (i.e. Fannie Mae, Freddie Mac) can turn around and sell those loans rather quickly giving them the ability to provide more loans.
  • People need a temporary place to live while they wait so loans for both hotels and multi-family dwellings will rise.
  • Businesses have the same basic needs, but with the addition of short-term loans to fund such things as payroll and replenishing lost inventory while they wait for insurance money to roll in.

What they will be in need of is money to lend, which is where you come in. We will let you know if they are looking for CDs to do so. Page 7 contains a list of all banks and credit unions operating in Puerto Rico and the U.S. Virgin Islands. You’ll also see we included those operating in Guam, on the other side of the globe. Guam has not faced any tropical storms or the like recently, but it is another U.S. territory and a September 6, 2017 SEC filing got our attention.

BankGuam Holding Company, the parent of ****Bank of Guam, in a stock offering, warned investors of the possibility of a nuclear strike by North Korea. In this event, the financial institutions here would be faced with similar challenges to those in the Caribbean. The difference is that about one-third of the land in Guam is occupied by American military bases. While a military strike on Guam could decimate the civilian population, with the help of the U.S. military, the re-build would likely proceed rapidly.

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When Yield Spread is Slight

How do banks make money with a slim interest margin? By increasing loan volume. And after a precipitous drop in residential real estate lending during the housing crisis and Great Recession, we are pleased to report, it is making a healthy come-back. Comments received by the Federal Reserve from businesses across the nation indicate that the growth may be starting to slow,  at least in many regions of the country.

For example, respondents from the Boston Region reported a positive outlook while admitting they are somewhat constrained by low inventories. All areas except New Hampshire and Vermont reported moderate decreases in closed sales of single-family homes.

In New York, commercial real estate has held steady but residential real estate markets have strengthened. Low inventories in upstate NY have pushed prices to new highs. Low inventories and rising demand are starting to have the same effect on the suburbs around the city.

In Cleveland, the average sales price rose almost 5% from January through July, causing a softening in the market.

Richmond, though in the midst of a seasonal summer slowdown,  seems to be experiencing a boom in first-time home buyers. Inventories are low and prices are on the rise. Homes are snatched off the market rather quickly.

In Atlanta, respondents expect home sales to hold steady or increase slightly in the coming months. Home prices have risen a bit as inventory is down with the same number of people looking to buy.

The Chicago area report modest increases in real estate and construction activity. Although, contacts in this region noted that a dearth of single-family starter homes is hindering growth. (The Chicago region has the lowest net interest margin of the six Federal Reserve Regions.)

The Minneapolis region saw modest but widespread growth in most of its larger cities, the Minneapolis-St. Paul area being the exception.

Bargain hunters abound in the Dallas Region. Sales of low and moderately priced homes are strong while those at the higher end have softened.
 
Just like last year at the time, the San Francisco region was the only region to actually report robust growth in residential construction and sales,  especially in urban areas. (The San Francisco region also boasts the highest net interest margin.)

That leaves the Philadelphia, St Louis and Kansas City regions, which each reported little change in residential loan demand in recent months.

The banks listed on page 7 have had the largest percent growth in 1-4 family residential lending during the 12 months ending June 30, 2017. That’s good news for them; banks that specialize in mortgage lending report the lowest net interest margin as a group at just 2.49%.

Credit card lenders are always the highest. This quarter the interest margin for credit card lenders was 10.86%. That’s a mighty big difference.

Yield Spread and Residential RE Loans

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Jumbo Rate News 3436

If you did not know we are located in Florida, you probably do now. Thankfully, we are all okay. Irma was a finicky storm and devastated much of our state, but for the most part, our employees escaped the worst of her wrath.

In fact, we have been fortunate enough to be able to finalize credit union star-ratings off-site and we will have them uploaded to our website as quickly as possible. We thank you all for your patience.

Second quarter credit union data was released just as we were packing up to evacuate so it has taken a little longer to process than normal. But, as you can see on page 7, they are complete. After watching the percentage of credit unions rated 2-stars or below drop for several quarters in a row, we actually saw a slight uptick this quarter.

States with significant increases in Troubled and Problematic Credit Unions include: AL, DC, IN, KS, MO, NC, ND, NJ, NY, OH, RI, UT and VA. But with 6.9% of its CUs rated 2-Stars or below, Wyoming continues to have the highest percent.

On the flip side, 80.1% of the nation’s federally-insured credit unions are rated 5-Stars or 4-Stars. Highlights reflected in the NCUA release of the date include:  

Credit Union Highlights Q2

The industry continues to contract. Smaller credit unions, in particular, are finding it more difficult to maintain their independence. As a result, the number of credit unions with at least $500 million in assets is increasing, while the number with assets less than $50 million are decreasing creating a net deficit of 3.2% over a year ago.

Membership continues to grow. And with that, so grow loans and share deposits. While shares and assets grew almost in tandem, loan growth is outpacing them both.

At 0.75%, the overall delinquency rate on loans is the same as a year ago. Credit card delinquencies, however, are now above 1% (see chart A). This is an area of particular concern with both banks and credit unions.

Credit card chargeoffs, at 1.3% (2.5% annualized) are also on the rise affecting net chargeoffs on total loans. The net chargeoff rate on total loans is on the rise as as a result, but it remains well below recession levels (chart B).

Credit Union Delinquencies

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Jumbo Rate News 3435

Credit card balances at the nation’s banks jumped an astronomical 75.6% between the second quarter 2009 and the second quarter 2010. Much of that was by necessity as the unemployment rate ballooned. Consumers attempted to tighten their belts as soon as they were able, but that only lasted two years before credit card balances began to grow again.

The pace has accelerated in the past 24 months. Balance grew 6.4% from June 30, 2015 to June 30, 2016, and rose another 4.5% in the most recent 12 month period.

Credit Card Balances Rising

Unfortunately, the quality of credit card loans is  deteriorating. (See chart on page 2.)  While nonperformers are still far below the levels of 2008 thru 2011, they are on the rise. While charge-offs in most loan categories are going down, credit card charge-offs  had their 7th consecutive year-over-year  increase at June 30th.

Granted, they improved continually through 2015, but are now at very similar levels to 2013, as are loans 90 days or more past due. Credit card loans 30-89 days past due, which are a precursor to the other groups, are well above 2013 levels.

Industrywide, the average credit card charge-off rate is 3.66%. Banks with assets between $100 million and $1 billion have the highest average net year-to-date charge-off rate at 6.13%. Banks with assets less than $100 million have the lowest at 3.16%. There are banks at every asset level that are reporting much lower than the average levels. These banks exercise much more prudence in their underwriting, and it shows.

Underperforming Credit Card Loans

The community banks listed on page 7 can be counted among them. Each has greater than $500,000 in credit card loans outstanding as of June 30, 2017; each reported a year-over-year increase in the dollar volume of credit card loans outstanding; and each reported a decrease in credit card delinquencies from a year earlier. We commend them.

The majority of the banks on the list are very well rated, but you may be wondering how 2-Star American Bank North, Nashwauk, MN made the grade. We asked ourselves the same thing. Should a 2-Star rated bank be included on a list like this? In this case we decided, the answer was yes.

American Bank of the North has been operating under an FDIC Cease and Desist Agreement since May of 2011. Part of that agreement called for the charge-off and reduction of “Adversely Classified Assets”. It also addressed the need to improve the bank’s underwriting and loan policies. During the six years since the agreement was signed, the bank has made great strides on both counts and, even though the Enforcement Action keeps it rated 2–Stars and therefore relegated to Bauer’s Troubled and Problematic Bank Report, we do believe it is worthy of this list.

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As we reported last week, “the FDIC released its Quarterly Banking Profile on Tuesday, August 22nd and by most accounts, the banking industry had a stellar 2nd quarter.”  Now we’ll take a look at what that really means.
 
•Quarterly Net Income
The banking industry’s $48.3 billion net income in the second quarter 2017 was $4.7 billion (10.7%) higher than a year earlier. The primary reason for this was a 9.1% year over year increase in net interest income. Thank Janet Yellen and the Federal Reserve’s Open Market Committee for raising short term interest rates. Noninterest income was up just 1%.
 
•Average Return on Assets
At 1.14%, the average industry ROA is the highest it’s been since Q2’07.
 
•Problem Banks
The number of problem banks continues to decline, but so does the number of healthy banks. Total banks reporting dropped 4.5% from Q2’2016 (from 6,058 to 5,787). The number of banks on the FDIC Problem List is currently at 105—its lowest level since Q1’2008. The number of banks on Bauer’s Troubled and Problematic Bank Report (rated 2-Stars or below) is at 127, a level not seen in ten years.
 
With 11.7% of its banks rated 2-Stars or below, Georgia is the only state that continues to have over 10% of its banks represented on Bauer’s T&P Report (see page 7). Nationwide, only 2.2% of banks earn this dubious distinction.
 
•Loans and Leases
Total loans and leases increased 3.7% from June 30, 2016, and based on the monthly Consumer Confidence Survey® conducted for the Conference Board by Nielsen, we can expect that upward trend will continue. The survey results show that, because of a strong labor market, consumer confidence was up in July and then again in August. The Commerce Department seemed to back that up as it revised its GDP second quarter growth up to an annual rate of 3%.
 
Now to the less than stellar part…
 
•Charge-offs
Banks charged-off $11.3 billion in loans during the second quarter—$1.1 billion more than second quarter 2016. While the majority of loan categories registered lower charge-offs than a year ago, they were offset by a 24.5% year over year increase in credit card charge-offs. This is the 7th consecutive quarter in which credit card charge-offs have registered a year over year increase. As a result, banks  with assets > $1 billion increased their reserves for credit card losses by $1.4 billion (4.3%) in the second quarter.
 
•Number of Banks
The number of banks reporting declined… again. Three banks failed during the second quarter; 62 were lost to mergers/acquisitions. No new banks were added this quarter, although there were two new reporters in the first quarter.
 
 

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Environment More Favorable for De Novos

The FDIC released its Quarterly Banking Profile on Tuesday, August 22nd and by most accounts, the banking industry had a stellar 2nd quarter. We will be discussing that further in the weeks to come. Our biggest take-away from the press conference releasing that data, however, had nothing to do with the data at all.

FDIC Chairman Martin Gruenberg remarked in the Q and A session following the release that the agency has approved six applications for deposit insurance in the past ten months. While that pales in comparison to the nearly 200 that were approved in 2007, it is more  than had been approved in the previous 60 months combined.

The FDIC has been trying to encourage the formation of new banks. It even released a handbook in May to make it easier for interested parties. The problem was, there was no interest—in more ways than one.

De novo banks rely more heavily on interest income than do established banks. When the Fed Funds rate dropped to near zero in December 2008, De novo bank applications dropped right along with it. Now that the Fed Funds rate is rising, the environment is becoming more favorable for start-up banks.

The last new bank we had in this country was Blue Gate Bank, which opened for business on October 3, 2016 in Costa Mesa, CA. The second newest bank was 19 months earlier. Primary Bank was chartered March 9, 2015 in Bedford, NH. A list of all banks chartered since 2008 that are still active can be found on pages 2 and 7.

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Ownership has its Privileges

Mutual to stock conversions were very popular in the 1980s & ’90s, but as we noted earlier this year, the conversion rate in recent years had slowed to a crawl (JRN 34:12). Not any longer.

The primary difference between the two is that mutuals are owned by their depositors. As such, they are free to reinvest profits back into   themselves. Stock institutions are owned by shareholders, some of whom are depositors, but not all. A stock conversion enables the bank to raise capital by selling stock ownership. That capital is usually used to fund growth.

When a conversion is announced, the depositors of record are allowed to purchase stock prior to the Initial Public Offering (IPO). Many people used this as a get rich quick scheme. They would open accounts at as many mutual banks as they could and then sit back and wait/hope that at least some of them would convert. If the depositor purchased 1,000 shares at $10 and the stock opened at $15 in the IPO, they made an easy $5,000 profit by selling right away.

Of course the amounts were bigger, but the concept was the same. This was repeated over and over again. These depositor/owners had no vested interest in the bank. They simply wanted to make money.  Eventually the pace of conversions died down, but it seems to be heating back up.

*****HarborOne Bank, Brockton, MA is a particularly interesting case. It was originally established in 1917 as Brockton Credit Union. In 2004 it changed its name to HarborOne Credit Union and in 2013 it became HarborOne Bank, a Cooperative Bank (a mutual bank). Then, on June 29, 2016, HarborOne Bank converted again. This time into a two-tier mutual holding company structure.

*****Pentucket Bank, Haverhill, MA took a similar approach with its conversion last June (JRN34:12). It formed a two-tiered holding company structure too, one tier being a mutual. While the bank itself is no longer a mutual, it is still owned by one. This enabled it to raise the desired capital without risking its coveted independence.

Not coincidentally, both of these examples are in Massachusetts. In fact, the first mutuals were established in Massachusetts and Pennsylvania in the early 1800s. Back then  most commercial banks only served retail and commercial businesses so consumers needed a safe place to earn interest on their savings.

In addition to safety, (similar to credit unions—see JRN 34:29) mutual banks are owned by the people they serve, their depositors. Many of these owners are now looking to grow in order to remain viable. Aside from organic growth, there are basically two ways to do this and still maintain ownership. It can either merge with another mutual or do what HarborOne and Pentucket did. As a result, the number of mutual banks is diminishing.

In fact, in an effort to boost the ranks, leaders of mutual banks discussed ways to lower the regulatory hurdles credit unions face to convert to mutual institutions ('a la HarborOne) at a recent meeting of the OCC’s Mutual Savings Association Advisory Committee.  It can’t hurt. The last mutual bank to be chartered in the U.S. was in 2004 when Washington Credit Union became *****1st Security Bank of Washington.

The vast  majority of mutual banks still reside in the Northeast and Mid-Atlantic today. A complete list of Mutual Banks (not Mutual Holding Companies) along with financial highlights, can be found on page 7 and is continued on the special insert.

Diminishing Numbers of Mutual Banks


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Buy Repossessed Real Estate

The idea of flipping real estate has been around for a long time. It may have fallen out of favor during the housing bust, but consumers are feeling better about the economy now. All of those cable TV shows are looking more enticing to those looking to make a quick profit.

Now before we go any further ...we are not realtors nor do we claim to know the ins and outs of this niche industry. We did, however, get the following tips from Zillow.com:

Get an Appraisal & Inspection

“REO properties are not automatically bargains. Banks are in business to make money, so they price their homes competitively. Some REOs are discounted because of severe damage or location.“

Do a Title Search      

Never assume the property has a clean title. “Search public records for liens and outstanding taxes, then hire a title company to run a full, insured title search before closing the deal.”

Practice Patience

It may take weeks to hear back on your  purchase offer.

Now, if you’re still interested in buying repos, Bauer knows which banks have them. And while the inventory has been steadily declining since 2010, all of the banks listed on page 7 have at least $25 million in REO/OREO (Other Real Estate Owned, usually from foreclosure).

Another source of OREO is the FDIC itself, which sometimes ends up with property from a bank failure. As of August 9, 2017, the FDIC had 133 properties for sale, including 71 single family homes, 42 parcels of land, 14 commercial properties and five former bank branches. You can learn more about these at fdic.gov.

When bank OREO hit its peak, nearly 80% of all U.S. banks had some OREO on their books and the industry total surpassed $50 billion. Today, about 63% still report some OREO, but the total is down to about $10 billion. But while the inventory industry-wide is declining, that is not the case for some of the banks listed on page 7.

Compass Bank, for example, barely made this list with OREO of $25.113 at March 31st. The previous quarter, it would have escaped the list altogether as it had just $21.112 million in OREO at year-end 2016. At March 31, 2016, Compass Bank’s OREO was just $17.887 million. So while $25 million may not seem like a lot for an $84 billion asset bank, its year-over-year increase in OREO is greater than 40%.

Another example, First Citizens, Raleigh, NC , released its second quarter earnings report on July 26, 2017 in which it stated that nonperforming assets increased $6.2 million  from March 31st. It attributed  that increase to a $4.3 million jump in OREO and a $1.9 million increase in nonaccrual loans. The two prior quarters, First Citizens’ OREO had dropped, but that does show the fluid nature of OREO.

It also bears noting that both of these examples hale from the Atlanta Region, which was the leader in Nonperforming Assets (Delinquencies + OREO) from 2011-2014 (see chart below). In 2015, the Kansas City Region took the lead, or re-took the lead, we should say, since it had been the leader in 2010. By the end of 2016, the Dallas, Atlanta and Kansas City regions were all neck and neck, all just a little above 1%. A big improvement.

The San Francisco and New York Regions have consistently remained at the bottom of the pile, which in this case, is a very good thing. It’s not so good if you are looking to purchase OREO in San Francisco, but there are still some to be had.

 

Repossessed Real Estate Report

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City Treasurers Take Note

It isn’t  often that we report on the Community Reinvestment Act in Jumbo Rate News as it does not directly affect CD rates or the strength and stability of the bank. And, when we have reported on CRA ratings, it was generally from a perspective of pending acquisitions (JRN 24:27) which could be squelched given an unsatisfactory CRA rating.

The Community Reinvestment Act (CRA) was originally established in 1977 under the Carter Administration. The idea behind the act was simple: reduce the ability of urban banks to redline inner-city neighborhoods and attempt to provide fair credit standards to all. CRA was a response to accusations that urban banks were using inner-city deposits to further growth in the more desirable suburbs. However, the original act was not much more than lip service. All that was needed under Carter’s plan was a “perceived” effort to try to reach the inner-city neighborhoods.

It wasn’t until 1995, under President Clinton, that the Act  became a force to be dealt with. No longer was the measure of CRA compliance subjective; it was now an objective measure. Examiners were instructed to use federal home loan data, broken down by neighborhood, income and race, to rate banks.

In order to gain approvals for mergers, acquisitions or branch openings, federally insured banks, thrifts and savings banks now needed a passing CRA score.

Then, about a year ago (JRN33:32) we learned the Consumer Financial Protection Bureau (CFPB) was hiring mystery shoppers to determine whether banks were discriminating in their lending. BancorpSouth, MS was the first to have charges brought against it based on what these shoppers experienced, i.e. Redlining and Unfair Pricing.

BancorpSouth’s CRA rating was downgraded (retroactively) from Satisfactory to Needs to Improve. Not only would this affect pending acquisitions, it also cost Bancorp-South $10.6 million in settlement charges. The CFPB was clearly getting more serious about CRA. Still, that pales in comparison to what ****Wells Fargo Bank, NA, Sioux Falls, SD is now facing.        

On March 28, 2017, Wells Fargo announced the Office of the Comptroller of the Currency (OCC) had downgraded its CRA rating from “Outstanding” to “Needs to Improve”. This is the first time since the ratings have been publicly disclosed that Wells Fargo has received a final rating of anything other than “Outstanding”.

Less than four months later, July 17, 2017, the city of Davenport, Iowa disclosed it was preparing to sever its 32-year relationship with Well Fargo. With nearly 32% of the deposit share in the Davenport market, Wells Fargo had been a logical choice for city funds, until now. Davenport’s policies require that institutions have “satisfactory” CRA ratings both in their Metropolitan Statistical Area (MSA) and nationwide in order to be eligible to receive city deposits.

Both ****US Bank, Cincinnati, OH and *****Quad City B&T, Bettendorf, IA are under consideration to take Wells Fargo’s place. Both have “Satisfactory” CRA ratings. Quad City has a slightly higher share of the market with 25.8% of deposits to U.S. Bank’s 23%, but Quad City is a small, community bank and may not have all of the bells and whistles the city is accustomed to.

In the March 29th American Banker, Brian Kleinhanzl, an analyst at Keefe, Bruyette and Woods, was quoted regarding the CRA downgrade, “In general, it’s a nonevent”. But if other City/County Treasurers start pulling their accounts from the bank, it could be anything but.

According to the report: “The findings reflect an extensive and pervasive pattern and practice of violations across multiple lines of business within the bank, resulting in significant harm to large numbers of consumers.

This is becoming an all too familiar story for  Wells Fargo, which until recently had been one of the oldest, most respected banks in the nation. As its list of public relations nightmares continues to grow, one has to wonder what it can (or will) do to win back the nation’s trust.

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Jumbo Rate News 34:29 July 31 2017

I have found myself lately having the same, or similar, conversations with different people of varying ages and very different walks of life.  The topic has come up in various setting and when mentioning the term “credit union”, I have been asked:

 

Q. Isn’t a credit union the same as a savings and loan?

In this instance, the person thought that after the Savings and Loan crisis in 1989, in an effort to change public perception of the industry, they simply changed the name to credit union.

 

The answer is no. Credit unions are not-for-profit cooperatives, owned by their members.

 

Q. I’m not in a union, how can I join a credit union?

In this case, the person was thrown off by the word “union” and not belonging to a union, felt she was also unable to join a credit union.

 

Credit unions have what is called a field of membership (FOM). This limits members to specific group or groups of people, generally, but not always, based on where they work or live. It has nothing to do with a labor union, unless a labor union happens to be in that particular CUs FOM.

 

Q. Is my money safe in a credit union?

This question we get all the time at BauerFinancial. The National Credit Union Administration (NCUA) offers the same insurance limits and protection for credit union shares as the Federal Deposit Insurance Corp. (FDIC) does for bank deposits.

 

As it turns out, ****Affinity FCU, of Basking Ridge, NJ recently commissioned Harris Poll to conduct an online survey to determine exactly what types of misconceptions consumers have regarding credit unions. The results, which were made public on July 20th included:

  • 45% of Americans believe that banks offer more products and services than CUs.
  • Fewer than half of Americans believe CUs offer mortgages or online banking.
  • 30% said it’s difficult to find a CU they are eligible to join (although, based on our own experience, the number may be higher).

Credit unions have a history spanning more than a century in the US (and longer in Europe). The first credit union in North America was organized in 1900 in Quebec to provide affordable credit to working class families in the area who otherwise may have turned to loan sharks charging exorbitant interest rates. In 1909, the concept came to the states as St. Mary’s Cooperative Credit Association opened its doors to Franco-American Catholics in Manchester, NH.

 

That same year, Edward Filene, a prominent Boston merchant and philanthropist, teamed up with the Massachusetts Banking Commissioner to get the Massachusetts Credit Union Act passed into law. That law became the basis for the Federal Credit Union Act which was signed by President Franklin Delano Roosevelt in 1934.

 

****Morris Shepard FCU, Texarkana, TX, became the first federally chartered credit union on October 1, 1934. It is still in operation today.

 

During the Depression years, a Senate report on how credit unions fared:

  • “In the 38 states and the District of Columbia (where credit unions existed), there have been no involuntary liquidations.”
  • “Their record for honest management is exceptional.”
  • “They have proved their durability and have served their members uninterruptedly during the worst depression in our history.”

 

In 1970, with 12,000 credit unions serving nearly 12 million members, an independent  agency to charter and supervise CUs was needed so Congress created the National Credit Union Administration.

 

It wasn’t until 1974 that credit unions were able to provide share drafts (i.e. checking accounts). Since then, credit unions have expanded their offerings to provide a wide variety of share (deposit) products as well as low-interest (generally) loans. While they may not have the vast branch networks that some banks have, they often have shared services  enabling members to conduct business at a neighboring CU instead of their own.

 

While the credit union industry has had its ups and downs, it was a major benefactor of the anti-Big Bank sentiment that followed the Great Recession of 2008. By 2012, assets at federally-insured CUs surpassed $1 trillion for the first time, and they continue to grow both in size and popularity.

 

While not all CUs (or all banks) are created equal, they are certainly worth consideration. In fact, 358 have earned Bauer’s 5-Star rating for 100 consecutive quarters or more, earning them a Best of Bauer distinction. They are listed in this issue (page 7 + supplement).

 

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Most Elite Community Banks

Thirty-four years ago (1983), Jumbo Rate News became the first, and only, CD listing service to limit the banks it would list to strong, credit-worthy banks. Reaching for yield meant nothing if the bank was not going to live to carry the CD to term. If it failed and its deposits were taken over by another bank, the original CD terms were void and, in general were dropped down to passbook (savings account) rates.

Back then, in order to accomplish our self-imposed mandate, the banks had to be evaluated  manually, one by one. As time went on, however, Bauer developed a system to evaluate all savings and loans, then banks, and eventually, credit unions. Bauer’s star-rating system was created in December 1988 based on June 1988 financial data, and has since become the industry standard. 

All banks and credit unions rated 5-stars or 4-stars are unconditionally recommended by Bauer. However, especially after the trails of the 2008 recession, Bauer wanted to further elevate 5-Stars institutions that were able to navigate their way through without losing their 5-star status, a new designation—Best of Bauer—was born.

Best of Bauer banks and credit unions have earned and maintained a 5-star rating for 25 straight years. That’s 100 consecutive quarters, a quarter of a century... or more! There are currently 365 banks and 358 credit unions that have earned this distinction, or a little over 6% of the industry.

Bauer also believes that longevity in and of itself deserves recognition. For our page 7 list this week, we  honor the oldest U.S. Banks that have also earned the Best of Bauer distinction. All of the banks listed on page 7 are more than 130 years old and all have earned Best of Bauer status. For example, the Institution for Savings in Newburyport, MA is the oldest Best of Bauer bank (established in 1820). But it’s not the oldest bank overall.

A handful of Big Banks are just as old or older. Which brings us to another point: all of the banks listed on page 7 are community banks. That’s no accident.

Community Banks are much more likely than their larger counterparts to keep an adequate capital cushion... just in case. They are much less likely to make risky investments than non-community banks. They know their customers at a personal level which provides invaluable inside knowledge prior to issuing loans. And, they work towards common, unified goals with the people they serve.

Working together helps to create a stronger community, which in turn, creates a stronger community bank. Our congratulations go to all for a job continually well done.

The Northeast may seem disproportionately represented on page 7 but as you can see from this chart, nearly 10% of the Northeast Region (Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont) are Best of Bauer. That’s by far, the highest percent in the nation.

Conversely, the Western Region (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Washington, Wyoming and Pacific Islands.) has just 1.62% - far below the national average of 6.27%.

The other regions are: 

Southeast, which includes AL, FL, GA, MS, the Carolinas, TN, VA, WV, PR and the U.S. Virgin Islands;

Central: contains IL, IN, KY, MI, OH and WI;

Midwest: IA, KS, MN, MO, NE and the Dakotas; and

Southwest: which encompasses AR, CO, LA, NM, OK and TX. The is the only region that managed to exceed the national Best of Bauer average for both banks and credit unions.

BONUS: Supplemental pages are included  in this week’s newsletter to recognize ALL of these top performing banks. Congratulations!


Best of Bauer Banks and Credit Unions
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Uptick in Interest Margins

For seven long years we watched banks struggle with interest rate margins as the Federal Reserve kept the Fed Funds rate at the historically low level of between zero and 0.25%. Now, after four rate hikes in 18 months, lending rates are finally on the rise. What began  with the prime lending rate, which has had four corresponding quarter point increases, and consequently rose from 3.25% to 4.25%, other loans have and will continue to follow suit.

 

What’s more, up until now at least, many banks have been able to keep deposit rates low allowing them to make the most out of the rate hikes by raising interest charged on loans at a faster pace than rates paid on deposits. As a result, they are seeing very welcome increases to their net interest margins (NIM). The average NIM at March 31, 2017 was 3.19%, up from 3.10% a year earlier.

 

Much of the improvement has been at larger banks according to the FDIC, because smaller banks tend to have more of their assets tied up in longer term investments. In fact, nearly 54% of all U.S. banks saw a decrease in NIM from a year ago.

 

Those banks that have long-term, low yielding investments, will continue to play catch-up but, all other things being equal, they should be able to capitalize on higher employment and growing consumer confidence.

 

The unemployment rate hit a 16–year low in May. It rose slightly in June (to 4.4%) but that is thought to be a result of more people actively searching who may have previously been discouraged. The number of job openings hit a record earlier this year, so there are jobs to be had.

 

That brings us to the “all other things being equal” statement. International events will always play their part and we have no way of predicting how things in the Middle East and Far East will unfold. But barring any major catastrophes abroad, domestic factors should translate to improved consumer sentiment which, in turn, should create more willingness to borrow. Lenders will need to capitalize on that while savings rates are still low. As for CD investors, you should be keeping your terms short at this point... rates will rise.

 

The banks listed on page 7 have the highest interest margins in the country; those highlighted in yellow are credit card banks. As a whole, credit card lenders consistently have far better interest margins than the rest of the industry. (See chart A.)

 

Those highlighted in pink are Industrial Loan Banks; those in orange are both. What’s the difference? Holding companies that own most banks are required to file financial reports every quarter with the Federal Reserve. However, holding companies that own Industrial Loan Banks are not. So, for example, Federal regulators may not have the same level of knowledge regarding the condition of  Pitney Bowes, Inc., Stamford, CT, which owns *****Pitney Bowes Bank, Salt Lake City, UT as they do of bank holding companies. (Pitney Bowes Bank supplies credit to finance loans on Pitney Bowes machines.)

 

Of the 25 Industrial Banks still in operation, 23 are headquartered in the San Francisco Region (15 in Utah alone). Chart B breaks down net interest margin by region. While San Francisco leads the way, most areas of the U.S. are earning between three and four percent on the spread. The exception being the Chicago Region, which is struggling, earning a mere 2.55% on its interest margin.

 

Uptick in Interest Margins
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Delinquencies Improve at Most Banks

Measuring delinquent loans and the level of reserves a bank has to cover those loans is an extremely useful tool when evaluating a bank’s financial strength as well as its  future viability. Bauer’s Double-Trouble Nonperforming Bank Loan List does that quite nicely by measuring the combination:

Trouble 1 Nonperforminig Assets:

In typical times, nonperforming assets should represent less than 2% of assets. In good times they should represent less than 1%. After peaking at 3.4% in 2009, the banking industry’s nonperforming asset ratio has been continuously declining and is currently under 0.81%. That’s great for the industry.

 

However, as we know, not all banks are created equal.

Trouble 2 Inadequate Reserves:

Generally speaking, to cover a worst-case scenario, Bauer likes to see enough reserves to cover 100% of delinquent loans at a bank. In reality, less than 72% of U.S. banks have reserves enough to cover delinquent loans.

In the past, we would have taken these two components and created a list for page 7.  We would have come back at a later date looking at the same problem (nonperforming assets) but from a different angle.

This second angle was developed in 1986 by our founder, Paul A. Bauer. He discovered that, by subtracting delinquent loans and repossessed assets  from both the numerator and the denominator of the leverage ratio equation, he could easily see the potential impact of non-performing assets. This Bauer’s Adjusted CR became an invaluable predictive measure of the future health of a bank.

Of course, in 1986 we were in the throws of the Savings and Loan Crisis and Mr. Bauer was not the only person realizing that delinquent loans were being sorely overlooked by regulators. Mr. Gerald Cassidy of RBC Capital Markets came up with his own method for evaluating troubled loans. In Cassidy’s equation non-performing assets are divided by the sum of Tier 1 Capital and Reserves. If this “Texas Ratio” exceeded 100%, he believed that the bank was doomed to fail.

While Messrs. Bauer and Cassidy took different approaches, their ratios essentially assessed the same problem from opposite ends. With Bauer’s Adjusted CR, a negative number is bad. With the Texas Ratio, anything over 100% is bad. These two methods generally yield similar results, but not always.

For example: Zero-Star Grand Rivers Community Bank, Grand Chain, IL has a Bauer’s CR of -1.738%. One would expect its Texas Ratio to be approaching 100%, but it is only 54.76%. Likewise, 1-Star First Citizens Bank of Poulson, MT has a negative Bauer’s Capital Ratio (-0.247%) and a Texas Ratio of 59.85%. Of course, we believe ours is the better predictor. In fact, all six banks that have failed so far this year have had a negative Bauer’s Adjusted CR while only three had a Texas Ratio exceeding 100%. But, the Texas Ratio has merit too.

So now we have four different ratios to consider for our page 7 list. Here’s how we did it.

The banks listed on page 7 are all rated 2-Stars or below.

They also all have:

  • Nonperforming assets (excluding those with government guarantees) greater than 7% of tangible assets AND they have less than a 50% loan loss reserve ratio to delinquent loans;
  • OR they have a negative Bauer’s Adjusted Capital Ratio;
  • OR they have a Texas Ratio exceeding 100%.

No matter how strong the industry gets as a whole, there will always be some banks that fall into these categories. Fortunately, there are fewer now than there have been in some time. The chart below reflects the percent of noncurrent assets plus other real estate owned to assets as per the FDIC QBP Q1’17.

 Delinquencies as a percent of assets graph


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It has been described as “collapsing”, “stalling”, “waning”, and even “ominous”, and the reasons posited for the recent slowdown in lending are just as numbered. But Bauer has its own explanation (and adjectives) for the recent slowdown in lending, and they are far less dire.

 

The U.S. economy has been in an eight year expansion since the housing crisis. In the beginning we witnessed a lot of belt-tightening. Consumers were trying to eliminate debt and businesses were using existing inventory and putting off large expenditures. As time progressed, unemployment went down and confidence went up.

 

Taking advantage of the historically low interest rates was a no-brainer. And so they did—both consumers and businesses alike. Many consumers tapped into the equity of their homes as businesses restocked their warehouses. Now that rates are beginning to rise, they are collectively patting themselves on the back.

 

That doesn’t mean that lending has suddenly come to a screeching halt. Total loan balances at the nation’s banks dropped by one-tenth of a percent in the first quarter but increased four percent year-over-year. And while this was the first quarterly decline since 2013, it will not be the last. And that’s okay.

 

Loan growth remains at or above nominal GDP growth, so nationally there is little to worry about. We are more concerned with regional variances (see charts on page 2). For example, home equity lines of credit declined, as we all knew they would (1% in the first quarter and 6% in the last 12 months). However, they rose in the Dallas Region. Dallas managed to keep its credit card growth to a minimum, though. Perhaps they are swapping one source of funding for another.

 

The Kansas City Region, on the other  hand, witnessed double digit growth in credit card loans. Every Region except Atlanta is bustling with construction and development loans.

 

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Do you know how your bank or credit union is rated

Credit Union star-ratings were finalized and updated on our website last weekend based on March 31st financial data. (Bank ratings were updated May 26th.)


There are currently 147 credit unions on our Troubled and Problematic Credit Union Report. These institutions are rated 2-Stars or below by Bauer and/or are classified as less than “Adequately Capitalized” by regulators. These credit unions have nearly 800,000 members and more than $8.2 billion in assets.


While the majority of states witnessed improved star-ratings,  there are a few notable exceptions.

  • Alabama went from having less than 2% (1.7% to be exact) of its credit unions rated 2-stars or below a year ago to having 5.2% today;
  • New Hampshire increased from 5.6% to 6.3% over the course  of the 12 months;
  • New York’s percentage increased from 3.5% to 5.3% over the year;
  • And Rhode Island went from 4.8% at 3/31/16 to 5.0% now.

Wyoming now has the highest, unchanged from last year at 6.9%. Those that dropped from above to below the 5% mark were: Connecticut went from 5.6% to 4.0% and South Dakota from 7.85% to 5.0%.


Nationwide, the percent of credit unions rated 2-Stars or below dropped ever so slightly—from 2.4% to 2.37%. The percent of banks nationwide that were rated 2-Stars or below dropped from 2.91% to 2.27% over the 12 month period.


Arizona and Georgia have the highest  percentages relegated to Bauer’s Troubled and Problematic Bank Report. (Bank state percentages were featured three weeks ago in JRN 34:21.) Arizona had 11.8% at 3/31/2017, up from 11.1% a year ago and Georgia had 11.7%, which was down from 14.5% last March. New Jersey came in next with 8.2%, which is down from 11.0% last March. At 5.5%, South Carolina was the only other state with a bank T&P above 5%. That’s down from 10.0% a year ago.


On the positive side, over 80% of both banks & credit unions are now recommended by Bauer (i.e. rated 5-Stars or 4-Stars). Eight states (AK, DE, ID, ME, MS, NV, VT & WA) have NO Banks OR Credit Unions rated 2-stars or below headquartered there (although they may have branches).


Fed Funds Rate Up 1/4 Point


As expected, the Fed’s Open Market Committee (FOMC) raised short-term interest rates on Wednesday (June 14th) by a quarter point. Banks were quick to respond by increasing the prime lending rate from 4% to 4.25%. CD rates should follow suit, but at a more gradual pace.


The FOMC also announced plans to begin unwinding its balance sheet starting later this year: Project Policy Normalization. It’s been a long time coming.


Between 2008 and 2014 the Federal Reserve expanded its balance sheet by Trillions  through a series of Quantitative Easing (QE1, QE2 & QE3) as well as what it called “Operation Twist”.


(The Quantitative Easing programs added billions in Treasury and Mortgage-backed securities to the Fed’s balance sheet while Operation Twist effectively replaced short-term bonds with longer term ones, extending the maturity of the balance sheet.)


While the Federal Reserve stopped increasing its balance sheet in 2014, it continued reinvesting maturing assets to maintain the size of its balance sheet in the hopes of spurring spending by holding down long-term interest rates.


Now that the economy no longer needs that boost, they will start allowing the securities to mature without replacing all of them. For starters, the Fed will allow $6 billion Treasury securities and $4 billion mortgage-backed securities to mature each month.


Every quarter, those amounts will be subject to rise gradually, depending on how spending and inflation are reacting to the changes. Ultimately, after many quarters of gradual rises, $30 billion in Treasuries and $20 billion in MBS’s will be allowed to mature off of the balance sheet until the Fed’s portfolio is back to a “normal” level.


However, one thing that cannot be ignored is that while Dr. Yellen’s term as a member of the FOMC runs through January 2024, her appointment as Chairman expires February 3, 2018. President Trump has not definitively ruled-out her reappointment, but he has reportedly hired a former Wall Street executive, Gary Cohn, to lead the search for a suitable replacement. Some believe Mr. Cohn may even want the job for himself.

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Jumbo Rate News 34:23, June 12, 2017

BAUERFINANCIAL is working diligently on credit union star-ratings and will have them available as soon as possible. We do have data, though…

 

Based on March 31, 2017 data, there are 5,737 federally-insured credit unions nationwide (down 3.6% or 217 from a year earlier). Collectively, during the twelve preceding months, they:

  •  Increased assets by 7.8% (to $1,337.6 billion);
  •  Increased membership by 4.2% ( to 108 million);
  •  Increased total loans by 10.6% (to $884.6 billion);
  •  Member business loans led the charge with a 15.3% jump (to $68.9 billion) followed by automobile loans which grew 13.7% (to $306.9 billion);
  •  Real estate loans continue to represent the largest slice of the loan pie at $438.9 billion after growing 9.1%;
  •  Loan delinquencies dropped slightly from 0.71% to 0.69%;
  •  The capital ratio also dropped —from 10.78% to 10.70%;
  •  As did ROA—(from 0.75% to 0.71%).

But, there is a world of difference when you break the industry down by asset size. While the largest CUs (those with assets exceeding $1 billion) reported double digit gains in most growth measures, the smallest CUs (those with less than $10 million in assets) reported declines (see chart). The range for the four groups in between is provided as well.

March 31, 2017 Credit Union Data by Assets Size

One place the smaller CUs did shine is in their capital ratio. The composite CR for the smallest CUs was nearly 15% (14.95%). For the largest CUs, it was 10.55%.

 

Page 7 includes the 50 federally-insured CUs with the highest rate of loan growth from Q1’16 through Q1’17 provided that the CUs were old enough and large enough to be rated at year-end 2016 data. We are pleased to report that CUs of all size brackets are represented.

Time to Get Back into CDs as Rates are Finally Heading Up!

Dr. Janet Yellen and the Federal Reserve Open Market Committee (FOMC) meet Tuesday and Wednesday (June 13-14) for the fourth time this year and are widely expected to raise the Fed Funds rate another quarter point (to 1.25%). This would mark the third increase in six months and CD rates are moving in tandem.

After seven long years (December 2008 until December 2015) of a near zero (between 0 and 0.25%) Fed Funds rate, CD rates have much ground to recover, but they are making progress. The chart below depicts the top CD rates from Jumbo Rate News for the first week of June 2009 through 2017. On the left, we have the actual rates for a 1 year and a 2 year CD. On the right, we show how your $100,000 CD would grow over the course of 2 years (based on the 2 year rate listed).

The 2-year rate has surpassed anything we have seen in this decade and $100,000 would earn $3,296 more over its lifetime now than it would have if placed in 2013 (at its lowest point). As the FOMC continues to raise the Fed Funds rate, these earnings will continue to grow. (Granted, they have been raising them at a much slower pace than originally expected.) Even so, if you backed away from the CD market due to low rates, its time to think about getting back into it. Rates are finally heading up!

Jumbo CD Rates are Finally Heading Up

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Commercial Real Estate Booming Jumbo Rate News June 5 2017

Commercial Real Estate Loans (CRE) are comprised of multifamily (five or more) residential real estate, plus nonfarm, nonresidential real estate. This includes office buildings, shopping malls and most other structures that house businesses. In spite of the current woes in retail and in the face of rising interest rates, the nation’s appetite for CRE loans is on the rise.


While we are more than happy to quantify, i.e. as of March 31, 2017 data, CRE loans at U.S. banks account for 18.7% of total loans and over 10% of total bank assets, sometimes a qualified opinion is useful as well. That’s what we have from the latest Beige Book (May 31, 2017) which summarizes comments and observations made by bankers and other business contacts throughout the nation. While most respondents were upbeat, vast differences appeared across regions.


For example, most respondents from the Federal Reserve Bank of Boston region expect CRE activity will remain as is or improve slightly in coming months. Those from Connecticut, however, “remained less optimistic”.

In the New York region, results were divided further based on the type of CRE. Office space continues to do well, availability has levelled off but rents are about 10% higher than a year ago. Retail is a whole other story with vacancy rates reaching levels not seen in many years.


In the third region, Philadelphia, leasing is not quite living up to expectations, but the rest of the region is doing well with construction activity on the rise throughout the region and across commercial sectors.


Activity in the Cleveland area has been elevated and remains so. Demand for commercial property development, infrastructure projects and education needs are keeping it humming.


The Richmond region is bucking the  trends with strong retail leasing and sales while other office and industrial activity in this region has slowed somewhat.


The Atlanta region reports improvement across the board with the exception of multifamily construction. The rate of improvement varied widely by individual sub-markets, however.


The Chicago region is also split with activity in Chicago itself slowing down while levels in Western Michigan are reportedly at their best in many years.


The St. Louis region has “improved modestly” but there was nothing modest about the outlook for commercial construction, which is described as “robust”.


Not far away, the Minneapolis region reports that CRE activity has declined slightly, although from high levels.


Kansas City continues a slow but steady rise in CRE activity, vacancy rates are declining and rents and sales prices are rising as a result.


The Dallas region was described as “solid” with two notable exceptions:

office leasing in the Houston area is  reported as “sluggish”;

there is some concern about the amount of new CRE construction  in the region.

And that brings us to San Francisco where demand for CRE is strong but there is a shortage of available space on which to build new structures to accommodate it.


That’s a cursory synopsis but it should give you an idea not only of what is going on in your area in CRE and also why page 7 does (or does not) contain banks in your state. Page 7 lists the 50 banks with the highest year-over-year growth in CRE loans, but only if   CRE lending constitutes at least 10% of the bank’s entire loan portfolio. The chart below shows how CRE lending has grown (or not) at U.S. Banks over the past 10 years. We’ve provided both the dollar volume (Q1 each year) and the 12 month change. Notice the highly robust growth over the past two years.

Commercial Real Estate Loans Jumbo Rate News June 2017

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New Bank Star-Ratings this Week

Bank Star-ratings have been updated based on March 31, 2017 financial data; new Credit Union Star-ratings will be coming out soon.

The FDIC press release pertaining to the first quarter data highlighted three data points: net income is up; loan growth has slowed; & its “Problem Bank List” is at a 9 year low. All true. Let’s compare the FDIC’s Problem List with Bauer’s Troubled & Problematic Report.

FDIC: “‘Problem Bank List’ Falls to 9-Year Low: The number of banks on the FDIC’s Problem Bank List fell from 123 to 112 during the first quarter. This is the smallest number of problem banks since March 31, 2008, and is down significantly from the post-crisis peak of 888 in the first quarter of 2011. Total assets of problem banks fell from $27.6 billion to $23.7 billion during the first quarter.”

Bauer’s Troubled & Problematic Bank Report currently contains 132 institutions (20 more than the FDIC list). This is the smallest number since 2007 and is down considerably from its peak of 1,097 in the fourth quarter of 2009. Total assets of Bauer’s T&P banks now stand at $28.5 billion.

Nearly 60% of the banks that were on the fourth quarter 2009 list are no longer in existence. Another 5.5% are still limping along with a 2-star rating or lower. Only 37% managed to pull themselves back up and are now rated 3-stars or better. In fact, the majority of those are now recommended by Bauer (rated 5-Stars or 4-stars). Here are some other interesting facts:

Fact: All banks that have failed in the past six years were rated Zero-Stars by Bauer at the time of their failure.

Fact: 98% of banks that have failed since 2008 were represented on Bauer’s Troubled and Problematic Bank Report before their failure; 95% were rated Zero-Stars.

Fact: Unlike the FDIC’s list, Bauer’s list is available to the public. Stay ahead of the curve, order yours today. A pdf version is available for just $99 ($297 for a one-year subscription—see sample).

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It isn’t very often that a regulator will come out and tell you what signs to look for if you are worried about your institution merging or being acquired… but that is exactly what the National Credit Union Administration (NCUA) did in a video series in April 2016.

It was  created to educate CU directors, but of course we were intrigued. According to the NCUA, when analyzing past mergers (and in Bauer’s case to predict future ones) there are essentially six commonalities: 

 Three consecutive years of:

  1. Shrinking Membership;
  2.  Losses; and
  3. Declining Capital Ratio;
  

Plus: 

  1. A Prompt Corrective Action Directive (PCA) as much as 3-4 years prior to the merger;
  2. No Succession Plan (particularly crucial if management is getting on in years but also important if a credit union is very small);
  3. A poor CAMELS rating (a confidential rating assigned by regulators).
    

We took the NCUA’s information and added our own expertise to come up with a list that we published last May (JRN 33:19). Of the 52 CUs that were included last year, 20 (or 38%) no longer exist today; 10 (19%) still meet the criteria this year and are listed on page 7; and 22 improved enough to be removed from the list based on 12/31/2016 financial data. 

The list on page 7 includes 37 credit unions that have had declining membership AND capital ratios for the past three years AND also posted annual losses in 2014, 2015 and 2016. There are an additional 13 CUs listed that are currently classified as either critically or significantly undercapitalized. These CUs are subject to PCA.  

If at all possible, a credit union will seek a merger partner while it is still in good enough health to have some bargaining power. There are benefits that can be gained from a merger, including:

 
  • Improved financial condition
  • Expanded member services
  • Expanded field of membership
  • Ensuring succession planning.

But in spite of these potential benefits, history has shown that many CUs simply wait too long.    

That was the case for both zero-star FCAMEC Federal CU (a/k/a Florida Conference AME Church FCU), Tallahassee, FL,  which failed on March 17, 2017 and zero-star Valley State CU, Saginaw, MI, which failed on March 31, 2017. Both were significantly undercapitalized at the close of 2016.  

Interestingly, neither of the two failed CUs appeared on last year’s list. FCAMEC Federal Credit Union posted losses for both calendar 2015 and 2016 but posted a profit in 2014. Likewise, its capital ratio dropped from year-end 2014 to 2015 and again from 2015 to 2016. But it rose from year-end 2013 to 2014. And, its membership grew in 2016. 

Valley State Credit Union saw declines in its year-end capital ratios all three years. It also posted losses for all three calendar years. Its membership numbers, however, were on the rise up through the first quarter of 2016 before they started to decline. 

Both of these credit unions have something else in common, however. Something that Bauer has long used as a predictive tool. They both had problems with bad loans. Whether intentional or not, we believe that to be a glaring omission from the NCUA’s list of things to watch for. FCAMEC FCU and Valley State CU both had negative Bauer’s Adjusted CRs, which factors in those bad loans. 

Six other CUs listed on page 7 also have a negative Bauer’s Adjusted CR (noted with a 2). An additional fifteen CUs do not meet the NCUA criteria used to create the page 7 list, but do have a negative Bauer’s Adjusted  Capital Ratio. They are listed on page 2.

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Federal regulators closed the fifth ban k of the year last Friday and this one has hit a nerve.

Guaranty Bank, Milwaukee, WI
, which ironically also did business as BestBank in Georgia and Michigan, was closed Friday, May 5, 2017 by the Office of the Comptroller of the Currency (OCC) and the FDIC was named receiver. In its role as receiver, the FDIC is mandated to resolve banks in the manner that is least costly to the Deposit Insurance Fund (DIF).

In this instance, the least costly alternative came from *****First-Citizens B&TC, Raleigh, NC, which agreed to assume all deposits and purchase $892.6 million of Guaranty’s $1 billion in assets. The estimated cost to the DIF for this transaction is $146.4 million.

Guaranty Bank had a Bauer rating of zero-stars dating back to the first quarter of 2012. It had been plagued with bad loans, was bleeding money and was significantly undercapitalized for years. It also was operating under a Prompt Corrective Action Directive (PCA)  since 2014. That directive was terminated when a new one was issued this February that changed the regulatory classification of the bank from “Significantly Undercapitalized” to “Critically Undercapitalized”.

Its closure was no surprise to us. So why is there  public outcry over this one?

Guaranty Bank had 119 branches in five states. Only 12 of them were brick-and-mortar stand-alones. The other 107 were located in grocery and retail stores that served primarily low and moderate income neighborhoods, many of which were in major cities (Atlanta, Chicago, Detroit, Milwaukee). None of the store branches reopened.

While First-Citizens has a sprawling, 550 plus branch network spanning 21 states, it does not have any presence in Illinois or Michigan, and has only two locations in Wisconsin. In Georgia, most First-Citizens branches are located in wealthy neighborhoods far from the shuttered Guaranty branches. That leaves a lot of disenfranchised bank customers with no branch at all.

Perhaps the most difficult part of this equation is that most of the customers at these in-store branches had direct deposit of their: paychecks; social security checks; and/or disability checks. Now they have to find a way to get access to their funds, which won’t be easy as even the ATMs at the shuttered store branches are not operational.

Sophia Choi of WSB-TV 2 Atlanta reported that a crowd of former BestBank customers had gathered Monday morning at a local Kroger trying to get their money but were unable to do so. “They won’t take no checks,”  said Brandi McCall, a BestBank customer.

That could be why it took so long to close Guaranty Bank. After all, its woes began during the housing crisis. It was “Well Capitalized” through 2009 but by the close of 2012 Guaranty Bank had dropped to the lowest regulatory classification: “Critically Undercapitalized”. It had a leverage CR of 1.06% and Bauer’s adjusted CR of –6.70%. While it managed to crawl back up to “Significantly Undercapitalized” for the better part of four years, it would never thrive again.

Below is a list of banks that have failed so far this year (in order of fail date) along with financial highlights as of December 31, 2016. On Page 7 you will find 10 other banks that were financially similar as of that date, along with historical numbers to indicate what direction they are heading.

Fortunately, none of the ten compares to Guaranty Bank with its 107 in-store locations. The largest is Beach Community Bank which has 11 branches in the Florida panhandle. All  are brick and mortar stand alone.  Cecil Bank is the second largest with nine brick and  mortar, stand alone branches in Cecil and Hartford counties in Northeast Maryland.

The other eight range from one branch to four branches. It shouldn’t be difficult to find a buyer for any of them… if needed.

failed_bank_2017

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Introduced by Senator Elizabeth Warren (D-MA) and co-sponsored by Senators John McCain (R-AZ), Maria Cantwell (D-WA), Angus King (I-ME), Kirsten Gillibrand (D-NY) and Bernie Sanders (I-VT), the 21st Century Glass-Steagall Act of 2017 aims:


“To reduce risks to the financial system by limiting banks’ ability to engage in certain risky activities and limiting conflicts of interest, to reinstate certain Glass-Steagall Act protections that were repealed by the Gramm-Leach-Bliley Act, and for other purposes.”


On page 2 you will find a timeline of certain banking events that have led us to where we are today. Just as The Depository Institutions Deregulation and Monetary Control Act of 1980 inadvertently spawned the Savings and Loan Crisis in the 1980s, the Gramm-Leach-Bliley Act of 1999 paved the way for the financial crisis that erupted in 2008 (JRN 26:10). Each crisis led to its own new legislation intended to clean up the mess.


By introducing this new legislation, Ms. Warren, et. al. are conceding that some of these so-called remedies were flawed. In particular, as stated in Section 2 (a) (11) of the new bill (S.881): “the regulatory response to the crisis has led to more mergers between financial institutions... increasing the dominance of a few large, complex financial institutions that are…  “too big to fail”.


No one can dispute that mergers are making the Big Banks bigger. But,  the Trump administration, along with community bankers, is favoring a two-tiered regulatory system. Instead of forcing the big, complex banks to divest from their  non-banking activities, the largest banks (those listed on page 7) would be subject to more stringent oversight and capital requirements than their smaller counterparts.


With heavy-hitters on both sides, we expect there will be some form of compromise. Perhaps allowing some forms of investment banking if they do not present any conflict of interest to the bank’s customers and if the bank maintains a minimum  leverage capital ratio of 10%. (The House Financial Services Committee approved its own bill on Thursday allowing banks with at least 10% leverage CR to be exempt from Basel III.)


Only 39% of the banks on page 7 currently have a 10% leverage CR.

bank_legislation_timeline_gramm_leach_bliley_to_dodd_Frank_to_21st_century_Glass_Steagall

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The Fed’s Open Market Committee meets for the third time this year on Tuesday, May 2nd and Wednesday, May 3rd to discuss whether further changes in the Fed Funds target rate are warranted at this time. The consensus after the last meeting was that we would see two more rate increases this year, but we suspect that Dr. Yellen, et. al. will want to see more data before making another move.

The quarter point increase in March seems to have had a minimal effect on the housing market in spite of the Bank Prime Loan Rate increasing to 4.0%. In fact, the National Association of Homebuilders (NAHB) projects a 10% increase in housing starts in 2017. According to NAHB surveys, 90% of the loans financing these residential properties (from land acquisition to development to construction) come from banks and thrifts.

bank-residential-construction-loans

Big Banks

Bank call report data show the industry increased its lending for residential real estate construction by nearly 17% in calendar 2016. Every asset category witnessed an increase except the biggest banks. The nine U.S. banks with assets greater than $250 billion decreased their residential real estate construction lending by 9.1%. The 105 banks in the next category ($10 billion to $250 billion) more than made up for them by increasing theirs by 25.8%.

These Big Banks account for just over 1/3rd of these residential construction loans.

Mid-Sized Banks

The next category, banks with assets between $1 billion and $10 billion control 32% of the market, but only one (out of 620) has more than 10% of total assets invested in single-family construction lending. That bank is $1.006 billion *****Village Bank, Auburndale, MA, which increased the value of its residential real estate loans by 28% during 2016 (from $97.228 million to $124.029 million). Even though Village Bank is slightly over the $1 billion asset threshold, it is a true community bank. It has taken over a century to grow to its current size, focusing that whole time on bettering the lives of those who live in Middlesex County.

Small Banks

That brings us to the final two size categories that comprise the small bank section, which comprises 88% of the industry. This sector accounted for 31.2% of all single-family construction loans at year-end 2016. That may not seem like much for 88% of the banks… until you discover they control only 7.5% of industry assets. For the most part, these are the banks that are financing local contractors and supporting local economies.

We break it down even further to separate out the really small banks, those with less than $100 million in assets, from the group. These really small banks only increased their single-family construction lending by 9.5% during 2016, a little over half of the increase of banks from $100 million to $1 billion. But, there are a lot of standouts.

The 50 community banks listed on page 7 have the highest year over year growth in residential real estate construction lending if residential construction accounted for at least 10% of their total loans. Fifteen of them (30%) have assets < $100 million; 49 (98%) have assets less than $1 billion.

The exception: the first bank on the list.  ****Franklin Synergy Bank, TN is a mid-sized community bank, similar to Village Bank in Auburndale, MA. It was established in 2007 to “Build Dreams & Build Relationships” in Franklin and Rutherford counties in Tennessee. One of its primary focuses is to make dream homes a reality for its customers and it appears to be succeeding with over a 1200% growth in single-family construction lending during calendar 2016.

The fact that single-family construction lending has increased nearly 17%  is a good sign for the economy as a whole. The fact that so much of the funding comes from community banks is a good sign for the economies where they operate. Most of the banks on page 7 can be found in Bauer’s latest book: Top 100 Community Banks in 100 Categories (just $24.95).

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The FDIC’s Policy regarding minority depository institutions (MDIs) states:
 
“Minority depository institutions often promote the economic viability of minority and under-served communities. The FDIC has long recognized the importance of minority depository institutions and has historically taken steps to preserve and encourage minority ownership of insured financial institutions.”

MDIs are institutions where 51% or more of the voting stock is owned by minority individuals, specifically Asian American, Black American, Hispanic American or Native American. Congress has established the following goals:       
     - Preserve the number of MDIs; 
     - Preserve the minority character in the case of merger; 
     - Provide assistance to prevent insolvency of MDIs; 
     - Encourage creation of new MDIs; and    
     - Provide training and technical assistance to MDIs. 
 
In the event of a failure, the FDIC tries to maintain the minority character, which is not always an easy task. According to the FDIC Report to Congress for 2016, only 38% of the MDIs that failed between 2002 and 2016 were acquired by other MDIs. But, they were the big ones, accounting for 86% of total assets at failed MDIs. 
 
Of course, consolidation has hit this sector just like the rest of the banking industry. Looking at voluntary mergers during that same time frame, 54% merged with other MDIs accounting for 76% of the assets for the group. 
 
But this year... one MDI has been closed and the process was far from simple. We first wrote about  zero-star Seaway Bank & Trust, Chicago, IL in January (JRN 34:05) as it was one of just two banks in the nation that had received a regulatory classification of “critically undercapitalized” with both September 30th and December 31, 2016 financial data. The first had already failed and we surmised that Seaway’s days were numbered. We were right; it failed the same Friday our article came out. 
 
Seaway B&T was a Black/African-American MDI until it was closed on January 27th (JRN 34:15). Regulators have little choice when a bank becomes critically undercapitalized, there is a short window for it to improve, find an acquirer or be shut down. When the first two options didn’t pan out, the state of Illinois swept in, closed the bank and named the FDIC as receiver. 
 
When shopping for an acquirer, the FDIC is also tied to strict rules as it must accept the bid that is least costly to the deposit insurance fund. In the case of Seaway, that turned out to be *****State Bank of Texas, Dallas. While also a MDI, State Bank of Texas serves mostly Asian Americans, not Black Americans. According to the FDIC press release, State Bank of Texas was going to assume all of Seaway’s deposits and purchase $309 million of its assets. The ten branches of Seaway were to reopen the following business day as branches of State Bank of Texas.  
 
However, just over a month later, we learned that State Bank of Texas was selling nine of those branches to ***Self-Help Credit Union, Durham, NC and that they will continue to operate under the Seaway name.
 
According to its website, “Self-Help’s history and mission are deeply intertwined with the history of African-American credit unions”. Were State Bank of Texas and Self-Help in discussions from the outset? It doesn’t really matter, the point is that Self-Help CU is in a position to help Seaway continue to provide banking services and counter any discriminatory lending practices in the diverse neighborhoods that it has serviced for 50 years. We applaud the move. 
 
There are some who argue that the MDI distinction no longer has value. We disagree. We actually consider MDIs to be the epitome of community banking: committed to helping their neighbors be successful. A list of all U.S. MDIs as of December 31, 2016 along with financial highlights is on page 7 and the insert.

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While the number of federally insured credit unions continues to decline, by every other measure, they are growing strong. Between year-end 2006 and year-end 2016, the number of federally insured credit unions dropped 31%; total assets, on the other hand, increased by 82%. As a result, the median credit union has $29.05 million in assets, up from $12.5 million in 2006. The “average” credit union today has over $223 million in assets, a 163% increase over 2006. The whys and hows are as varied as the credit unions themselves.

The list on page 7 includes all federally insured credit  unions that increased their asset size by 26% or more during calendar 2016 with the exception of any that are too new or too small (less than $1.5 million in assets) to have a star rating. Let’s take a look at a few of them.

The first one, ****Fellowship Credit Union, Lamar, CO, acquired a like-minded CU, ***Arkansas Valley FCU, Las Animas, CO on October 1, 2016. The transaction nearly doubled its asset size (from $12.6 million to $23.3 million) and more than doubled its membership (from 2,487 to 5,469). This is Fellowship’s third credit union acquisition since its inception in 1959.

The second CU listed, ****Stewart’s FCU, Saratoga Springs, NY, took a very different approach to building its assets. Comparing its 12/31/15 Call Report to that of 12/31/16, we see its number of potential members is unchanged at 6,000. And, its number of current members actually dropped during the year (from 3,005 to 2,754). Yet, it has been very successful in increasing the amount of shares on deposit by those members.

While Stewart’s FCU is trying to attract more lending with attractive rates, it has been only marginally successful. Instead, the majority of those new shares are now on deposit in other financial institutions. The total amount it reports on deposit in other financial institutions has increased from just over $1 million to just under $9 million.

In regards to the third CU listed on page 7, it was the acquired institution, ***Jeff-Co Schools FCU, Mount Vernon, IL, that began searching for a partner. With less than $9 million in assets and limited resources, the board & CEO decided this was the best way to offer members services and amenities they were requesting. ***Kaskaskia Valley Credit Union, Centralia, IL fit the bill.

Skip down the list about one-third of the way to ****Manatee Community CU, Bradenton, FL. This credit union’s growth stems mainly from bank closings in Gulf Coast region over the past several years.  As a community credit union, its membership is open to anyone who lives, works, attends school or worships in Manatee County, including displaced and/or dissatisfied bank customers. During calendar 2016, its membership grew 16% while its assets grew 50%.

Skip down again about two-thirds of the way. *****City Center Credit Union, Provo, UT was originally chartered in 1928 to serve the needs of postal employees in the Provo area. It has expanded that field and is now open to all residents of Provo County. In the past year, its membership has grown 17.8% and its assets have grown 33.7%.

Still others are growing by buying banks (or portions of banks). The most recent, ***Self-Help CU, Durham, NC, announced in March that it plans to buy much of the failed Seaway B&T, Chicago, IL from  *****State Bank of Texas, Dallas. State Bank assumed the deposits and $309 million in assets when Seaway was closed in January. The plan now is for nine branches and $200 million in deposits to be taken over by  Self-Help CU.

In January, *****Advia CU, Parchment, MI announced it will be acquiring its second Wisconsin bank in six months. Last August it purchased ***Mid America Bank, Janesville adding four branches and $81 million in assets (13.8%) which was not enough to get it on page 7. Now it is in the process of acquiring *****Peoples Bank, Elkhorn, WI with assets of $237 million or, another 17.5%.

Other recently announced bank acquisitions by CUs include (but are not limited to):

*****IBM Southeast Employees CU, Boca Raton, FL has filed all of the necessary paperwork to acquire $110 million asset *****Mackinac SB, FSB, Boynton Beach, FL, which will increase its assets by 12%;

*****Family Security CU, Decatur, AL will increase its assets by 4% when it acquires the $20 million ***½ Bank of Pine Hill, AL; and

*****Royal CU, Eau Claire, WI barely made a dent in its asset size when it acquired $35 million asset Capital Bank in St. Paul, MN last year. And the list goes on.

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Dating back to the very first U.S. credit union chartered in 1908, St. Mary’s Bank Credit Union, member business loans have been a part of the credit union business model. However, over the past  several years the practice has become a core service offered by a much larger number of CUs and is an important source of credit for small businesses in particular.

With a minor hiccup in 2014, member business loans have been on a steady incline since the Great Recession (see chart). Yet, the rules governing these loans had not changed significantly since 2003, until now.

Credit-Union-Business-Loans

With certain exceptions, effective January 1, 2017, federally insured credit unions have more flexibility and greater autonomy in making commercial and business loans to their members. The final rule modernizes the process of making business loans by moving from a prescriptive rule to a principles-based rule. NCUA’s oversight will focus on risk management and align more closely with that of bank regulators.

While credit union business lending pales in comparison to that of banks, the NCUA Board believes that the experience gained in the past 13 years in particular, warrants these changes. Not only did they successfully navigate through the recession, CUs have slowly but surely been increasing their investment in member business loans. As a percent of total assets, these loans surpassed 5% for the first time at the end of 2016.

The delinquency rate on these loans peaked above 4% in 2010 and then dropped but has been climbing again for the past two years. As of year-end 2016, the delinquency rate on member business loans is 1.58%.

Page 7 lists the 50 federally-insured credit unions with the most business lending based on 12/31/2016 data. The majority are well rated; the majority also have loans other than business loans rounding out their portfolios. The two with the highest percent:

***Progressive Credit Union, New York, NY (98%) and Zero-Star Melrose Credit Union—Briarwood, NY (89%) have something else in common: a high concentration of taxi medallion loans. We’ve reported on this before (JRN 33:33).

Until recently, a taxicab  medallion was considered to be one of the safest and surest investments in the world. Banks and credit unions that specialized in financing them did so with the expectation that they would remain so.

With the rise of smart-phone ride sharing  apps, however, the value of taxicab medallions in many U.S. cities has plummeted. The loans made to finance these once elite assets are now faltering. This is what happened to Melrose Credit Union.

As of December 31, 2016, Melrose Credit Union’s capital ratio is just 5.73%, but that doesn’t begin to tell the story. It’s Bauer’s adjusted CR, which factors in delinquent loans is -31.65%. Its $98.7 million loss in 2016 was actually an improvement over the $176.7 million loss in 2015. Melrose CU has been operating under conservatorship since February 10, 2017 and is quite literally fighting for its survival.

While it also has its share of delinquent loans, Progressive CU is much better positioned to weather the storm. It is still very well capitalized (33.55% CR) which gives it a nice cushion absorb losses. While it remained profitable through 2015 it did lose $52.1 million in calendar 2016. During the fourth quarter its delinquency to asset ratio grew only slightly (from 12.23% to 12.32%) but its repossessed assets jumped from $1.4 million to $7.1 million (an indication that it is getting its bad loans off the books). Its Bauer’s adjusted CR is 24.2%.

The only other CU listed on page 7 that has less than a recommended rating of 5-Stars or 4-Stars is ***Evangelical Christian CU, Brea, CA. Its business loans represent 85.6% of total loans. In this case, the CU is actually on the mend. It closed out 2011 with Zero-Stars and has slowly, but surely, been working its way back up.

It’s hard to imagine that the new rules will help in this situation, but we can’t imagine they would hurt either.

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Before we begin, let’s be clear, FDIC-insured banks are NOT the only institutions that finance auto loans and leases. In fact, bank  auto loans account for less than half (but more than a third) of the U.S.’s $1.157 trillion auto debt.

Automobile finance companies, i.e. Ford Motor Credit, Toyota Financial, and a myriad of others, account for the largest slice. While Credit Unions represent a more modest, but growing segment of U.S. auto loans. As always, our focus is on the federally-insured institutions that could be affected by any downturn in the industry.

The leading U.S. auto lender when it comes to FDIC-insured banks is ****Wells Fargo Bank, N.A., Sioux Falls, SD, which has roughly $60.5 billion in outstanding auto loans. As of the end of 2016, 2.8% of those loans were at least 30 days past due. That’s up 30 basis points from a year earlier. However, if you just look at the 90 days past due and those in nonaccrual status, the numbers change dramatically. At year-end 2016, 0.34% fell under this category, up from 0.32% at year-end 2015.


The list on page 7 contains all FDIC-insured banks that have Automobile lending that exceeds 10% of total loans and more than 4.5% of those auto loans at least 30 days past due as of the end of 2016. Wells Fargo does not fall into either of these categories.

****Capital One N.A., McLean, VA on the other hand, does. Capital One is the third largest FDIC-insured auto lender with 30%, or $47.9 billion, of its total loans concentrated in automobile lending. Of those, 6.6%  were at least 30 days past due at 12/31/2016. While high, it has gone down from 7.22% a year earlier. Capital One did not have any loans reported as 90 days or more past due and still accruing at either year end, but its auto loans in nonaccrual status dropped from 0.53% at 12/31/2015 to 0.47% at 12/31/2016. So it is definitely on the right path.

So why do we keep reading that auto loans are going to be the next disaster?

The white portion of the following chart derives from the Federal Reserve (G.20) Statistical release:


The shaded areas were calculated and completed by BauerFinancial.

In other words, when financing a car, we are  paying a higher interest rate for a longer period of time. It now takes longer than five years to pay off even a used auto and 5½ years to pay off a new car.

Hypothetically, a person looking to purchase a used car could finance for 48 months instead of 61 months and save $1,508.21 in interest over the life of the loan. But, here’s the caveat, the monthly payment would be  $458.90. That’s a high payment for a used car, especially when we consider that wages have been pretty stagnant.

What our hypothetical person is apt to do instead is opt for the new car. Hypo will have to finance $11,425 more but at the lower rate of 5.1%. If the loan is extended out another six months (to 72 months or six years), the monthly payment will be $457.26, just under that of the used car for 61 months.

Up until now, the finance companies have been able to take advantage of lower used car values by charging higher rates and extending the terms. But if people only opt for new cars, it won’t be long before the supply of used cars is so abundant they will be making crazy deals to get rid of them. That would cause underwriting standards to loosen and mistakes to be made.

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On March 6, 2017, the board of directors of *****Eagle Savings Bank, Cincinnati, OH  announced plans to convert from a mutual to a stock form of ownership. The difference: a mutual is owned by its depositors and is free to reinvest its profits back into itself whereas a stock institution is owned by shareholders, many of whom are depositors, but not all.

After being very popular in the 1980s and ’90s, the conversion rate of mutual to stock slowed to a crawl in recent years. It seems to be heating back up as there have been several such announcements in the last six months. A stock conversion allows the bank to raise capital by selling stock ownership. Eagle reportedly hopes to sell 2.2 million shares and raise $22.5 million, which it expects will fund growth opportunities.

*****PCSB Bank, Brewster, NY
, a $1.2 billion asset bank and its new holding company, PCSB Financial Corp, commenced a stock offering to depositors at $10 per share on February 14th. Due to inclement weather, the 30 day sale period was extended through the end of the business day Friday, March 17th. A special meeting will be held to determine if any will then be offered to the general public.

Another, ****Huntingdon Valley Bank, Huntingdon Valley, PA and its new parent, HV Bancorp, Inc. did likewise in November and began trading on the Nasdaq in January.

Conversions like this don’t pose any immediate threat to the community nature of the bank as most, if not all, of the original stockholders are depositors who care about the bank and the community. But, there are some that are not quite so benign.

The more common of these is the investor who has opened accounts at mutuals across the country solely to cash in if it ever does go public. If it does, as a depositor of record, the investor can buy at the low offering rate (generally $10) and then sell when the stock hits his or her preferred price point. Less common, but more sinister, is the investor who pushes for the bank to go public in the hopes to force it into a sale. In this event, the sale would most likely go to the highest bidder, not necessarily the best bank to fit the needs of the community.

To avoid these pitfalls, some mutuals have converted in such a way they have the best of both worlds. *****Pentucket Bank, Haverhill, MA is one such bank. In a multi-step process, Pentucket Bank has established two holding companies: a top-tier mutual holding company and a mid-tier H.C. which holds 100% of the stock of the bank and is owned by the top tier mutual. While a bit convoluted, this process allows the bank to raise capital without risking its independence. While the bank itself is no longer a mutual, its top-tier holding company remains so.

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A  combination of industry consolidation and membership growth over the past 10 years has yielded an 80% increase in the “average” asset size of the nation’s federally-insured credit unions. The 7.3% increase in assets in 2016 was fueled mainly by loan demand as every type of loan saw year-over-year growth. New autos took the lead with a 16.8% jump over a year ago. The chart below shows industrywide trends from 4th quarter 2015 to 4th quarter 2016.


However, credit unions come in various shapes and sizes. They range from the very smallest, $20,596 asset (that’s thousand) unrated Holy Trinity Baptist FCU, a faith based credit union in Philadelphia with fewer than 100 members, all the way to $80 billion *****Navy FCU in Vienna, VA which has 6.8 million members around the world. Not every size witnessed the same growth patterns.

Ten years ago, 25% of the industry had $3.5 million or less in assets. Today fewer than 14% are that small. (Bauer does not rate CUs with less than $1.5 million in assets; there are currently 412.) Even with this growth,  there are still 1,659 federally-insured credit unions with less than $10 million in assets. While these represent over 28% of the industry in quantity, they represent less than 1% of industry assets, shares and loans.

Conversely, the 501 CUs with assets exceeding $500 million represent less than 10% of CUs by count yet control roughly three-quarters of the industries assets, shares and loans.

That being the case, it is much more telling to look at subsets of credit unions rather than the industry in aggregate. That’s exactly what the chart below does. The turning point for shares and assets seems to be at about $100 million in assets. While the smallest CUs are struggling with profitability and delinquencies, they have a larger capital cushion to buffer the blow(s).

Star-ratings are updated on all banks and credit unions now and can be found at bauerfinancial.com. The chart on page 7 compares the percentage of recommended credit unions (rated 5-stars or 4-stars) as well as those rated 2-stars or below from fourth quarter 2016 to year-end 2015. Eighty percent of all reporting credit unions (regardless of federal-insurance) are now recommended by Bauer.

There are also currently 156 Credit Unions on Bauer’s Troubled and Problematic Credit Union Report, up from 142 last quarter but lower than the 167 listed a year ago. This list contains all CUs that are rated 2-Stars or below and/or those that are less than “Adequately Capitalized” by Regulatory Standards. This report is available for $99 ($297 for a 1-year subscription). Simply call 1.800.388.6686 or order online at bauerfinancial.com.


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All bank star-ratings were updated last weekend and all fourth quarter reports are now available for banks. At this writing we are still waiting on credit union data but we will have it analyzed and available as quickly as we can.

The FDIC’s Quarterly Banking Profile highlighted many of the positives for the quarter. For example:
 - net income was 7.7% higher than fourth quarter 2015 bringing full year industry earning to $171.3 billion;
 - loan balances grew in every major category and were up 5.3% in 2016.
 - Community bank revenue and loan growth outpaced the industry.

But this is what caught our attention: A 5.2% jump in interest bearing assets drove the average net interest margin (NIM) up from 3.07% in 2015 to 3.13% in 2016. That sounds good until you look at the bigger picture. Aside from the 3.07% at 12/31/2015, 3.13% is the lowest year-end NIM in recent history. At the end of 2010, the industry NIM was 3.76% and it steadily declined, until now.

Also, fewer than half of the nation’s banks actually witnessed an increase in 2016; 54.3% reported lower NIMs than a year earlier.

By Size: Banks with assets greater than $250 billion reported the lowest NIM in the fourth quarter at 2.75%, but they generally have volume to make up for the low margin.

By Region:  The Chicago region reported the lowest NIMs by far at just 2.52%. The highest was San Francisco at 3.79%.

By Asset Concentration:
Credit card banks always have the highest NIM (10.82%) and international banks generally have the lowest (2.36%). Setting those aside,  there is quite a spread, although nothing comes close to the credit cards. Agricultural lenders came in at #2 with a  collective fourth quarter NIM of 3.68%. Mortgage Lenders, on the other hand, reported a NIM of just 2.84%.

This will be particularly interesting as the Federal Reserve raises interest rates. (A rate rise is being discussed for the March 14-15 meeting.)

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The Federal Reserve Bank of New York last week released its Quarterly Report on Household Debt and Credit and, at $12.58 trillion, U.S. consumer debt is  inching very close to its 2008 peak of $12.68 trillion. The report is conducted in conjunction with Equifax so these numbers reflect what is found on credit reports, regardless of whether the lender is a bank, credit union, finance company, or other lender, as long as it is reported to the credit bureaus.


Every type of consumer debt increased in the fourth quarter but  credit card balances had the highest jump (4.3%), followed by student loans (2.4%) and auto loans (1.9%). Mortgage debt increased at a more modest pace (1.6%), yet mortgage originations have reached their highest level since the beginning of the Great Recession.


Highlights from the report include:

 - Q4’2016 saw the highest number of newly originated mortgages since  Q3’2007.

 - Automobile loan originations in 2016 were at their highest level in the report’s 18-year history.

 - Delinquency rates on auto loans  (those 90 days or more past due) rose 0.2% in the fourth quarter and now represent 3.8% of auto loan balances.

 - Home Equity Lines (HELOCs) were pretty flat in the fourth quarter, rising just $1 billion.

 - The aggregate credit card limit increased for the 16th consecutive quarter, with a 2.3% fourth quarter 2016 jump.

 - Credit card inquiries were down from the third quarter; this would indicate a decline in future demand.

 - The number of bankruptcy notations continues its downward trend and hit a new annual record low for this report’s 18-year series.

The chart below depicts the amount and composition of household indebtedness in the U.S. since the end of 2007. Page 7 lists the 50 U.S. banks with the highest percent change in loans to consumers from year-end 2015 to year-end 2016.



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What do the U.S. Tax Code, The Batman Lego Movie and the Indymac Bank Failure all have in common? Steven Mnuchin. After a contentious  battle, and a very close vote, divided almost entirely on party lines, Mnuchin, President Trump’s nominee for Treasury Secretary, was sworn in on Monday, February 13th.


As Treasury Secretary, Mnuchin’s top two priorities are rewriting the U.S. tax code and stripping away parts of  Dodd-Frank, both in a manner that satisfies both the President and Congress. That’s a tall order. We will see if he is up to the challenge.


To his credit, Mr. Mnuchin has already had a number of successes in his 54 years. After graduating from Yale in 1985, he followed in his father’s footsteps working at Goldman Sachs. After 17 years and a number of promotions within the company, he left GS and began working at a hedge fund. A year later, he started his own.


In 2009, an investor group led by Mnuchin formed OneWest Bank, FSB,Pasadena, CA which was the highest bidder to purchase IndyMac. OneWest purchased 33 branches, all deposits and about $20.7 billion in assets for a discount of $4.7 billion. The FDIC and OneWest entered into a loss-sharing agreement on the single family residential loan portfolio under which, OneWest would continue the FDIC’s existing loan modification program. To head the new bank, Mnuchin moved from New York to California.


To increase its assets, OneWest acquired two more failed banks:


First Federal Bank of California, FSB(12/18/2009), which  added 39 branch offices and a loss share agreement on $5.3 billion of the failed bank’s assets. And,


LaJolla Bank, FSB (2/19/2010), added ten branches and included a loss share agreement on $3.31 billion in assets.


In one year, the new bank had doubled in size. It also had found itself receiving criticism from several consumer watch groups claiming the bank was highly aggressive in foreclosing on mortgages. These groups argued that OneWest was profiting from its loss share agreements and therefore less inclined to look for alternate solutions.


That claim failed to carry any water. Not only did the foreclosure rate of OneWest align closely with the rest of the industry, the FDIC even issued a statement that it had not made any loss-share payments to OneWest. Yet, that is the reputation that has been the most difficult for Mnuchin to shake. In 2015, Mnuchin, et. al. sold OneWest to CIT Group. Mnuchin stayed on as a member of the board of CIT until December 2016 when he was nominated to his current post.


Page 7 contains the 50 U.S. banks with highest dollar volume of troubled debt restructured loans as of 9/30/2016. This is a concerted effort on the part of regulators and bankers that began in 2008, in an effort to restructure viable loans to allow people to keep their homes. While a number of these restructured loans also went south, the program has been mostly a success.


The graph shows the dollar amount of the restructured loans that comply with the new terms (based on third quarter data each year).


So, that leaves us with the Lego Movie. While living in Southern California, Mr. Mnuchin picked up another hobby. He is listed in the credits of over 30 films over the past several years, as either producer or executive producer. Some of his movies include:

The Lego Movie with Chris Pratt and Will Ferrell;

Edge of Tomorrow starring Tom Cruise and Emily Blunt;

Blended which starred Adam Sandler and Drew Barrymore; and

Black Mass with Johnny Depp.


Mnuchin is the third Goldman Sachs man running our Treasury Department. He follows  Henry Paulson under G.W. Bush (R) and Robert Rubin under Clinton (D).


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Two short years ago, noncurrent C&I loans were at their lowest level in 31 years (probably longer, but that’s as far back as the FDIC has available records). Noncurrent C&I loans stood at 0.50% at the close of 2014 and rose just slightly (to 0.54%) at March 31, 2015. But, as the saying goes, all good things must come to an end.

 

The first quarter of 2016 was the pivotal quarter. Not only did C&I loans grow by nearly 4%, lending standards for C&I loans began showing weaknesses. Noncurrent C&I loans increased by 65.1%  in that quarter alone. That was the largest quarterly increase since the first quarter of 1987. Not only that, but net charge-offs for C&I loans posted a year-over-year increase of 144.7%.

 

That being the case, we were not surprised to see in the Federal Reserve’s January 2017 Senior Loan Officer Opinion Survey on Banking Lending Practices (SLOOS) that most banks left the standards and terms of their C&I loans unchanged during the fourth quarter of 2016. Granted, the survey is very limited with just 70 domestic banks and 23 U.S. branches and agencies of foreign banks taking part, but the majority of those  taking part tended to believe C&I lending standards will be loosening and asset quality of C&I loans will improve in 2017. (We at Bauer are not so sure about that.)

 

When it came to C&I lending, there were two camps: those that tightened either standards or term, and those that left them unchanged.

 

Reasons cited by those that tightened included:

  - Less favorable or more uncertain economic outlook;

  - Deterioration in the bank’s capital positions (either current or expected);

  - Worsening of industry-specific problems;

  - Reduction in risk tolerance;

  - A decrease in secondary market liquidity to resell these loans;

  - Deterioration in their own liquidity positions (either current or expected); and, last but certainly not least,

  - Increased concerns over  changes in Washington re: legislation, supervisory actions, and/or or accounting standards.

 

Conversely, banks that eased their C&I standards and/or terms did so because of:

 

  - Aggressive competition from other banks as well as from nonbank lenders;

  - Increased risk tolerance; and

  - A more favorable or less uncertain economic outlook.

 

If you notice, risk tolerance and economic outlook are on both lists as they can go either way, and are difficult to measure. Aside from those, competition is the driving factor behind banks easing their standards.

 

The graph depicts the growth in C&I loans at U.S. banks over the past eight quarters. Demand is clearly there. Whether it be for investments in plant or equipment, or to finance mergers and acquisitions, as a rule, these loans have shown solid growth. We will be monitoring the quality of the loans, as we always do.

 

The 50 community banks listed on page 7 reported the highest dollar volume of C&I loans on their books at 9/30/2016. In addition to providing the dollar amount, we also listed the percent of total loans that the bank’s C&I loans represent and what percent C&I loans represented a year earlier. Two-thirds of them reported a lower percent in the more recent quarter than a year ago.

That seems to be unique to these community heavily invested in C&I, though. When you look at the entire industry, about half increased and half decreased their percentage of lending that was C&I.

 

CIT Bank, for example, lowered its C&I lending by $1.747 billion over the twelve months ending 9/30/2016. Total loans at the bank decreased by $1.316 during that time-frame. As a result, its commercial real estate lending went from 14.9% to 17.43% of total loans. Residential lending, construction and “other” lending all ticked up as well.

 

The majority of the banks on page 7 are well-rated by Bauer.  Most, not surprisingly, are  classified by  the FDIC as “Commercial Lending Specialists”.


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Since the beginning of the Great Recession, mostly as a result of actions taken by the Federal Reserve Bank of New York, the Federal Reserve’s balance sheet has increased more than four-fold. The first jump(s) came in 2008 when FRBNY made loans to newly formed Limited Liability Corporations to keep the country from having even bigger problems. These included:

Maiden Lane LLC was created to acquire certain assets of Bear Stearns.

 

Maiden Lane II & Maiden Lane III LLC were created to facilitate restructuring of AIG.

 

As a result, assets at the FRBNY went from $315.5 billion at year-end 2007 to nearly $1.3 trillion in assets at the close of 2008. By year-end 2011, the credit extended to AIG had been fully repaid but not the loan to Maiden Lane. It still accounted for $17.7 billion of FRBNY’s $1.684 trillion of assets. FRBNY’s assets accounted for 75% of the system’s total assets. (See chart.)


The Maiden Lane Loans for AIG were paid off in 2012.

 

In the years from 2008-2010, the Federal Reserve in Washington embarked on two separate Quantitative Easing campaigns (QE1 increased the Fed’s balance sheet by $600 billion; QE2 raised that to $1.25 trillion). The effect on the economy was still minimal.

 

Then, in June 2012, the Fed decided to try something new (kind of, it was actually used once in the ’60s). Operation Twist (JRN 29:25) was the name given to this policy of buying longer-term Treasuries while selling shorter term ones. The goal was to bring long-term interest rates down and spur lending. It had little effect as well.

 

Banks didn’t want to make loans and neither consumers nor businesses had the confidence to want to take out loans. Rates were already as low as they could go (without going negative) and the economy was still struggling. In September 2012, the Fed introduced QE3 or QE Infinity, as some called it since, unlike the others, it had no planned end. Under QE3, on a monthly basis the Fed would purchase:

 

 - $85 billion in fixed-income securities;

 - $40 billion of mortgage backed securities; and

 - $45 billion of U.S. Treasuries.

 

Whether it was QE3 that began to spur the economy is still in debate, but unemployment is now below 5% and inflation is approaching the Fed’s 20% target. We have had two 1/4 point increases (Dec. 2015 & Dec. 2016) and expect more later this year. What’s more, consumers and businesses are feeling better about borrowing. That all bodes well for the future.

 

There is one extremely large variable  however, that we cannot ignore: President Donald Trump. If the new president cuts taxes and increases government spending, as he said he would, inflation could spike, causing the FOMC to raise rates faster than currently expected.

On the other hand, volatility with U.S. trade partners and/or domestic and global unrest could just as easily have the opposite effect.

 

While we are not prepared at this moment to make a prediction as to when we will see another rate raise, we are pleased to share that, over the past few years not only has loan growth begun to pick up, it has done so while savings have increased. The chart below depicts this trend. It references the average dollar amount per member that credit unions have reported over the past five years, both in deposits and in loans. As you can see, both are trending up.


 

Page 7 lists the 50 federally insured credit unions with the highest dollar amount on deposit per member. They are leading the trend in a very good way… and the majority are very well rated by Bauer.

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We remember being shocked reading this statistic from the FDIC’s Fourth Quarter 2009Quarterly Banking Profile (QBP): “Only 31 new charters were added in 2009, the smallest annual total since 1942.” (Only 20 of the 31 remain active today.)

Since 2009, de novo banks have been even more scarce. In fact, in  the five years from 2012 through 2016, there were only two: Primary Bank in New Hampshire (which opened on July 28, 2015) and Bank of Bird-in-Hand in Pennsylvania (which opened for business on November 29, 2013).

We are pleased to be able to report that the tide is changing.

International Bank of Commerce, Oklahoma City, OK (Cert #59093) received approval for deposit insurance and was officially established on January 1, 2017. Happy New Year!

Blue Gate Bank, Costa Mesa, CA
received provisional approval for deposit insurance back in October and opened its doors to the public on Monday, January 23rd.

Before we get too exited, though, we have also seen the first bank failure of 2017. On January 13th, Zero-Star Harvest Community Bank of Pennsville, New Jersey was closed by the New Jersey Department of Banking and Insurance. All deposits and the four branches of the failed bank were purchased by *****First-Citizens Bank & Trust Company, Raleigh, North Carolina.

While failures are slowing and de novos are picking up, the pace of mergers remains quite robust. According to the FDIC QBPs, The number of banks reporting financial data has decreased by 25% — from 8,012 at the start of 2010 to just 5,980 at September 30, 2016, and will be even lower when the fourth quarter QBP is released (see chart below).


Page 7 contains a list of the 50 newest U.S. banks that are still in operation today. Most are well-rated by Bauer and all but one (Zero-Star Urban Partnership Bank, Chicago, IL) are considered Well-Capitalized by regulators. Urban Partnership Bank’s Leverage Capital Ratio (CR) of 5.48% is good enough for an “Adequate” regulatory capital designation. However, its continuous losses combined with a delinquency to asset ratio of 6.14% and a negative Bauer’s Adjusted CR secure the bank a zero-star rating.

Another bank that is teetering dangerously close to failure is Zero-Star Seaway Bank & Trust, also of Chicago, IL. Like Harvest Community Bank (which failed earlier this month), Seaway B&T is “Critically undercapitalized”. It has been operating under an enforcement action for the past two years, but has slowly been losing the battle. At September 30, 2016, Seaway Bank & Trust had a Leverage CR of just 1.93%, a delinquency to asset ratio of 6.27% and a negative Bauer’s adjusted CR. We believe its days are numbered.

In addition to the two above, 39 other banks are rated Zero-Stars, our lowest rating. Between mergers and failures, our communities would benefit from more de novos
.

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Last week we reported that, after a very slow start in 2016, consumer’s appetite for debt, including credit card debt, is back with gusto. Revolving credit (primarily credit cards) actually dropped (-0.3%) in January 2016 (JRN 33:18). A quick look at the graph below and it’s easy to see that trend was short-lived. Credit card loans at U.S. banks grew 6.6% to $761.645 billion in the 12 month period ending 9/30/2016.


However, after eight years of improvement, the quality of those loans started to show some strain.

By the end of the third quarter 2016, credit card charge-offs had increased 13.4% or $658 million (from a year earlier). In addition, there was a $1 billion increase in noncurrent credit cards. (Noncurrent includes all loans 90–days or more past due  as well as loans that are no longer in accrual status.)

Those increases led to a prudent 6.1% ($1.7 billion) third quarter bump in loan loss reserves.

Why prudent? The consumer price index (CPI) surpassed the 2% mark in December. The 2.1% year-over-year increase was the largest since June 2014 and that, combined with improvements in unemployment numbers, means the Federal Reserve will be raising interest rates again sooner, rather than later.

In fact, we would not be surprised to see a quarter point increase on February 1st, depending on what happens during the rest of this month. Although March 15th is probably more likely as it will give the Fed’s Open Market Committee (FOMC) time to tell if these advances are permanent. They will not want to wait too long, as changes take some time to fully take effect.

In a speech on January 18, 2017, Fed Chair Janet Yellen said, “as of last month, I and most of my colleagues--the other members of the Fed Board in Washington and the presidents of the 12 regional Federal Reserve Banks--were expecting to increase our federal funds rate target a few times a year until ... the end of 2019”.

Incoming data obviously can change that expectation ...in either direction. As of today’s writing, though, we see justification for four quarterly rate increases this year. Good for CD investors. Bad for holders of credit card debt. As the Fed raises interest rates, the rates on those cards will also rise as will their delinquency and charge-off rates.

The Beige Book also came out on January 18th. While a summary of comments from people outside of the Federal Reserve System, and not necessarily reflective of the view of  Federal Reserve officials, it did reinforce our perception of what the FOMC will do.

Reports from most of the regions agreed that:

 - The economy continues to expand at a modest pace.

 - Non-auto retail sales are expanding.

 - Labor markets have tightened and are expected to continue tightening.

 - Employment growth was up slightly to moderately, even in districts that mentioned layoffs.

 - Wages have seen modest increases.

 - Wage pressures are expected to rise.

 - Pace of hiring expected to remain steady or increase.

 - Pricing pressures are up.

 - Increases in input costs were more widespread than increases in final goods prices.

 - Expectation for rise in final goods prices to follow.

 - Home prices holding steady or are up slightly.

All of the above, combined with other data, and the comments from Chair Yellen, point to a rate rise in the near future, so put those credit cards away. 

Page 7 contains a list of the 50 U.S. bank with the highest dollar volume of credit card loans; those highlighted in yellow are categorized by the FDIC as “Specialized Credit Card Lenders”. The list also includes:

 - The dollar amount of credit card loans that are 30 days or more past due;

 - The amount of credit card loans as a percent of total loans;

 - The percent of growth of credit card loans over the past 12 months; and

 - The percent of credit cards that are past due at least 30 days.

______________________________________


No, we are not bringing on the scare tactics. The fact is, loan quality improved so dramatically in the years after the recession, it was bound to start to swing in the opposite direction at some point. But that doesn’t mean we can stand on the sideline when we see the movement begin.

And it has. The first chart below shows the year-over-year change in dollar volume for all loans to individuals (blue) over the past several years as well as the change in just credit card loans (orange) over the same timeframe. Consumers’ hesitancy to jack up credit card balances was relatively short-lived, but not as short as their appetite for other consumer loans (i.e. automobiles and other revolving lines).  

This is actually a good sign. A willingness to spend and put things on credit shows an increased confidence in both the recovery and the overall economy. Consumers worried about losing their jobs would not  exhibit this pattern.

However, for the first time since the recession, we also see an uptick in the delinquency rate of consumer loans. The second chart shows how, after improving for several years, the delinquency rate (90 days or more past due or in nonaccrual status) and the rate of loans past due 30-89 days ticked up in the third quarter of 2016.

This was true for credit card loans as well as the larger pool of all loans to individuals. While these rates are well below the 15-year average (the credit card 15-year average delinquency rate is 3.68% according to the ABA as cited in the American Banker 1/10/17), it is nonetheless a change in direction. And it is something we will continue to monitor.


We tried to create the list on page 7 so it would not be skewed toward banks with low volumes of consumer loans but were only marginally successful. Here’s how we did it:

In all of the banks listed on page 7:

 - Consumer loans (credit cards, automobiles and other consumer loans) account for at least 20% of total loans.

 - And, at least 5% of those consumer loans are at least 30 days past due (some much more).

For example: Fortis Private Bank, the first bank on the list, is classified by the FDIC as a Consumer Lending Specialist. It has loans totaling $296.262 million of which 61%, or $180.306 million worth are loans to consumers.

Over 40% of those $180.306 million in consumer loans were past due at least by 30 days at September 30, 2016.

Compare that to a year earlier when loans to individuals of $33.735 million represented under 22% of total loans and past due consumer loans were 28% of all loans to individuals. Still high, but much better than now.

In this case, though, most of the consumer loans have government guarantees. The bank lacks the “skin in the game” to incentivize it to do better underwriting. That’s the same story for Fort Hood National Bank, a bank for those who serve our country. At 9/30/2016, 33% of its total loans were to individuals, almost double from a year earlier. While a large percentage (21%) of those loans are now past due, government guarantees keep the bank off the hook for the losses.

In fact, many of the banks on page 7 are in similar situations. Jackson Parish Bank is not one of them. Jackson Parish Bank has total loans of $18.786 million, 20% of which are to consumers (down slightly from 21% a year ago). Past dues on those consumer loans now represent 15.6% of the total. That’s up from 12.8% a year earlier. It bodes watching.



It was 16 years ago: 2001. George W. Bush was sworn in for his first term as President of the United States. Terrorists struck down the twin towers in New York City and tried to do the same to the Pentagon. Anthrax was closing down offices and mail houses in what would become the worst case act of bioterrorism in the nation’s history.

That was the last time a Republican took over the oval office. A lot has happened in the interim. The target Fed Funds rate dropped 50 basis points at a special meeting of the Fed’s Open Market Committee (FOMC) in January 2001. That was after sitting pretty for seven months at 6.50%. It would continue to drop at each of 11 meetings throughout the year (eight scheduled and three special). By the close of that year, the Fed Funds target was just 1.75%.

Fast forward to 2008. The FOMC   finishes a historic lowering of the Fed Funds target rate to “near zero”. The country is in the throws of the “Great Recession”. Then, in January 2009,  President Barack H. Obama,  (D) was sworn in. Since he has been in office, there have been just two rate changes: one in December 2015 and the other in December 2016.

To say the FOMC faces “considerable uncertainty about future fiscal and other economic policy initiatives”, as is noted in the minutes from its December meeting, is a considerable understatement. Most members do agree that we are looking at “more expansionary fiscal policies” in the coming years.

The timing and size of Mr. Trump’s stimulus efforts, whether they be tax cuts, spending on infrastructure, or business incentives, is sure to have the FMOC on its toes. Gone are the days of “near zero” interest rates and there is already a mention that they may have to raise rates faster than currently expected.

That’s great news to us, and to anyone who relies on interest  income. It’s not so great for banks and credit unions that have failed to manage their interest rate risk properly. You don’t have to worry about that per se since Bauer takes that into account when assigning its star-ratings.


However, if you are going to be in the market for a loan, especially a long-term loan, you may want to lock in your rate sooner rather than later.

You may want to consider the banks listed on page 7. These 50 banks have managed to earn Bauer’s 5-Star Rating for the entirety of the program: 114 consecutive quarters (Since December 1988). Donald Trump will be the sixth U.S. President in office since we began rating banks (the first was Ronald Reagan).

These banks have been through it all and Bauer has every reason to believe they will continue to do so. What makes them different?

They:

- know their customers and the ups and downs of their local economies and businesses.

- don’t get involved in risky investments or investment vehicles that they don’t understand.

- have high capital levels to cushion in the event of a downturn.

- practice prudent loan underwriting so very few loans go sour.

As you can see, most have been around for a long time, much longer than Bauer has been rating them. In fact, the majority even predate the FDIC which started insuring banks in 1934, after the Great Depression. They have been through wars, countless presidents, the Savings and Loan crisis of the 1980s and the Great Recession of 2008.

They are well prepared for whatever the next four years throws their way. And so is Bauer.


January:

C.U. Lending Takes Flight

At nearly $770 billion, total loans at federally-insured credit unions increased 3.3% during the third quarter 2015 and 10.7% during the twelve months ending 9/30/2015. We had concerns  that the interest rate spread may tighten as the Federal Reserve began to raise interest rates. Those proved to be premature.

February:

Problems Loom in C&I Lending

Since hitting a low point in 2010, Commercial & Industrial loans increased over 50%. It seems, as we had feared, that some bankers are saying yes to loans they should be declining. While total noncurrent loans (those past due 90 days or longer) have been steadily decreasing, non-current C&I loans have increased in the last three quarters.

In March we Pondered Whether 90% of U.S. Banks Were Too Small to Survive.

It takes on average, over 76 cents for the nation’s 1,688 banks with less than $100 million in assets to generate a dollar of income; it takes almost 69 cents for the next group. That accounts for 90% of the industry. Allowing these community banks to dwindle would devastate small business. To choke the life out of them with over-regulation would imperil our entire economy. The answer must be NO!

April:

New Banks Finally on Horizon

FDIC Chairman Martin J. Gruenberg commented that the agency is looking for ways to facilitate the process of establishing new community banks and has seen indications of increased interest in de novo charter applications in recent quarters. Music to our ears.

May:

Consumers Idling Economy

Borrowing in  the first two months of 2016 grew at annualized rates of  just 5.8% in February and 5.1% in January. These are the smallest percentage changes since 2011. Revolving credit (primarily credit cards) actually dropped (-0.3%) in January.

June:

Credit Card Tardiness Ticks Up

Synchrony Financial, Salt Lake City, UT, the fourth largest U.S. credit card bank, increased its forecast for defaults and panic ensued. JRN was a source of calm amid the storm.

Granted, Synchrony Bank’s delinquency to asset ratio is above 1.5%, which is a little higher than we like to see; it has enough set aside in loan-loss reserves to cover three-times what it has delinquent now.

July:

Most Big Banks Pass Stress Tests

Even in the severely adverse scenario, most companies did quite well as U.S. firms have substantially increased their capital since the first round of tests seven years ago. Although, there were some caveats:

M&T Bank Corporation met minimum capital requirements on a post-stress basis after submitting an adjusted capital action plan.

The Federal Reserve required Morgan Stanley to submit a new capital plan by December 29, 2016 to address certain weaknesses in its capital planning processes.

August:

Something Both Parties Agree on

When Senators Elizabeth Warren (D-MA) and John McCain (R-AZ) introduced a new 21st Century Glass-Steagall Act in 2013 (JRN 30:31) nobody else was listening. Perhaps they will now as both the RNC and the DNC platforms included calls to reinstate some form of  the act.

September & October:

Another Case for Community Banks

Wells Fargo on the hot seat for fraudulently opening as many as 1.5 million deposit accounts and more than 500,000 credit cards. Out went CEO John Stumpf and in came Tim Sloan.

November:

Was All About The Election

December:

Fed Raises Rates, 2nd Time Since 2006

It came as no surprise, but the quarter point increase in the Fed Funds rate is a fitting and welcome way to close-out 2016 and say Hello to 2017.


It came as no surprise, but the quarter point increase in the Fed Funds rate is a fitting and welcome way to close-out the year. A quarter percent is not going to make a big wave in  the Jumbo CD rate curve, but it is just  the first in what we expect to be several incremental increases over the next two to three years (JRN 32:48).

That was what we wrote in the final issue of JRN in 2015. The increments have come a lot more slowly than we anticipated, but we finally got a second rate rise this December.

The difference between the end of last year and the end of this year? Last year loan demand was extremely anemic. Banks had little-to-no reason to attract deposits. Loan demand this year has picked up in nearly all categories for both banks and credit unions. With an expectation that loan rates will rise, as they do when the Fed Funds target rises, it is natural for consumers and businesses to want to lock in lower rates while they can.

The resulting increased loan demand will ultimately create a need for more deposits to fund the loans, and when that begins to happen, we will finally start to see a real change in Jumbo CD rates.

It is clearly going to be a long, slow road. If 2016 wasn’t enough to convince us of that, the Fed’s Open Market Committee (FOMC) projections (released every December) make it pretty clear. Last December, a majority of FOMC members believed the Fed Fund target rate would be 1.25% or higher by now. Instead, it is at a mere 75 basis points. The farther out we look, the bigger the discrepancy from last year, and the bigger variations in the predictions. For example, (throwing out  the lowest and the highest) the projected appropriate target range for 2018 runs all the way from between 1.5% and1.75% to 3.25%.

For 2017 (again discarding the highest and  the lowest), the predictions range from 75 basis points (i.e. no change from now) to 1.75% (which would most likely come in four quarter-point increments). Clearly some members believe 2017 will be a repeat of 2016 while others believe the Fed will be playing catch-up. The majority, however, put us right in the middle (above 1% and below 1.75%).

Page 7 contains a list of the 50 community banks that have the largest dollar volume of Jumbo CDs (time deposits of $100,000 or more). Many of them are listed on our rate pages but that doesn’t necessarily mean they will be among the first to pull the trigger on a deposit-side rate rise.



The number of Bauer recommended credit unions (rated 5-Stars or 4-Stars) decreased by 30 during the third quarter, but that is more a result of industry consolidation than anything else. The percent (80.3%) is virtually unchanged since last quarter. Just like the nation’s banks, the number of federally insured credit unions dropped below 6,000 in the third quarter.

 

Approximately 70% of the decline was in smaller credit unions (those with assets less than $10 million), and most were a result of mergers.  While these smaller credit unions have a higher aggregate capital ratio than the larger groups, other indicators pale in comparison. For example, membership grew 4% industrywide from Q3’2015 to Q3’2016, but in these smaller credit unions, membership actually dropped 1.2%.

 

Boosted by the increased membership, insured shares and deposits industrywide surpassed the $1 trillion mark for the first time ever. Loans were also up, rising over 10% from a year earlier, and growing in every major category (as  shown in the chart).


As has been the case for some time,  most credit union growth is concentrated in the largest institutions, the 498 with assets exceeding $500 million. A quick comparison between these large credit unions and those with assets under $10 million, and you can see why the smaller institutions are merging. For example:

 

 - Annualized loan growth at the largest CUs was 11.6%, at the smallest it was just 1.8%

 

 - Net worth at the largest CUs grew 8.7% and just 0.7% at the smallest CUs, and

 

 - Return on Average Assets was 89 basis points at the largest CUs and just 12 bps at the smallest credit unions.

 

Of course, the majority of the industry (62.5%) is somewhere in between (2,601 have assets between $10 million and $100 million and 1,054 have assets between $100 and $500 million).  The numbers in the chart below are for the industry as a whole, but more accurately reflect this middle 62½%.

 

Page 7 contains a state-by-state list of recommended credit unions (5-Star or 4-Star) and Troubled and Problematic (T&P) credit unions (2-Stars or below) and compares those numbers to a year ago. A couple of numbers seem to jump out, so we are providing more information.

 

New Hampshire: The percent of T&P CUs in the Granite State jumped from 5.6% at 9/30/2015 to 11.8% at 9/30/2016. Shocking, right? Wrong. New Hampshire is home to just 17 credit unions. Fifteen are recommended, the other two are rated 2-Stars.

 

New Jersey: The Garden State houses 173 credit unions; 18 of them are too small to rate (Bauer does not rate credit unions with assets less than $1.5 million).. The remaining 155 cover every possible scenario: 121 are recommended; 25 are rated 3-Stars; six are 2-Stars; two earned 1-Star; and one,  Colgate Employees FCU is significantly undercapitalized and rated Zero-Stars.

 

Wyoming: The  Equality State (or The Cowboy State) is similar to New Hampshire in that very few credit unions call it home, 29 to be exact. Of those 25 are rated 4-Stars or better while 2 are rated 2-Stars. The other two are rated 3-Stars.

 

In spite of the above, the percent of T&P credit unions is now at its lowest point since early 2008 and dropping. In terms of number, there are currently 130 credit unions rated 2-Stars or below. The Troubled and Problematic Credit Union Report is available for $99; Statewide Credit Union Reports are $60 each.

 

 


The number of banks in the U.S. has fallen below 6,000, about half what it was 20 years ago. Yet, in spite of its quantity, the industry has posted its second consecutive earnings record. Third quarter net income of $45.6 billion was 12.9% higher than a year earlier.

The increase was attributed mainly to increases in net interest income, which jumped $10 billion during the quarter. Loan volumes continue to rise, particularly at community banks, so hopefully they will see more benefit before interest expense starts to rise too.

Loan quality, however, was a bit of a mixed bag with the biggest areas of concern being credit card loans and  Commercial & Industrial loans.


That brings us to Problem Banks. The FDIC currently has 132 banks on its Problem List with assets of $24.9 billion. The FDIC Problem List currently contains 2.2% of the nations banks representing 0.19% of industry assets.

Bauer’s Problem List, which always has more because we project negative trends forward, contains 2.6% of banks and represents 0.25% of industry assets.

Look how far we’ve come. When Bauer’s Troubled and Problematic count reached its peak in 2009, banks rated 2-Stars or below represented  13.7% of the industry and 4.7% of industry assets.



National banks that are members of the Federal Reserve are prohibited from establishing or acquiring an out-of-state branch primarily for the purpose of deposit production (Riegle-Neal Section 109). In other words, if a bank has branches outside of its home state, it must be using the deposits from those branches to make loans in that state.

Section 109 is a two step process. In order to pass the first step, a bank must show that its out of state branches have a loan-to-deposit ratio of at least half of the published host-state ratio for those branches, which is updated annually. If the bank passes step one, it does not have to go on to step two.

The host state loan-to-deposit ratio is an estimate determined by total loans (from June 30th call report data) and total deposits from that state (from Summary of Deposit data) for all banks headquartered in that state.

    Sum of Loans        =    Host State LTD Ratio
  Sum of Deposits

For example, based on June 30, 2015 data, all banks headquartered in Alabama had a combined host loan-to-deposit ratio of 82%, up from 76% in 2011 (see page 7).

Therefore, if a bank headquartered outside of Alabama has branches in Alabama, it  must have at least a 41% loan-to-deposit ratio in Alabama (82/2) to pass part one of Section 109. If the bank fails part one, or if there is insufficient data to conduct step one, step two requires that regulators determine if the banks is “reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches”.

In most instances, a bank that fails step two will sell its out-of-state branches or find another way to remedy the situation before any formal action is taken. That would be the end of it and no one would ever know… but we have a hunch about this one:

****SouthCrest Bank, Woodstock, GA, just announced it will sell its two Alabama branches to *****Guardian Credit Union in Montgomery. Under a new CEO, Brian D. Schmitt, the bank plans to refocus lending directly in the Atlanta market.

According to the release, Guardian will pay a 5% premium on the deposits, estimated at $45 million and will also purchase loans worth over $6 million.

   6 million in loans       =  less than 14%
45 million in deposits

Okay, maybe its more than just a hunch.


The FDIC first introduced loss-sharing as an incentive for healthy banks to purchase undesirable loans from a failed bank in 1991. Under these agreements, the FDIC typically reimburses 80% of losses associated with a specified pool of loans during a specific time-frame. The assuming bank is responsible for the other 20%, up to a predetermined threshold.

With a thriving banking industry and minimal failures, the practice was  shelved for several years. Then , on July 11, 2008, Indymac Bank, FSB, Pasadena, CA failed. In addition to estimated uninsured deposits of $1 billion held by 10,000 depositors, Indymac had assets of $32 billion. Without a buyer, the FDIC created a new bank, Indymac Federal Bank, FSB, and operated it under conservatorship trying to maximize its value and make it attractive for a future sale.

The loss-sharing concept returned. On March 20, 2009, with the incentive of a loss-share agreement on the entire single family residential loan portfolio. OneWest Bank, FSB, also of Pasadena, stepped up to the plate. There would be over 300 more failed banks resolved  over the next several years using loss-sharing incentives, including two more purchases by OneWest. OneWest went on to acquire CIT Bank in August of 2015 and rebranded itself to CIT Bank, NA. As of June 30, 2016, it continues to have the most loans on its books subject to loss share agreements. (The top 50 are listed on page 7.)

The loss-sharing agreements are typically eight years, although many banks have been allowed to terminate their agreements early. In fact, two that are listed on page 7 have since terminated. They are:

*****Branch Banking & Trust Company, Winston-Salem, NC. BB&T  entered into the agreement on $15 billion of assets with its acquisition of Colonial Bank, NA, Montgomery, AL in 2009. As a result of its early termination settlement, it posted a pre-tax loss of $20 million in the third quarter but retains ownership of the loans and other assets and thus will recognize all gains and losses here out. And,

*****First Bank, Troy, NC, which paid $2 million to the FDIC in September. It will now be responsible for all losses and recoveries associated with its purchase of Cooperative Bank, Wilmington, NC (2009) and Bank of Asheville, NC (2011).

With loss-sharing initially covering asset balances of over $216 billion, the amount now covered is less than $17 billion. The estimated savings to the FDIC exceeds $41 billion. It has not been a win-win for everyone, though.

***Banco Popular de Puerto Rico was denied reimbursement for $55 million in loss-share claims in an arbitration dispute last month. The FDIC reportedly stopped paying a portion of the loss-share starting in 2012 due to differences in the way the bank calculated charge-offs on certain commercial real estate loans. The decision will negatively impact its third quarter financials.

The graphs depict that while the number of banks subject to loss-share agreements remains somewhat elevated, the number of covered assets has diminished drastically in the past few years.




The Federal Reserve is supposed to be apolitical and while Chairman Yellen insists that politics play no part in the Fed’s Open Market (FOMC) discussions or decision-making, the fact is, it is very rare for a rise in the Fed Funds rate right before a presidential election.

In fact, in the past 32 years, there has only been one. That was in 2004 when incumbent George W. Bush was running for a second term against John Kerry. Alan Greenspan was still at the helm of the Federal Reserve, which  raised the Fed Funds rate a quarter point at each of its 17 meetings from June 2004 through June 2006. The rate rose, incrementally, from 1.00% to 5.25% in the 2-year period. And there it sat. Until September 2007, when it began to drop again, precipitously, until it hit near zero in December 2008. When the Fed raised the rate  a quarter point last December, Dr. Yellen made sure we knew that further increases would be gradual and would also be dependent on incoming data.

Bauer believes the incoming data do support a rate rise. Esther George, the most vocal dissenting voter of the FOMC, agrees. Esther L. George is the president and CEO of the Federal Reserve Bank of Kansas City.

On February 2, 2016, she wrote, “it is important to remember that even after this first rate hike, monetary policy remains highly accommodative.  Real interest rates continue to be negative and the Federal Reserve’s large portfolio of Treasury and mortgage-backed securities keeps downward pressure on longer-term rates.”

Then, on April 7, 2016:

“Since the December meeting, economic data have largely confirmed an outlook for further growth. We have received four strong labor reports as well as data showing that inflation is moving higher.

Unfortunately, however, the initiation of raising interest rates coincided with what appears to be a more vulnerable global economy, and a domestic economy that appears to be slowing in the first quarter and is threatened by markets that are anxious, uncertain, and volatile. Faced with these dynamics, the Federal Reserve’s decisions to continue to normalize its policy settings have become more difficult.”

May 12, 2016:

“I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today’s economic conditions. The economy is at or near full employment and inflation is close to the FOMC’s target of 2 percent, yet short-term interest rates remain near historic lows. Just as raising rates too quickly can slow the economy and push inflation to undesirably low levels, keeping rates too low can also create risks. Interest-sensitive sectors can take on too much debt in response to low rates and grow quickly, then unwind in ways that are disruptive.”

The June FOMC vote was unanimous in favor of keeping rates unchanged. What changed? BREXIT, the British vote to exit the European Union. Nobody knew how that was going to affect the markets and staying pat was absolutely the right thing to do in that moment. Ms. George has dissented at every meeting since. And, slowly but surely, others are joining her.


We are all for it.  At the same, we understand that higher interest rates could put added pressure on community banks’ net interest margins which have been slowly rebounding from the 30-year low of 3.02% in the first quarter of 2015. They are currently at 3.08% industrywide, and 3.58% for community banks.  As long as loan rates can keep pace with deposit rates, that trend will continue.

The community banks listed on page 7 have the highest net interest margins based on June 30, 2016 financial data. They are all well above the industry average. Higher interest income on 1-4 family real estate loans is credited for the improvement.


Bank equity capital increased $30.4 billion in the second quarter 2016 (1.7%) as  banks are retaining more earnings in preparation for tougher capital standards. Banks reduced quarterly dividends by $6.1 billion (21%) compared to the second quarter last year. As a result, retained earnings were $6.7 billion (49.2%) higher than a year ago.


The FDIC began requiring a “capital conservation buffer” this year of 0.625% which will gradually increase  to 2.5% in 2019. The chart below shows the buffer amount for each year as well as the minimum ratio required with the buffer in order to be “Adequately Capitalized”. The last column indicates the number of banks that fall short based on June 30, 2016 financial data.


The new minimums (with the conservation buffers) are only used to determine payout restrictions. Banks that fail to meet these minimums face restrictions on dividend payments, share buybacks and discretionary payments (including bonuses).



The minimums used for Prompt Corrective Action (PCA) have remained unchanged. At the end of the second quarter 2016, there were only two critically undercapitalized banks by regulatory standards. Under Prompt Corrective Action Rules (PCA), a Critically Undercapitalized bank has a limited window in which to improve or find an acquirer before its gets shut down by regulators. As a result, both Zero-Star Allied Bank, Mulberry, AR and Zero-Star Woodbury Banking Company, GA have already been closed. But, as we all know, there is a big difference between being “Well-Capitalized” by regulators and being “Well-Rated” by BAUERFINANCIAL.


The banks listed on page 7 had the largest year-over-year increase in net worth and all 50 are “Well-Capitalized” by PCA standards, but not all have stellar star-ratings. Capital is king, there is no doubt about that. But regulators (and anyone else interested in bank safety) need to look beyond capital and  capital conservation buffers.


As of June 30, 2016, there are:

  • 19 “Well-Capitalized” banks with a Texas Ratio that exceed 90%;

  • 23 “Well-Capitalized” banks with a negative Bauer’s Adjusted Capital Ratio;

  • 103 “Well-Capitalized” banks that posted a second quarter 2016 loss, a first half 2016 loss AND a 2015 calendar year loss;

  • 211 “Well-Capitalized” banks operating under a supervisory agreement; and

  • 116 “Well-Capitalized” banks rated 2-Stars or below by Bauer.

The FDIC brags that 99% of its banks controlling more than 99% of banks assets are  “Well-Capitalized” by regulatory PCA standards.


That may be true, but at mid 2008, in the heat of the Great Recession, 98.4% of U.S. banks, also controlling over 99% of industry assets were considered “Well-Capitalized” as well. The designation just doesn’t hold any weight.


Let’s compare.

As of June 30, 2008, there were:

  • 55 “Well-Capitalized” banks with a Texas Ratio that exceeded 90%;

  • 69 “Well-Capitalized” banks with a negative Bauer’s Adjusted Capital Ratio;

  • 640 “Well-Capitalized” banks that posted a second quarter 2008 loss, a first half 2008 loss AND a 2007 calendar year loss;

  • 259 “Well-Capitalized” banks operating under a supervisory agreement;

  • 358 “Well-Capitalized” banks rated 2-Stars or below by Bauer, and


Not to mention, hundreds of “Well-Capitalized” and “Adequately Capitalized” banks that didn’t make it to today.



We have often reported on bank efficiency ratios. Not only is this the most common way to evaluate a bank’s performance, it is also very straight forward.

The efficiency ratio =  noninterest expense / (net interest income + noninterest income)

After the debacle at Wells Fargo, though, we wanted to take a closer look at productivity ratios. After all, Wells Fargo employees were creating false accounts (on both the deposit side and the credit card side) to boost their “perceived” productivity. Granted, we don’t know how many of the 2 million plus fraudulent accounts were actually funded, but the analysis is still enlightening.

This week we chose the Assets Per Employee ratio as our measure of productivity. In contrast to the Efficiency Ratio, in which a lower number is better, higher assets per employee indicate the employees  are effectively managing a larger proportion of the bank’s assets.

The assets per employees ratio =Average Assets / # of Full-time Equivalent Employees

This is also a very straight-forward calculation, so long as nobody is cooking the books.

We have listed the community banks with the highest average assets per employees on page 7. The first three have very high ratios (two have brokerages and one specializes in equipment leasing). In fact, most U.S. banks (community or not) with a high ratio have either a brokerage business, a strong internet presence, or a niche customer base that gives them an edge in this particular measure.

We also provided the efficiency ratio on page 7. While the majority of banks with strong performance ratios also have low efficiency ratios, more than a handful are over 80%. That means it takes these banks, all things equal, more than 80 cents to generate $1.00 in revenue.

Of course there are other ways to evaluate performance. Otherwise the 108% Efficiency Ratio at ****Safra National Bank could be quite worrisome. Safra’s net interest margin is less than 1.5%, yet it earned a profit of more than $6.5 million in the second quarter and $15.6 million for the first half of 2016. And, its asset quality is stellar. Its focus: “to meet the global needs of a select group of high net worth individuals and their respective businesses”, is clearly paying off.

The graph below depicts three different performance measures based on second quarter data for the past 7 years. A complete assessment cannot be made without including all measures.

Aren’t you glad you have Bauer to do the heavy lifting for you?

Source: FDIC Quarterly Banking Profile


National Cyber Security Awareness Month  Week 4: OCTOBER 24-28

Our Continuously Connected Lives:

    What’s Your “APPtitude”

As our digital world expands, it is imperative that we build strategies for security, safety and privacy at home and at work.

There is now an App for just about everything you can imagine. While these apps can bring tremendous benefits, they can also open us up to cybercrimes.

Many of us already bank and pay bills online but we are entering a new era of smart everything:

  • Smart Cars;
  • Smart Cities;
  • Smart Homes;
  • Connected Healthcare devices;
  • Digitized records.

Technology is advancing at breakneck speed. We must all do our part in this interconnected, digital world to ensure we connect in a safe and secure manner.

STOP—THINK—CONNECT!


It wasn’t either of the bruising punishments on Capital Hill that caused Wells Fargo’s embattled CEO and Chairman, John Stumpf, to tender his resignation, effective immediately, on Wednesday evening.


Last month, when we first reported on millions of fraudulent accounts opened at Wells Fargo (JRN 33:37) we posited the idea that Mr. Stumpf’s job would not be in danger ...unless investors got nervous. Since then there have been:

  • A $185 million settlement with regulators;
  • Two Congressional hearings;
  • Stumpf’s forfeiture of $41 million in unvested equity; and
  • Calls for a criminal investigation.


Investors blinked. The stock price for WFC dropped 14% from $50.80 on August 31st to $43.75 on October 4th. Board members are reportedly “furious” not only over Stumpf’s handling of the affair, but also that they were kept in the dark.


The fraud goes back farther than originally thought. In fact, it’s possible it started in 1998, long before Stumpf took the reigns. Yet, after ten years leading the bank, one would be hard-pressed to believe Mr. Stumpf was unaware of the sales culture at the bank. This is what The Motley Fool had to say:


Overly aggressive sales targets from Stumpf and Kovacevich before him essentially forced employees in Wells Fargo's branches to create untold millions of fake deposit and credit card accounts for customers. And then, when Stumpf was called before Congress to answer for the bank's actions, he blamed its lowest-paid employees.

It was an incomprehensible response from a man who made untold tens, perhaps hundreds, of millions of dollars from the efforts of these very same people he called "teammates." And to add insult to injury, we've since learned that many Wells Fargo employees who blew the whistle on the unfolding scam, some of whom emailed Stumpf directly about it years ago, were fired under pretexts in such a way that made it essentially impossible for them to ever work in the bank industry again. - Oct 12, 2016 at 7:38PM


Despicable is the word that comes to mind.


Payday Loans and the Alternative, PALs


As the comment period winds down for CFPBs Notice of Proposed Rulemaking on Payday and other high-cost installment loans, we would like to take a moment to go over the differences between these predatory loans and Payday Alternative Loans that are offered by some credit unions.


Over 12 million Americans take out payday loans totaling roughly $38 billion each year;. Fewer than 100,000 are taking advantage of the payday alternative loans (PALs) offered by the nation’s credit unions. (The 50 credit unions with the highest dollar volume as of June 30, 2016 are listed on page 7.)


Of the 530 credit unions that reported a payday alternative loan rate at June 30th, the interest rate charge ranged from 5% to 28%; over half charged 25% or greater. While that may seem high compared to a secured loan, they pale in comparison to what payday lenders are charging. With fees and compounding, a consumer could end up paying up to 400% from another lender.


National Cyber Security Awareness Month

Week 3: October 17-21 Recognizing and Combatting Cybercrime


This week’s topic encompasses what to do before a cyber intrusion occurs, how to recognize the signs of an attack, and what to do if you discover you are a victim of cybercrime, regardless of what form it takes.


The many forms of cybercrime:

  • Organizational data breaches
  • Identity theft
  • Revenge porn
  • Cyber-stalking
  • Harassment and bullying
  • Child sexual exploitation
  • Online radicalization
  • Recruitment to terrorist networks


The fact is, any internet-connected organization or individual can fall prey. To prevent and/or mitigate losses, we would urge you to read “Best Practices for Victim Response and Reporting of Cyber Incidents” published by the Cybersecurity Unit of the Department of Justice.



Anyone familiar with BAUER knows that we have always been, and will remain, champions of community banks. You may also know that the term “Community Bank” has been redefined - first by the FDIC (December 2012) and later by Bauer (May 2016JRN 33:17).
 
Previously, the determination was  based solely and inconsistently, on asset-size. While similar, our new definition is not exactly the same as the FDIC’s, but we believe it to be an accurate portrayal of true community banks.

Bauer’s Community Bank Definition:
 

   All FDIC-insured banks and thrifts except:

  •    Banks with assets > $50 billion
  •    Banks in holding companies with assets > $50 billion
  •    Banks with assets  greater than $1 billion that operate in more than 3 states.
  •    Banks with Specialized lending
  •    Banks with other Specialization   that have > $1 billion in assets
  •    Bankers Banks
  •    Credit Card Banks
  •    International Banks
  •    Trust Companies, and
  •    Most Industrial Loan Banks.

While we are confident in our new definition, we are also cognizant that many studies and even the FDIC’s Quarterly Banking Profile (QBP), continue to report results based on asset size (although the QBP does have a separate section now committed exclusively to the performance of community banks).

The reason we are rehashing all of this now is simple. Earlier this week, the American Banker reported that “Bigger Banks Are Gobbling Up a Larger Share of Deposits”. Reading that, it would be easy to think that the largest ten banks are taking all of the deposits. Not true.

Combined, the largest ten banks gained just 3.2% in deposits; two actually lost deposits (not Wells Fargo; it gained 5.4%). ****State Street B&T, Boston, MA lost 15.7% in deposits from June 30, 2015 June 30, 2016 and ***½ BNY Mellon, New York, NY lost 9.3%. ****TD Bank, Wilmington, DE, on the other hand, gained 10.4%. 

However, as the chart below shows, the smallest of the small banks are taking quite a hit. That’s not because deposits are fleeing, but because small banks are merging. During the twelve months ended June 30, 2016, 268 banks were lost to (absorbed by) mergers; 32% of the absorbed banks had less than $100 million in assets and another 57% had between $100 million and $1 billion. Who were they absorbed by? Banks with greater than $1 billion in assets. That’s why we see the shift in deposits.


In a report earlier this year, the Federal Reserve Bank of Saint Louis found compliance costs to be the reason so many smaller banks were merging. According to their findings, compliance costs at banks with less than $100 million in assets represented more than 8% of noninterest expense. Those same compliance costs at banks with assets between $1 billion and $10 billion were less than 3% of noninterest expense. That is a huge incentive to merge.

Fortunately, the majority of those banks are seeking out other community banks as merger partners (a la Merrimac Savings Bank, MAJRN32:25). As a result, when we look at June 30, 2016 Community Banks, we see that their deposits grew by 9.2% from a year earlier. Community Banks  control 19.7% of the nation ‘s deposits.

Those with the highest percent growth are listed on page 7.


Now in its 13th year, National Cyber Security Awareness Month is more pertinent than ever. This year’s focus is on the consumer and each week a different avenue of protection will be highlighted.

 

Oct 3-7 = Stop. Think. Connect.

 

At home, Americans are storing more of their personal information on their PCs, including taxes, bank statements, passwords and pictures.  Think about how you would feel if those things were lost or stolen.

 

In business, a safe and secure environment is vital to the protection of intellectual property, customer data and reputation.  No matter what safeguards and firewalls are in place, a company is only as secure as its weakest link. In business, that weakest link is the individual user: your employee(s).

 

What You Can Do:

1. Set appropriate privacy and security settings (get the cyber planning guide from the FCC);

2. Automate software updates for your browsers and operating system;

3. Delete communications that seem suspicious, even if you think you recognize the source.

 

An Ominous Prediction:

According to Experian’s Third Annual 2016 Data Breach Industry Forecast Report, businesses can look forward to increased instances of cyber-extortion.

 

The more familiar cyber theft, where account numbers and data are sold on the black market, is not as lucrative as it was a few years ago. This has paved the way to extortion, which has become so prevalent a new insurance industry has emerged to cover losses incurred from it.

 

A cyber extortionist will steal information that is useless to him/her, but valuable to the owner. The owner will be contacted and given the “opportunity” to pay handsomely for the return of the property. If the owner refuses, the stolen data will either be released to the public or encrypted and returned, useless, to the owner.

 

While anti-malware software will always be a step behind the malware it is chasing, it will often be included in your software updates. That’s why it is so important to automate your system and browser updates. There could be a fix long before you know there’s even a problem.

 

When Yield Spread is Slight, Increased Volume is Key

 

How do banks make money with a slim interest margin? By increasing loan volume. After a precipitous drop in residential real estate lending six years ago, it is finally making a come-back. Comments received by the Federal Reserve from businesses across the nation, indicate that the growth is expected to continue, at least at a moderate pace, in most regions of the country.

 

Here’s a Synopsis—From Coast to Coast:

 

Boston: After a very busy spring and early summer, New England reports slowing home sales due to a shortage of available inventory.

 

New York: Housing markets have been mixed but high-end demand continues to weaken as does demand for condos and co-ops.

 

Philadelphia: Like New England, the mid-Atlantic sees existing home sales leveling-off due to a shortage of available units.

 

Cleveland: Pent-up demand resulted in a 7% increase in single family home sales and a 4% increase in sales price over a year earlier.

 

Richmond: Modest increase in home sales due to a shortage of inventory, but optimistic.

 

Atlanta: The tortoise of the group, with slow but steady residential real estate growth.

 

Chicago: Residential real estate activity increased to “moderate” pace and is expected to stay that way for the next 6-12 months.

St. Louis: Residential real estate market weakened slightly from a year ago, but still remains  strong.

 

Minneapolis: Strong growth in single family home construction as construction of multifamily units slowed.

 

Kansas City: Respondents expect declines in inventory and sales in the coming months.

 

Dallas: Strong demand for low and mid-priced homes while demand for higher priced homes softened.

 

San Francisco: This is the only region that actually reported robust growth in residential construction and sales. In fact, you can see on  page 7, that over a third of the banks that reported the greatest increase in year-over-year residential real estate lending hail from this region.



How many years, agencies, and fraudulent accounts does it take before someone takes action? Whistleblowers and customers started filing complaints against Wells Fargo in 2013, at least, but no one reportedly knew the extent of the fraud taking place at one of the nation’s largest banks.

The numbers are daunting. Over 1.5 million deposit accounts and more than 500,000 credit cards may have been opened fraudulently so that sales staff could meet quotas and get bonuses. Not only were accounts opened, bank staff actually transferred funds between accounts leading to untold dollars in insufficient fund penalties and fees for unsuspecting customers.

Bank fees can (and should) be reimbursed. That’s the easy part. Rectifying credit reports that were adversely effected by fraudulent credit card issuances is not easy at all. A media release issued by the Consumer Financial Protection Bureau (CFPB) stated, “The gravity and breadth of the fraud that occurred at Wells Fargo cannot be pushed aside as the stray misconduct of just a few bad apples. As one former federal prosecutor has aptly noted, the stunning nature and scale of these practices reflects instead the consequences of a diseased orchard. ”

Over 5,300, mostly lower-level apples from that diseased orchard have been let go over this scandal. That isn’t enough for Senator Elizabeth Warren (D-MA), who is calling for CEO John Stumpf to resign, return money and be criminally investigated. If history tells us anything, Mr. Stumpf doesn’t have to worry much about job security ...unless investors get nervous. So far, they’re not blinking.

Where were the regulators while all of this was happening? Thomas Curry, Comptroller of the Currency, the regulator for big banks like Wells Fargo, has not escaped the hot seat. In his prepared remarks before the Senate Committee Tuesday, Curry acknowledged that, “enforcement actions such as these require thousands of hours of examination and investigation work”. He thanked both the CFPB and the Los Angeles City Attorney’s Office, without which, this fraud may still have been covered up.

The fact is, the OCC and the CFPB have levied combined fines in excess of $230 million on Wells Fargo Bank in 2015 and 2016 alone. The reasons ranged from illegal mortgage kickbacks, errors in escrow calculations, illegal student loan servicing, and now this. Yet, Mr. Stumpf (who reportedly earned $19.3 million last year) continues to defend the culture of the behemoth bank.

Think about it. Wells Fargo let go over 5,300 employees. Only 36 banks in the nation even employ that many people in total. Wells Fargo employs over 233,000!

The presidential candidates have differing means to reign in the Big Banks and their bad behavior, but both have similar ends:

Clinton wants executive compensation to suffer if a bank is required to pay a major fine. She believes banks that are too big to be effectively managed should be broken up.

Trump prefers to repeal Dodd-Frank and reinstate a Glass-Steagall type law, which would effectively break-up all Big Banks.

No one here is running for president, but there is something everyone can do. Bank locally. Banking at a community bank or local credit union has many benefits, not the least of which is, you are treated as a real person. It is much easier to defraud a faceless account number than  your neighbor.

Other benefits to banking locally include:

  1. Your deposits will be used to make loans locally. While you are earning interest (granted, not  much now, but as much as at a Big Bank) your deposits are being used to help neighbors and friends and improve your community.
  2. Community banks are structured to meet the needs of local families and businesses just as credit unions are designed to meet the needs of members.
  3. Bank and credit union officers are generally accessible, both physically and emotionally to the men and women who place their trust in them.
  4. Loan decisions are made locally and not based solely on financial data and debt ratios, but also on character and history.
  5. Community banks understand the needs of small business, since they too, are small businesses.

There is no shortage of institutions to pick from. Two weeks ago, we gave you Bauer’s state percentages for bank ratings. This week, we list all credit union state percentages. Over 80% of the nation’s credit unions are rated 5-Stars or 4-Stars (over 85% for banks). That gives you plenty to choose from.


A bank’s Efficiency Ratio  measures how much of its operating revenue is spent on overhead. A lower ratio indicates higher efficiency. According to the FDIC’s Quarterly Banking Profile, the average bank efficiency ratio at June 30, 2016 was 57.74%. In other words, it costs a bank, on average,  57.74¢ to generate $1 of revenue.

That’s down from 59.22% a year earlier and marks the lowest ratio since the fourth quarter 2010 when it was 57.22%. In fact, 55% of the nation’s banks reported a lower  efficiency ratio at the end of the second quarter 2016 than they did a year earlier.

But, is there really such a thing as an “average bank”? Banks have different business models: some focus on credit cards, others on commercial lending; some banks consider themselves more like retailers than bankers. We did, however, find two banks that had efficiency ratios of exactly 57.74% at June 30th. Both have similar operating models, so we will just discuss one here.

*****Buckley State Bank, Buckley, IL is a small community bank with assets of just $44.5 million. Its single office is the only banking option in the small town (fewer than 600 residents as of the 2000 census). Buckley State Bank has been making agricultural loans to its neighbors since 1920.

An example of a bank with one of the best efficiency ratios is ***First Credit Bank, Los Angeles, CA. Its  high capitalization helps buffer it from a high loan to deposit ratio (118.6%), most of which are CRE and construction and land development. Not only does First Credit Bank have an admirable efficiency ratio of just 12.6%, it also has an enviable interest rate margin of 6.05%, well above the industry average of 3.08% . First Credit Bank’s margin is almost more comparable to those of credit card banks (10%) than of commercial lenders which average 3.3%.

At the other extreme, more than  200 banks have efficiency ratios exceeding 100%. Granted, many of them are on Bauer’s Troubled and Problematic Bank Report, but many are not. These are primarily niche banks. ***Young Americans Bank, Denver, CO, for example, operates more like a school than a bank. A high efficiency ratio is expected.


If you look at efficiency simply by asset size (first chart), it is clear that efficiencies of scale do  have their limit. The ten largest banks are less efficient than the 102 banks in the $10—$250 billion category.

As a group, smaller banks do have to spend more than their larger counterparts, but there are exceptions. Page 7 lists the 50 community banks that have the lowest efficiency ratios. Many of these banks have successfully harnessed the power of the internet to keep their operating costs down.

But, as you can see in the second chart, the bank’s headquarter makes a difference as well. Banks in the San Francisco region (which includes AK, AZ, CA, HI, ID, MT, NV, OR, UT, WA  and WY)  have the lowest efficiency ratios nationwide. But the Dallas Region (AR, CO, LA, MS, NM, OK & TX) is struggling. As a group, these banks spend 16% more than San Francisco for each dollar earned.


All star-ratings have now been updated to reflect June 30, 2016 financial data. Last week we focused on banks; this week the focus is on credit unions.

While all vital statistics (except for actual number of credit unions) are on the rise, the increase in outstanding loan volume is what really stands out this quarter. The credit union industry posted a 10½% increase in loan volume from June 30, 2015 to June 30, 2016. (That compares to 6.7% for banks.)


Loan volumes are growing slightly faster than shares (deposits) bringing the loan to share ratio up from 75.5% a year ago to 77.8% at the close of the second quarter 2016. The ratio was slightly higher (79.9%) for low-income credit unions.

Conversely, as loans are increasing, investments are slowing, long-term investments to be precise. Investments with maturities of less than one year increased by 8.1% but all longer term investment dropped; those with maturities greater than 10 years witnessed the sharpest decline at 18.3%.

Also, as loans increase, so are delinquency rates—not in every category, but in many (see chart below). Significant increases could be seen in member business loans, student loans (w/o federal guarantees) and payday alternative loans. Real estate delinquencies were down, however, helping to keep the overall loan delinquency rate level at 0.75% - up just one basis point from a year earlier.

Page 7 lists the 50 credit unions with the largest dollar volume of total loans based on June 30 2016 financial data, as well as the percent increase from loan volume a year earlier. On page 2 you will find listees that changed star-ratings based on the new June data.  



Loan demand is on the rise and bankers seem happy to lend. Total loans and leases grew by 6.7% during the 12 months ended June 30, 2016, and grew in every major category with the exception on home equity lines of credit (which decreased 5.4%).

As a rule, loan quality is also good. Noncurrent loans (those past due 90 days or more) dropped by 3.4% in the second quarter alone and 5.7% from a year ago. In fact, according to the FDIC’s Quarterly Banking Profile, the average noncurrent rate  of 1.49% is the lowest for the industry since 2007. Loans past due 30-89 days also dropped and are now 1.9% lower than a year ago.

Of course, you can’t have a rule without an exception. Commercial & Industrial (C&I) Loans, which represent over 21% of total loans (the second highest after 1-4 family residential) are faltering. Growth is robust at 7.4% for the 12 month period, but quality has suffered.

C&I loans past due 30-89 days have increased 20.8% since June 30, 2015, but that’s nothing when compared to charge-offs, which have been on the rise for over a year. The second quarter $2.2 billion C&I charge-off may not seem like that much considering it is the second  largest loan category, until you realize it has increased over 100% from a year ago. What’s worse, noncurrent (90 days or more past due and those in nonaccrual status but not yet charged-off) C&I loans are up 134.6%. We warned about this (JRN 32:07).

We wrote:

    The fact that businesses are borrowing and growing bodes well for the economy… providing of course, that it is done judiciously.

    Too much lending in a short time could also mean that bankers are saying yes when they should be saying no. That happened frequently in the years leading up to the housing bubble.

Apparently, it was not done as judiciously as it should have been. On the bright side, they are already writing them off their books.


That being the case, the number of banks on the FDIC’s Problem Bank List dropped from 165 to 147 during the second quarter. It has been eight years since the FDIC has had this few banks on  its Problem List. These 147 banks have assets totaling just $29 billion.

Since Bauer projects negative trends forward, (like problem C&I loans) our Troubled and Problematic Bank Report always contains more than that of the FDIC. But they are getting closer. Bauer’s list contains 166 banks with $32.8 billion in assets. That means fewer than 2.8% of the nation’s banks (less than 1% of industry assets) are currently rated 2-Stars or below. It has been nine years since we’ve seen numbers this low.

We will have new ratings out in time for next week’s issue, but based on our preliminary analysis, over 85% of the industry is now rated either 5-Stars or 4-Stars (and therefore recommended by Bauer). Only four states still have greater then 10% of their banks represented on the Troubled & Problematic Bank Report (see chart A).

Chart B contains the states with the most improvement in the percent recommended.



In English, the word uber means extreme, usually referring to something extremely good. In German, it means over or above. In taxi talk, however, uber has become a different kind of 4-letter word altogether.

Until recently, a taxicab  medallion was considered to be one of the safest and surest investments in the world. Banks and credit unions that specialized in financing them, did so with the expectation that they would remain so.

With the rise of smart-phone ride sharing  apps, however, the value of taxicab medallions in many U.S. cities has plummeted. The loans made to finance these once elite assets are now faltering. This is what happened to zero-star Melrose Credit Union, Briarwood, NY.

When Melrose CU filed its June 2015 quarterly reports, the $2.1 billion asset institution’s capital ratio (CR) was  over 18%. It was then and still is, the credit union with the largest dollar volume of member business loans. A large number of those loans were made to finance taxicab medallion purchases. And, an 18% CR would prove an insufficient cushion for what was to come.

That quarter revealed the first sign; the credit union posted a loss (very out of character at the time, although not anymore). Its delinquent loans  as a percent of assets jumped from 0.27% in the first quarter 2015 to 2.61%. That was just the beginning.

By the end of 2015, Melrose CU had racked-up losses of nearly $177 million. Its delinquencies were growing exponentially and its capital ratio was suffering as a result.

At March 31, 2016 Melrose CU had a CR of 10.37%; its Bauer’s adjusted capital ratio (which factors in delinquencies), was negative (–11.03%) and it was reporting fresh losses quarterly.

Now, a preliminary look at Melrose CU’s June 30, 2016 report indicates the credit union is officially “undercapitalized” with a 7.49% CR. The New York Department of Financial Services issued a Consent Agreement against the CU in July. Since then, Alan Kaufman, the CUs president and CEO since 1982 has “departed” and has temporarily been replaced by interim president/CEO Steven Krauser.

Zero-star Montauk Credit Union, New York, NY was in a similar situation a year ago. Its medallion loans began heading south sooner than those of Melrose and it also lacked the same capital cushion that Melrose had when the tide began to turn. The result: Montauk was placed into conservatorship in September 2015 and merged into Bethpage FCU in March 2016. It was this acquisition that bolstered Bethpage’s member business loan portfolio by 28% (see page 7).

Two other credit unions that are highly invested in taxicab medallions are: ****Progressive CU, New York, NY and ***LOMTO FCU, Woodside, NY. Both are trying to decrease their exposure.

Progressive’s June 2016 call report indicates the credit union has 233 Troubled Debt Restructured Member Business Loans totaling  $108 million. All 233 are in nonaccrual status. The good news for progressive is that it still has a very generous capital cushion; it’s capital ratio at June 30th is down just slightly from March 31st—from 37.22% to 36.71%.

With June 30th assets of just $253 million and a  Capital Ratio of 11.05%, LOMTO C.U. has a much smaller cushion and its delinquencies are sky-rocketing. After posting $3 million losses in each of the previous two quarters, it lost another $4 million in the second quarter. It will be much more difficult for LOMTO to weather this storm.

All of the credit unions we have just discussed are listed on page 7 (highlighted in yellow) because they have among the highest dollar volume of member business loans. In normal circumstances, loans are earning assets, so to have a high volume is desirable. But, just as we witnessed with the housing bubble, if the underlying assets of those loans lose their value, the loan portfolio built using those assets as the foundation, will suffer. The difference this time is that the number of banks and credit unions effected is limited.


 

The Consumer Financial Protection Bureau (CFPB) is hiring mystery shoppers to determine whether banks are discriminating in their lending. ****BancorpSouth, Tupelo, MS is the first (although probably not the last) to have charges brought against it based on what these undercover shoppers experienced: Redlining and Unfair Pricing.

Redlining, which refers to the actual red lines that were drawn on a map to delineate which neighborhoods were “acceptable” from those less desirable (i.e., not white), has been going on in this country for decades, probably since the civil war. While the actual red lines are gone the practice is not ...in spite of the Community Reinvestment Act (CRA).

In its complaint, dated June 29, 2016, the CFPB charged BancorpSouth for redlining in the Metropolitan Statistical Area (MSA) of Memphis, Tennessee (which includes parts of Mississippi and Arkansas as well as Tennessee) and parts of Alabama (which showed similar inequities). The bank also has branches in Florida, Louisiana, Missouri and Texas that were not addressed.

There are eight counties located in the Memphis MSA and they are split   in equal parts: African-American (46.4%), and white (46.2%). (Only 4.7% is Hispanic). This is where it gets creative. Under the CRA regulations, BancorpSouth did not have to serve the entire MSA, rather, it selected its own “assessment area” which, prior to 2013 excluded 96.5% of the high-minority neighborhoods (map pg 2). It discouraged lending outside of that assessment area.

In January 2013, BancorpSouth amended its assessment area to include all parts of the MSA in which it had a branch. You’d think things would get better; they got worse. According to the complaint, in 2013 African-Americans were denied first mortgage loans 2.7 times more than white applicants in similar situations. Second mortgage loans were denied 4.6% more and home improvement loans were denied 1.9 times the rate of white applicants.

What’s more, similar African-American loan applicants were charged interest rates that were anywhere from 11 to 64 basis point higher than their similarly situated white neighbors. Similar situation  means that the income, credit scores and debt ratios were all comparable.

As a result of these findings, the CRA rating  for BancorpSouth has been downgraded retroactively from Satisfactory to Needs to Improve. In addition to a $10.6 million settlement, BancorpSouth joins the banks listed below and on page 7 that will likely be unable to complete any acquisitions (of which BancorpSouth has two pending) until the CRA rating is upgraded back to Satisfactory.



The Dodd-Frank Act was signed into law July 21, 2010. Just 28 months later, an article in the American Banker questioned whether that passage marked the beginning of the end for community banks. The article: Thanks to Dodd-Frank, Community Banks Are Too Small to Survive, by Louise Bennetts, appeared in the BankThink section on November 9, 2012.

That was not an isolated opinion, but one that has seemed to take on a life of its own in the years since. So much so, in fact, that the White House Council of Economic Advisors issued a brief on the subject (released August 10th). And, to no one’s surprise, the White House economists came to the opposite conclusion. So, who’s right?

The answer to that lies partially in your definition of a “community bank”.  Bauer’s definition is similar to the FDIC’s in that we exclude specialty banks (i.e. credit card banks), banks with branches in more than three states and banks with foreign branches. The White House economist definition was simply: banks with assets totaling less than $10 Billion.

With these differing definitions, it is no wonder the conclusions differ as well. But, we at Bauer believe that community banks are essential to our economy and way of life, so  let’s take a look at the facts.

Since the passage of the landmark legislation, over 1,700 banks have disappeared (including 267 failures). Of the disappearing banks, 82%  had less than $500 million in total assets; 99% met the White House Community Bank definition. Regardless of what definition you use, that’s a whole lot of community banks.

The majority of the banks that disappeared merged into other community banks (a la Merrimac Savings Bank in Essex County,  Massachusetts, which merged last autumn into North Shore Bank, a Co-op Bank, also in Essex County (JRN 32:25, 33:27)). White House economists do not consider these lost community banks. By their definition, these banks are still viable community banks, ready willing andable to serve their communities. That may be true, however, while residents of Essex County once had a choice and could shop for rates and terms to suit them, they no longer have that option and we suspect they would disagree with the White House on this.

Another point of contention is that many of the more burdensome provisions in Dodd-Frank were initially thought to apply only to large, complex banks. That has not been the reality thus far. While there is still talk of making it so,to date it is still just talk. As a result, the past six years have been very difficult for community banks in terms of compliance.

Page 7 contains a list (as per the FDIC) of the 50 largest banks that have become inactive since the passage of Dodd-Frank. Those highlighted in yellow failed; the rest were voluntary mergers. The red line  marks the $10 billion asset break. According to this, of the more than 1,700 banks that have disappeared since June 30, 2010, only  the 20 above the red line were NOT community banks by White House standards. Two banks were also conspicuously missing from the FDIC list: MetLife Bank and Wilmington TC both voluntarily relinquished their FDIC insurance and ceased taking deposits.

If TIAA-CREF and EverBank get their way, the $27 billion asset ****EverBank, Jacksonville, FL will be joining this list (although their deal reportedly includes a clause whereby TIAA can walk away if regulators overly scrutinize the plan). ***TIAA-CREF Trust Company, FSB has $3.6 billion in assets, just a small fraction of its parent company’s (pension fund giant, Teachers Insurance & Annuity Association of America) $272 billion of consolidated assets. If approved, EverBank’s $19 billion in deposits will increase TIAA-CREF’s FDIC-insured deposits more than seven-fold. Is this just an inevitable price of progress? We’ll let you decide.



A joint release from U.S. bank regulators concluded that, while U.S. banks have been making  strides in underwriting practices and risk management, the risk levels associated with some loan portfolios remain elevated. To examine their conclusion, we looked at several different angles including the Texas Ratio and Delinquencies to Assets.

When considering the Texas Ratio, smaller is better. A ratio greater than 100% is highly undesirable. Today, only 52 banks (fewer than 1% of the industry) exceed that level. Of the 50 banks with the largest year-over-year increase in lending (listed on page 7), none even reached 20%, and most were in the single digits. In fact, fewer than 30% of the entire industry currently have a Texas ratio exceeding 10%; only 2% exceed 50%.

Delinquent loans as a percent of total assets have dropped every quarter since the first quarter of 2010… until now. At March 31, 2016 delinquencies as a percent of total assets were 0.87%, up from 0.86% at year-end 2015. That may not sound like much, but with rising concerns in both the energy and CRE sectors, it is something that bears monitoring.

Prior to the beginning of the  Big Recession, we witnessed an extended period (9 quarters) in which the delinquency to asset ratio remained under 0.5%. A full recovery should bring us back to that general level. The fact that it ticked up for one quarter could just be a hiccup, but it is unusual to see in an expansionary period such as this.

Over 80% of the banking industry posted year-over-year increases in their loan portfolios at 3/31/16. But, in the latest quarter, total bank loans as a percent of assets  dropped—from 55.4% to 54.9%. Again, not a huge amount, but enough to warrant our attention.

 

The banks listed on page 7 had the highest percentage growth in their loan portfolio from March 31, 2015 to March 31, 2016. We have also listed the Texas Ratio for the two quarters to provide an indication of how/if that loan growth is affecting the overall loan quality.

They are not all apples to apples, though. Centennial Bank (the first bank on the list), for example, increased its loan portfolio (and its delinquency rate) through a merger. Summit B&T, Broomfield, CO acquired Centennial Bank out of Denver and upon merging the two, kept the Centennial name and headquarters but with the Summit FDIC certificate number.

United Roosevelt SB of New Jersey, on the other hand, is a small community bank with a single location. A year ago its loan to deposit ratio was just 15% but after a concerted effort, that ratio has risen to 73%. The money to make the loans came largely from divesting from securities. Smart move. Another smart move is that its loan loss reserves have kept pace. Its reserves to delinquencies are 1.22%. We wish they were all so prudent.



Both the RNC and the DNC platforms this year include calls to reinstate some form of  the Glass-Steagall Act of 1933. In the aftermath of the Great Depression, Glass-Steagall built a barrier between commercial banking and investment banking. Banks were given a year to decide which side of the wall they wanted to stay on. The authors of the bill believed that this wall would protect insured deposits from being used to cover poor investments. That worked for a while.

Little by little, however, big banks started pushing on that wall. In 1999, pushed by Sanford (Sandy) Weill and Citigroup, certain key provisions of the Glass-Steagall Act were repealed allowing Citigroup to merge with Travelers Insurance. The wall had been knocked down.

To his credit, Sandy Weill has admitted that was a mistake. From a July 2012 interview on CNBC, “What we should probably do is go ahead and split up investment banking from banking. Have banks do something that’s not going to risk the taxpayers dollars, that’s not going to be too big to fail.”  But the horses were already out of the barn by  then.

We don’t think anyone really believes that Glass-Steagall would have prevented the Great Recession of 2008; it didn’t prevent the Savings and Loan Crisis of the 1980s. The problem is greed, pure and simple, and nobody has yet figured out a way to legislate greed.

The Dodd-Frank Act of 2010 includes key elements, like the Volcker Rule (which prohibits banks from proprietary trading or owning any part of a hedge fund or private equity fund), but Dodd-Frank has also added myriad layers of regulation and cost. Unable to afford these new costs on their own, smaller banks are looking for merger partners.

Bauer has always been an advocate for traditional community banking: bankers helping people. Investment banking is anything but. While Big Banks that are involved in these riskier investments can be extremely profitable when times are good, the opposite is also true. Dodd-Frank sought to rein-in big banks and their risk-taking, but doing so, has penalized the entire system, resulting in the loss of hundreds of community banks.

Granted, small banks were not immune to forces of greed. Some of them did make loans to people who could not afford to pay them back. Poor loan underwriting was the cause of hundreds of the bank failures from 2007 on. Over 500 banks (mostly small) failed in that time-frame. But it wasn’t the small banks that collateralized those mortgages and disguised them to sell in the securities market. That could only be done by the big banks.  The big banks that are still Too Big to Fail, no matter what they try to tell us.

In addition to the 500+ banks that have failed, another 2,000 have merged since the end of 2006. That’s a  30% reduction in the number of banks in the U.S. Even with a reduction in bank failures (only three so far this year) that number continues to decline through mergers and acquisitions. (See pg 7.)

In the years leading up to the Great Recession, applications for de novo banks averaged about 200 per year. Of  those, roughly three quarters were approved. Those applications came to a screeching halt with the passage of Dodd-Frank in 2010. While they have started to trickle back (2 new applications have been filed this year; both are still pending)  we can count the number of de novo bank openings in the last 5 years with one hand. It has become too troublesome and too costly to run a bank the“old-fashioned” way. In fact, over 38% of the de novos formed after January 1, 2007, are already closed, one way or another.

Speaking before the House Committee on Oversight and Reform (July 13th), FDIC Chairman, Martin Gruenberg highlighted the economic benefits of, and why we need, de novo banks. He also cites low interest rates and narrow interest margins as reasons forming a new bank is “relatively unattractive” now. Add to that the costs and headaches of regulatory compliance and you go from “relatively unattractive” to downright ugly. 


Bauer has often suggested revisiting Glass-Steagall as a way to stabilize the banking system without penalizing community banks. When Senators Elizabeth Warren (D-MA) and John McCain (R-AZ) introduced a new 21st Century Glass-Steagall Act in 2013 (JRN 30:31) nobody else was listening.

Perhaps they will now.

 

 

Until March 2015, banks only reported one number for service charges on deposit accounts, and for the majority of banks, that is still all that is reported. However, beginning last year, banks with $1 billion or more in total assets, that also offer consumer deposit account products, were required to provide more details.

As a result, there are now 635 banks that have reported what types of fees they levy on consumers. The types of fees are broken down as:  

Overdraft Related;

 

Periodic Maintenance;

 

ATM Fees; and

 

All Other. 

 

From this new information, we discovered that ****JPMorgan Chase Bank raked in the most in overdraft fees during the first calendar quarter of 2016 with $441 million charged (up from $415 million a year earlier). But, because of its sheer size, those overdraft fees (annualized) represent just 0.127% of total deposits. Adding all other service charges brought JPMorgan Chase’s Service Charge Ratio to 0.339% of non-time deposits.

Similarly, ****Bank of America earned the most from  periodic maintenance on consumer accounts bringing in $227 million (down from $230 million a year ago), 0.07% of total deposits (annualized). Adding all other service charges brought Bank of America’s Service Charge Ratio to 0.43% of non-time deposits.
 

****Wells Fargo Bank topped the list on dollars made from ATM fees with $97 million (up from $90 million a year ago) or 0.028% of total deposits, when annualized. Adding all other service charges brought Wells Fargo’s Service Charge Ratio to 0.48% of non-time deposits. 

 

It isn’t surprising that the largest banks are bringing in the largest dollar volume of fee income. A better measure is what percent of deposits, or more importantly, deposits that are subject to service fees, those fees represent. By looking at these percentages, we can see which banks are more customer-friendly. 

 

Page 7 contains a list of the community banks that charge the highest percent of non-time deposit dollars in total service fees. 

 

With narrow interest margins, some banks have turned to fee income in order to remain profitable. In fact, according to the FDIC’s Quarterly Banking Profile, total service charges increased by $30.3 million, or 3.3% from March 31, 2015 to March 31, 2016. Depositors, though, don’t want fees eating away at interest income. The best way around that is to know the fee structure before opening an account. 

 

As you can see from the chart below, industry-wide, banks charge fees totaling 0.275% of total deposits. When you remove the time-deposits that are not subject to the fees, that ratio goes up to 0.318%. Based on that, the group containing 109 largest banks, those with over $10 billion in assets, is the only group that charges higher than the average on total deposits. 

 

However, when you remove the time deposits from the equation, this group is slightly under the industry average. The other group that came in under the industry average when we eliminated time deposits is mid-size banks—those with between $500 million and $1 billion in total assets. This group contains 657 banks. 

 

There are 55 community banks that charge service fees in excess of 1.5% per deposit dollar on accounts that are subject to service fees—nearly five times the industry average. They are listed on page 7.

Some of these banks have specific niches that support this higher fee income. For example, ***Merchants Bank of California, the first bank on the list, primarily services the check cashing industry. What is particularly disturbing, though, is that some of these banks (highlighted in green) cater to the men and women of our armed forces.

Another thing you will notice that, in spite of charging extremely high fees, some of the banks are still struggling to survive: 4 are rated Zero-Stars; 9 are on Bauer’s Troubled and Problematic Report (i.e. rated 2-Stars or below).




 

In 1983, Jumbo Rate News  became the first, and only, CD listing service to limit the banks it would list to strong, credit-worthy banks. To accomplish this, the banks had to be evaluated  manually, one by one.

As time went on, however, Bauer developed a system to evaluate all  banks and thrifts and, eventually, all credit unions as well. The first bank star-ratings that were assigned by Bauer came out in December 1988 based on June 1988 financial data. There are 51 banks in the U.S. that have earned a 5-Star rating for each of the 112 quarters since then. (Credit union ratings came two years later, December 1990 based on June 1990 data.)

Institutions rated 5-stars are unconditionally recommended by Bauer, as are those rated 4-Stars. However, in an effort to further commend institutions that were able to navigate their way through a quarter of a century without losing their 5-star status, a new designation—Best of Bauer—was born.

The Best of Bauer label is reserved for those institutions, bank or credit union, that have earned and maintained a 5-star rating for 100 or more consecutive quarters. There are currently 333 banks and 255 credit unions that have earned this highest honor.

We could have listed the 51 banks with 112 consecutive quarters (28 years) of 5-Star ratings on page 7 and called it a day. But, longevity in and of itself also deserves recognition. Therefore, we decided to list the oldest U.S. Banks that have earned the Best of Bauer label.

Based on March 31, 2016 financial data, there are 584 banks still in operation that were established prior to 1887 (130 years ago). Of those, 52 have been rated 5-Stars for 25 or more consecutive quarters. These are the banks listed on page 7. Our congratulations go to all for a job continually well done.

We say bank, but there are actually three different types of banks listed: community banks, savings institutions and mutual banks. Many  (most) people don’t know this, but in the beginning, all savings associations were mutuals. Many choose to maintain that structure to  remain independent and community-focused. Others have chosen to convert to stock ownership over the years. In fact, the number of mutual banks has been cut by one-third in the past ten years alone.

In an effort to preserve the mutual form of bank ownership, a number of the mutual institutions that have survived into the 21st century are now electing to merge with each other. We reported on one last year (JRN 32:25):

Another casualty of the times, the $73 million asset ***½ Merrimac SB announced it will be acquired by *****North Shore Bank, a Co-op Bank out of Peabody, Mass. Granted, if it had to find an acquirer, it found a good partner. Established in 1888,  North Shore, like Merrimac has a long history in Essex County, and a commitment to mutuality.

These mergers serve to maintain the mutual status as well as boost the banks competitively. As of March 31, 2016, there were only 396 mutual banks remaining in the nation. A full two-thirds of them are rated 5-Stars; 63 are “Best of Bauer”; and 15 are listed on page 7.

The first bank listed on page 7, *****Institution for Savings, Newburyport, MA, has been working diligently since 2006 to expand its market. In the years since, it has stretched well beyond its hometown roots of Newburyport and now covers much of Essex County. The combination of new branch offices and strategic acquisitions of Ipswich Co-operative Bank (another mutual) in July 2007 and Rockport National Bank, a small community bank in Rockport, MA in August 2014, have propelled that vision.

This slow, deliberate, expansion allows it to maintain its community-minded focus. In reality, though, all of the banks on page 7 are community-centric. In addition to 15 mutuals, the list on page 7 contains community banks that never were savings associations (or mutuals) as well as community banks that converted from mutual to stock ownership. The mutual to stock conversions have not undermined their commitments to the communities they serve. In fact, it is largely due to those commitments that these institutions have been able to consistently maintain their 5-Star ratings.

As a guide, banks with savings in the name are savings institutions, and unless noted with (mutual) next to the name, have since converted to stock ownership. But, regardless of charter type, all of the banks listed on page 7 are true community banks.


Nobody wants another banking meltdown. That’s why, each year since 2009, the Federal Reserve has created hypothetical scenarios to determine how well some of the nation’s largest and most systemically important bank holding companies would fare under extreme stress.

Each year the Federal Reserve comes out with two new hypothetical sets of scenarios to test the resiliency of these holding companies: adverse and severely adverse. The hypothetical scenarios this year represented:

Adverse Scenario
Moderate recession in U.S.
Mild deflation in U.S.

Severely Adverse Scenario
Severe global recession
Domestic unemployment up 5%
Heightened period of financial stress
Negative yields on short-term Treasuries

Even in the severely adverse scenario, most companies did quite well as U.S. firms have substantially increased their capital since the first round of tests seven years ago.

The actual fourth quarter 2015 aggregate Common Equity Tier1  (CET1) ratio of the 33 H.C.s participating this year was 12.3%. The CET1, which compares high-quality capital to risk-weighted assets, has more than doubled from 5.5% in the first quarter of 2009. And, all 33 banks passed the mandated 4.5% minimum in both the adverse and severely adverse scenarios.

Although, there were some caveats:

M&T Bank Corporation met minimum capital requirements on a post-stress basis after submitting an adjusted capital action plan.

The Federal Reserve  is requiring Morgan Stanley to submit a new capital plan by December 29, 2016 to address certain weaknesses in its capital planning processes.


(Note: These 33 firms represent 80% of U.S. domestic bank assets.)

The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. based on qualitative concerns. In other words, the assumptions or methodologies used by Deutsche Bank and Santander Holdings are either not reasonable, not appropriate or just plain insufficient. As a result of these objections, these two companies may only make capital distributions with express Federal Reserve approval.

Qualitative Objections:

While both H.C.s have improved from 2015, they still have material supervisory issues that critically undermine the capital planning process. The issues at hand limit their ability to adequately assess capital adequacy.

Deutsche Bank & Trust Corporation: 
For Deutsche Bank, the deficiencies are primarily in its risk management and control infrastructure.

Santander Holdings USA, Inc.:
Santander’s deficiencies lay in loss and revenue projections as well as risk-management and monitoring.

These companies may choose to submit revised plans once substantial progress is made in regard to the issues cited in their respective  objections.

Quantitative Objections:
As far as Quantitative Objections, once M&T Bank Corp. submitted adjusted capital actions, there were none.

The chart on page 7 shows the projected minimum capital ratios of all 33 H.C.s under both the Adverse and the Severely Adverse scenarios. For M&T we listed both the original plan followed by / and the adjusted plan minimums. 

Remember, these numbers are all hypothetical estimates; they are not real. They involve economic conditions that are far more  severe than expected. Also, these minimums reflect a nine-quarter period (Q1’2016 to Q1’2018) and do not necessarily occur in the same quarter for all H.C.s listed.

Deutsche Bank TC, New York, NY with $53 billion in assets is the 41st largest U.S. bank H.C. Its parent is Deutsche Bank Aktiengesellschaft, out of Frankfurt, Germany; its U.S. bank subsidiaries include Deutsche Bank TC Americas, New York, NY and Deutsche Bank TC Delaware, Wilmington, DE.

Santander Holdings USA, Inc., Boston, MA with $131 billion in assets is the 26th largest U.S. bank H.C. Its parent is Banco Santander, S.A. out of Spain and its U.S. bank subsidiary is Santander Bank, NA, Wilmington, DE.




As promised, this week we have provided a list of U.S. banks that deserve scrutiny for their high levels of nonperforming loans and/or their insufficient levels of loan loss reserves. 
 

Bauer has always adhered to the belief that measuring delinquent loans and the level of reserves a bank has to cover those loans is an extremely useful tool when evaluating a bank’s financial strength and future viability. Bauer’s Double-Trouble Nonperforming Bank Loan List does that quite nicely. It measures the combination:

Trouble #1: In typical times, nonperforming assets should represent less than 2% of assets. In good times they should represent less than 1%. After peaking at 3.4% in 2009, the banking industry’s nonperforming asset ratio has been continuously declining and is currently under 1% (0.96%).

That’s great for the industry, but it’s an industry average. The banks on page 7 all have more than 8% of theitangible assets nonperforming (excluding those with government guarantees).

Trouble #2: In addition to these high levels of nonperforming assets, loan loss reserves at all but three of the banks on page 7 represent less than 50% of delinquent loans. (The 3 don’t currently have any delinquent loans, but have high repossessed real estate numbers.) Generally speaking, to cover a worst-case scenario, Bauer likes to see enough reserves to  cover 100% of delinquent loans.

There were 54 banks that fell into this “Double-Trouble” classification based on March 31, 2016 financial data; those rated 2-Stars or below are listed on page 7. Two that would have been on this list failed during the quarter: First CornerStone Bank, King of Prussia, PA and Trust Company Bank, Memphis, TN. Both were  rated Zero-stars for several quarters prior to their failures.

Those rated 3-Stars or better have capital cushions large enough to absorb the shock of breakdown in their loan portfolios; that’s why they were omitted from this list. On the other hand, a negative Bauer’s Adjusted CR indicates the bank would be in deep doo-doo in a worst-case scenario.

The chart below compares the first quarter 2016 (blue) with the first quarters of 2015, 2013 and 2011 (gold). (This data comes from the FDIC’s Quarterly Banking Profile, which does not distinguish between government guaranteed or not.) Overall, you can see that the banking industry has improved considerably. Credit card banks, as we reported last week, are an exception. Yet, at 0.88%, credit card banks still have among the lowest overall delinquency and OREO rates.


 

 

 

With 1.84% of their assets either noncurrent or repossessed, mortgage lenders have shown the least improvement to date.  Georgia was the hardest hit state during the recession; over 25% of its banks failed. Even so, over 30% of the banks listed on page 7 are headquartered in Georgia. Illinois is also represented abundantly on page 7; the Prairie State lost 10% of its banks to failure from 2008 through 2015.

 
Synchrony Financial, parent of ****Synchrony Bank, Salt Lake City, UT, the fourth largest U.S. credit card bank, increased its forecast for defaults on Tuesday and panic ensued. Shares of Synchrony and other credit card issuers began to plummet from the news. But why?

 

The FDIC’s 1st Quarter 2016 Quarterly Banking Profile was very upfront about the fact that loan-loss provisioning was up 50% from 1st quarter 2015 noting that this was the 7th consecutive quarter in which loss provisions have increased. What’s more, the increase was much higher (55% higher) at banks with $10 billion or more in assets (compared to 16% at banks smaller than $10 billion). Synchrony Bank has total assets of $62.046 billion.

 

That’s why we were not surprised. Here’s why we’re not worried:

 

Industrywide, the average net interest margin rose from 3.02% at 3/31/2015 to 3.10% at 3/31/2016. The 50 banks listed on page 7, which includes 13 of the 14 banks classified as credit card specialists, all have considerably higher interest margins than the average. They are making money on the spread.

 

What’s more, the majority of these banks have low delinquency rates. Granted, Synchrony Bank’s delinquency to asset ratio is above 1.5%, which is a little higher than we like to see, it has enough set aside in loan-loss reserves to cover three-times what it has delinquent now.

 

If you recall, three weeks ago (JRN 33:21) we reported that asset quality was one of the best, if not the best indicator of a financial institution’s future wellbeing. We told you there were two well-known and respected ways to measure that quality: Bauer’s Adjusted Capital Ratio and the Texas Ratio.

 

For Bauer’s Adjusted CR, you are looking for 2 things. The first is that the ratio is above zero; the second is that ideally a bank’s Bauer’s Adjusted CR should not vary too much from its Leverage Ratio. At March 31, 2016 Synchrony Bank had a Bauer’s Adjusted CR of 11.66% and a Leverage CR of 13.01%.

 

The Texas Ratio is measured in the opposite direction whereby a ratio   under 100% is considered okay. Synchrony Bank’s first quarter Texas ratio is 8.85%.

 

Credit card loans, like all loans, are on the rise, but now, so are reserves in the event that more of those loans go sour.

 

The charts to the right show the movement of credit card debt at the nation’s banks over the past ten years. The great recession put pressure on consumers’ wallets and ended up causing a spike in card balances. Not surprisingly, many of the people who needed to use their credit cards to make it through that time, ended up defaulting.

 

Once things started to improve, however, noncurrent loans and loan losses showed steady improvement for 5 years. By March 31, 2015, they were back to 2006 levels. Now, they have ticked up a little bit, and we will have our eye on them.

 

As for Synchrony Financial, there is no need to panic over a 20 basis point change in its charge-off projections by 2017. Next week we’ll let you know who you should worry about with our “Double Trouble Nonperformers”.

 



 

All bank and credit union star-ratings are now updated based on March 31, 2016 financial data. Last week we reported on the nation’s banks, sounding an alarm that noncurrent rates on commercial and industrial loans jumped 65% in the first quarter of 2016; the largest quarterly increase since 1987!

 

This week we are blowing another whistle as, just like banks, credit unions are increasing their loan portfolios, and just like banks, cracks are beginning to show.

 

As the chart to the right shows, in addition to increasing assets, deposits and membership, CUs have reported year over year increases in every major loan category. It also shows the rise in delinquency rates on those loans and in the loan loss provisions set aside to cover any losses that result.

 

It’s not as bad as it looks, though. The overall delinquency rate of 0.71% is just up two basis points from last March. The cracks in underwriting appear to be contained mainly in the business loan category, which is double that at 1.41%. To put that in perspective, last year the business  loan delinquency rate was 0.95%, five years ago it was 3.91%. Net charge-offs are also up from a year ago; the industry’s annualized charge-off rate of 0.52% was up five basis points from a year ago.

 


 


 

First Quarter net income at the nation’s banks was $39.1 billion, slightly down (2%) from the $39.8 billion in the first quarter 2015. The drop can be attributed to  quarterly provision expenses of $4.1 billion by the largest U.S. banks (those  with more than $10 billion in assets) for loan losses.

The Culprit: Noncurrent commercial and industrial loans increased by $9.3 billion, industrywide in the first quarter. That’s a 65% increase, the largest since 1987. At the banks with more than $10 billion in assets, noncurrent C&I loans increased 82% or $8.9 billion while the rest of the industry’s noncurrent C&I increased by just 12% ($415 million).

Noncurrent loan rates declined in every other major loan category. That’s a good sign as total loans continue to exhibit strong growth, increasing 6.9% for the 12 month period ended March 31, 2016. That’s the highest 12 month growth rate since June 30, 2008.

Banks are also taking advantage of interest margins in anticipation of a Fed Funds rate increase. The average net interest margin rose to 3.10% from 3.02% a year earlier as 57% of the industry reported year-over-year improvement. A net interest income increase of $6.7 billion (6.4%) can be attributed to the combination of  higher yields and higher volumes of loans. The cost of funding assets has not yet changed appreciably.

Noninterest income was down $2.2 billion (3.4%) in the first quarter. This too, was concentrated at the nation’s largest banks, which reported a $1.9 billion (24.9%) decline in trading income as well as a $736 million (46%) drop in servicing income. More than half of all community banks increased their noninterest income from a year ago.

The number of banks on the FDIC’s Problem List now stands at 165; total assets at those banks are $30.9 billion. As always, Bauer’s Troubled and Problematic Bank Report is a little higher, containing 177 banks with assets of $35.4 billion. Two have already failed since April 1st. Bauer’s T&P Bank Report is available for $99 as a pdf file or $225 as an Excel® Spreadsheet. Order yours today at 800.388.6686.

We expect to have all star-ratings updated based on the March data in your next issue (JRN 33:23).

 


Let’s start by reiterating where we left off last week: When Bauer first began in 1983, a typical bank call report contained about 30 pages; today that is up to about 75 pages. With all of the new details and new data available, it’s easy to get wrapped up in whatever detail the press seizes on any given day. However, it’s important to look at the entire picture of a bank, not just one or two attributes, to accurately assess a bank (or credit union).

 
Thirty years ago (January 1986) JRN started its third year with a valuable new tool: Bauer’s Adjusted Capital Ratio. Our founder, Paul A. Bauer, discovered that by subtracting delinquent loans and repossessed assets  from both the numerator and the denominator of the leverage ratio equation, he could easily see how a bank would look if it were to take a loss on all of its  nonperforming assets. This new ratio was a much needed predictive measure of the future health of a bank, and it is just as valuable today as it was then.
 
Mr. Bauer wasn’t the only person to realize that delinquent loans were being sorely overlooked by regulators. At right about the same time, Mr. Gerald Cassidy of RBC Capital Markets came up with his own method for evaluating troubled loans. Cassidy’s equation divides non-performing assets by the sum of tier 1 capital and reserves. If this “Texas Ratio” exceeded 100%, he believed that the institution was doomed to fail. (The name “Texas Ratio“ was fitting due to the large number of Texas Savings and Loans that failed during the 1980s.)
 
These two ratios essentially assess the same problem from opposite ends. With Bauer’s Adjusted CR, negative is bad. That’s easy to remember. With the Texas Ratio, anything over 100% is bad. While not always exactly the same, these two methods have always yielded similar results. Based on December 31, 2015 financial data, the results are the same. The same 79 banks that had negative Bauer’s Adjusted CRs also had a Texas Ratio exceeding 100%. Three of them have since failed and one was acquired by a stronger bank. Thirty-three are considered “Well-Capitalized” by regulatory standards.
 
We have listed the four that no longer exist on page 2 and the 50 remaining with the highest Texas Ratios on page 7. And while we will say until we are blue in the face that  you cannot judge a bank by a single measure or ratio, if you had to pick one… a measure of loan quality, like either of these two ratios, would be your best bet. Of course, BauerFinancial incorporates these ratios, as well a multitude of other weights and measures, when evaluating an institution for its star-rating, so the star-rating is always the best place to look, but we know some people like to sink their teeth in, so this is for you.
 
As we were writing this article, the Federal Reserve Bank of New York published its Quarterly Report on Household Debt and Credit (May 24th) in which it reported that in the first quarter of 2016, “five percent of outstanding debt was in some stage of delinquency”. That’s the lowest amount since the second quarter of 2007! Wilbert van der Klaauw, senior vice president at the New York Fed, said, “Delinquency rates and the overall quality of outstanding debt continue to improve…  The proportion of overall debt that becomes newly delinquent has been on a steady downward trend and is at its lowest level since our series began in 1999.”
 
However, while loan quality continues to improve, household debt continues to rise. If the rise in debt is due to improved consumer sentiment, then an increase in debt is good. A $7 billion increase in auto loans in the first quarter 2016 would suggest that consumers are feeling a little better about spending money. That is, until you realize there was a simultaneous $21 billion decline in credit card debt and student loan debt was up by $29 billion.
 
Those numbers do not support any hypothesis of improved consumer sentiment. Instead they point to higher education costs and the fact that people need transportation.  It makes sense to lock in an auto loan now before rates start to rise. Since wages have been stagnant for the past eight years, Americans are tightening their belts with the credit cards in order to pay for higher education and transportation. Paying for needs and forgoing wants is not going to improve consumers’ outlook. Bauer’s Adjusted CR and the Texas Ratio are the first places that cracks will begin to appear.
 


Upon reading the first quarter 2016 financial release of *****Suffolk County NB(SCNB) in Riverhead, New York (also featured in an article in the American Banker 5/3/16) we couldn’t help but get a sense of déjà vu. While the AB article got us to take a close look at the filing, it was the wording of the release itself that we found unsettling. SCNB has stopped offering multifamily loans in New York City because...


“many borrowers now expect loan-to-value ratios to be based on extremely low capitalization rates, ...also requesting long interest only periods, low debt service coverage ratios, and limited financial performance covenants.”

 
 

We applaud SCNB for turning away these risky loans. But, we also know that if the borrowers are expecting it, it’s because they can get it someplace else.

SCNB also mentioned that it expects the OCC to establish higher capital ratios for it because it has a high percentage of Commercial Real Estate (CRE) loans. Of course, just as home mortgages are not all equal, neither are CRE loans.

 
The question, as with all loans, is: do they have proper underwriting? Not coincidentally, Forbes had an article on Tuesday—Optimism in Commercial Real Estate—in which the writer gushes about how deal volumes are going up and there is a whole new influx of CRE tech companies. Does any of this sound vaguely familiar? 
 
It should. We’re still recovering from the last “boom”. Should you be concerned? Not with your deposits. Not if you stick with banks and credit unions that are well-rated by BAUER (like the ones in this issue).   
 
Bauer has its finger on the pulse of the banking industry. And, yes, regulators may require higher capital ratios for banks that have high concentrations of CRE loans, particularly if those CRE loans are in multifamily homes, but Bauer already requires higher CRs than regulators for its recommendation.  
 
Bauer also determines how much of a capital cushion an institution has in the event that all of its “less than pristine” loans were to default. Because Bauer knows, not all loans are created equal.  
 
Page 7 lists the 50 Community Banks in the U.S. with the highest concentration of CRE loans to total loans. The last column on the chart removes multi-family home loans from the equation. It is, in effect, all “Other CRE Loans” as a percent of total loans.   
 
CRE = All Commercial Real Estate, including Multifamily (5+) Dwellings   
 
CRE-MF = All Nonfarm Nonresidential Real Estate (removes Multifamily Real Estate from the equation)   
 
If, as the AB article suggests, banks with heavy concentrations of CRE loans are required to maintain higher CRs, we would expect them to be:  
 
Leverage Capital Ratio between 8 and 9%,  
Tier1 Risk-Based Capital Ratio of 11%, and  
Total Risk-Based Capital Ratio of 12%. 
 
This assumption is based upon individual banks that have been prescribed specific CRs within an enforcement action. 
 
As of December 31, 2015 financial data, 909 community banks have CRE loans greater than 300% of their total net worth; only 15 have multifamily loans exceeding 300%. Of those 15, only a handful would have to raise significant capital. The most glaring of which, is **OneUnited Bank, Boston, MA.  
 
OneUnited has 91.4% of total loans tied up in CRE, and it is comprised almost entirely of multifamily loans.  
 
Under current requirements, OneUnited is considered well-capitalized by regulators. However, its leverage capital ratio is just 6.31%. Worse yet, its delinquency to asset ratio is 2.04% and its reserves to delinquencies are just 29.4%.  
 
OneUnited is in the process of expanding its online division, which could be bad or good. Its brick and mortar branches are confined to the Boston, Miami and Los Angeles areas and it is proud to be “the first Black internet bank and the largest Black owned bank in the country”. It is also designated as a Community Development Financial Institution (CDFI) and is dedicated to financial literacy.   
 
When Bauer first began in 1983, a typical bank call report contained about 30 pages; today that is up to about 75 pages. With all of the new details and new data available, it’s easy to get wrapped up in whatever detail the press seizes on any given day. It’s important to look at the entire picture, not just one or two attributes, when evaluating a bank.


It isn’t very often that a regulator will come out and tell you what signs to look for if you are worried about your institution merging or being acquired… but that is exactly what the National Credit Union Administration (NCUA) has done in a new video series geared for CU directors. We were intrigued.
 
According to the NCUA, when analyzing past mergers (in Bauer’s case to predict future ones) there are essentially six commonalities:
 
Three consecutive years of:
Shrinking Membership;
Losses; and
Declining Capital Ratio;
 
Plus:
A Prompt Corrective Action Directive (PCA) as much as 3-4 years prior to the merger;
No Succession Plan (particularly important if management is getting on in years but also likely if a credit union is very small);
A poor CAMELS rating (a confidential rating assigned by regulators).
 
We took the NCUA’s information and whittled it down to come up with a list that would fit on page 7.
There are 48 federally-insured credit unions on page 7 that have had declining membership for the past three years, posted annual losses in 2013, 2014 and 2015, and whose net worth to assets ratios declined from each year-end to the next for the same period. There are also seven CUs listed that are currently either critically (highlighted in pink) or significantly (highlighted in yellow) undercapitalized. They may or may not overlap both groups, but these CUs are subject to PCA.
 
Then we filtered out institutions that have a capital buffer large enough to rely on in the event of tough times and that have a high quality loan portfolio. Therefore, each credit union on page 7 is rated 3-Stars or lower by Bauer AND has a Bauer’s adjusted capital ratio under 8%. Based on the credit unions that have merged in the past, we believe this to be a good barometer.
 
Looking at the credit unions that have failed so far this year, we considered adding another criteria. Six of the ten failures of 2016 were managed by the same person: Joni Brown. But the FBI is already investigating that… and her.
 
That point is moot for this article anyway as the six credit unions run by Ms. Brown were all liquidated, not merged. If at all possible, a credit union will seek a merger partner while it is still in good enough health to have some bargaining power.
 
In 2015, 236 CUs merged; the annual average since 2003 is 273 per year. Of those, about 90% are voluntary. There are benefits that can be gained from a merger, including:
 
Improved financial condition
Expanded member services
Expanded field of membership
Ensuring succession planning.
 
In spite of these potential benefits,  history has shown that many CUs simply wait too long. Once the financial condition has deteriorated, the CU is faced with:
 
Fewer potential partners,
Less negotiating leverage,
And NCUA take over in which case, the CU would lose all of its decision-making power.
 
Unfortunately, many of the CUs listed on page 7 are apt to be in the 10% group of “involuntary mergers”, particularly those with ZERO-Stars or Not Rated (N.R.).

 

Data from the Federal Reserve shows consumers are still reluctant to increase their debt.  Borrowing in  the first two months of this year grew at annualized rates of just 5.8% in February and 5.1% in January. (March numbers are due out later today.) These are the smallest percentage changes since 2011. Revolving credit (primary credit cards) actually dropped (-0.3%) in January. Though not unheard of, it is a double edged sword in this economy.
 
On the one hand, we don’t want consumers over-committing and under-saving. On the other hand, consumer spending has been the major driver for economic growth recently. With consumers reluctant to spend, many economists are revising down their growth estimates for this year to 1% or less. Instead of driving the economy, we are just  stuck in neutral, idling.
 
The Fed’s Open Market Committee is looking for 2% inflation before raising interest rates much further, so a rate increase next month is not very likely. Although, strong job gains indicate the labor market is strengthening, so anything is still possible.
 
At the April FOMC meeting, one Fed member, Esther George, President of the Federal Reserve Bank of Kansas City, did vote for a rate rise. She was the only member seeking to raise the Fed Funds rate target range to between 1/2 and 3/4%.  All other members voted to keep them where they are. So, that was that.
 
New data that has come in since the Fed last met included Personal Income and Outlays for March from the Commerce Department’s Bureau of Economic Analysis (released April 29th). Wages increased $29.2 billion in March, a very welcome change after February’s $4.6 billion drop.
 
The wage increase resulted in  more disposable income, but as you can see in the chart (below), there was no corresponding increase in spending. It seems American consumers may have learned something from the Great Recession as the difference went into savings.
 
Americans are also working hard to keep their debt from growing, but they seem to be switching from one kind of debt to another:  revolving credit balances are on the rise while non-revolving debt is declining (see graph).
 
The consumer credit numbers reflect most credit extended to individuals (regardless of source) with the exception of loans secured by real estate. Then there are two subsets: revolving and non-revolving debt.
 
The most common revolving credit would be credit card loans, but home equity lines of credit and retail store credit cards are also included in this group.
 
Non-revolving includes motor vehicles, mobile homes, education loans, vacations, boats, trailers, and any other loans not included in the revolving credit category.
In spite of the drop (or leveling off) of consumer credit, more than 2,700 community banks increased consumer lending during Calendar 2015, some considerably. (The 50  community banks with the highest percent increase are listed on page 7.) They are doing so in varying ways and with varying results.
 
For example: **Optimumbank, Plantation, FL, had virtually no consumer loans at the end on 2014. It’s loans were almost entirely tied up in real estate... and many of them were bad. Hopefully it will do better with the consumer loans, but its consumer loans still account for less than 4% of total loans.
 
***½ Pan American Bank, Los Angeles, CA,  has over three-quarters of its loans tied up in consumer loans. It has also had problems with loan quality, although that has improved over the past couple of quarters. Pan American is still plagued by losses, however, and is operating under a consent order.
 
*****United Bank, Vernon, CT and *****Your Community Bank, New Albany, IN are two of 37 banks on the list that are recommended by Bauer (rated 5-Stars or 4-Stars). Each has its own unique story. Your Community Bank just announced (as we were writing this article) that it plans to be acquired by ***** WesBanco, Wheeling, WV later this year.  About 7% of Wesbanco’s loans are consumer.  
 


Before we begin to talk about our Community Bank Return on Equity (ROE) All-Stars, we would like to define the term “Community Bank”. In the past we simply looked at asset size to make this determination, as did the FDIC. Not too long ago, the FDIC changed its definition and now BAUER is as well.

 
Our definition is not, nor has it ever been, exactly the same as the FDIC’s. However, it is similar, and we believe it is an accurate portrayal of true community banks.
 
Bauer’s New Community Bank Definition includes all FDIC-insured banks except:
 

-Banks with assets > $50 billion

 

-Bankers Banks

 

-Credit Card Banks

 

-International Banks

 

-Trust Companies

 

-Banks with Specialized lending

 

-Banks with other Specialization  that have > $1 billion in assets

 

-Most Industrial Loan Banks, and

 

-Any other banks with assets  greater than $1 billion that operate in more than 3 states.

 

Now that we have defined exactly what constitutes a Community Bank, we would like to expound on an article in the  American Banker (4/26/16).
 

 

The AB reports, correctly, that smaller institutions are facing head winds when it comes to profitability and it provides a list of publicly traded banks that are handling that pressure with the most success (i.e. reporting the highest ROE).

 

We did not want to limit our list to publicly traded. While ROE is a term close to investors’ hearts, it is also a good measure of the effectiveness of management to make the most of what they have.

 

The graph below represents the average ROE for the entire banking  industry from 2007—2015. After dipping below zero in 2009, the industry has made great strides, although, at 9.2%, the industry ROE is still well below pre-crisis levels.


 

Simply put: ROE = net income/net worth

 

A bank that can grow its ROE without adding new capital is doing a good job of generating income from its assets. With the pressures on interest margins in recent years, this has been difficult to do, but banks are doing something right. During calendar 2015, net worth was up 3.5% while net income was up 7.4%! The community banks on page 7, in particular, are doing a remarkable job of making more with what they’ve got.  But what makes them so good at it?

 


According to its earnings release for 2015, ****Atlantic Coast Bank, Jacksonville, FL, the first bank on the list, had several factors boosting earnings, not the least of which was its interest rate margin (NIM). Atlantic Coast’s 4th quarter NIM was 3.1% compared to just 2.73% for the fourth quarter 2014.


 

Total loans at Atlantic Coast increased 34% over the calendar year, and were primarily financed with low-cost Federal Home Loan Bank advances.  In addition,  nonperforming assets dropped from 1.2% at 12/31/14 to 0.9% at 12/31/15. 

 
 
 

The second bank on the list, *****Bank of George, Las Vegas, NV, reported a $10 million increase in assets in the fourth quarter of 2015, almost all of which can be attributed to an increase in its loan portfolio, which happens to be pristine. Bank of George currently has zero nonperforming assets.

 
 

***½ Bank of Hampton Roads, VA acquired *****Shore Bank, Onley, VA in October 2015 and has another acquisition in the works. It expects to realize strategic benefits from both transactions, but in the meantime… net interest income grew 4.8% in the fourth quarter 2015 (2.6% for the year).

 


Noninterest income, however, skyrocketed 18.1% over 2014 driven primarily by mortgage loan originations, which were up 49% in 2015. Total loans grew by 8.3% in 2015 as the bank is converting lower yielding assets to higher yielding loans.

 


 

The other banks on this list also deserve credit for similarly bucking the trend and achieving these elevated ROEs, especially with interest rates still stuck in low-gear.

 


 

Citigroup, Inc. was the only one of eight systemically important banking companies to get a pass from both the FDIC and Federal Reserve on its 2015 “Living Will”, although it must make some revisions for 2017.   

 

The FDIC found deficiencies in Goldman Sachs Group, Inc. and the Fed found weaknesses in Morgan Stanley’s plan; all of which need to be addressed but  joint recommendations were not made so they also got a pass until 2017. These three, therefore, are no longer considered “Too Big to Fail”.

 

The other five (right) must  remedy deficiencies noted by October 2016. Dodd-Frank requires bank holding companies with consolidated assets of $50 billion or more to periodically submit plans that provide for rapid and orderly resolution under bankruptcy in the event of material distress or failure of the company.

 

While these eight are among the largest, there are over 40 bank holding companies that fall under this rule (the largest are listed on page 7) as well as certain non-bank companies that are designated as “systemically important”. Four foreign banks with this designation filed 2015 plans that are still under review. They are: Barclays PLC, Credit Suisse Group, Deutsche Bank AG and UBS. No word yet on when we will see those results.

 

As for the five that are still TBTF, the deficiencies noted were in the following areas:

 

Not Credible or Insufficient:

 


 

Citigroup, the bank that fared the best with its Living Will, is cutting jobs and restructuring to become “simpler, smaller, safer and stronger”.

 

Goldman Sachs is heading the other direction. On Monday, April 18th, Goldman Sachs purchased ****GE Capital Bank, Salt Lake City, UT, an Industrial Loan Bank (JRN 33:14) with $16.7 billion of online deposits (savings accounts and CDs). Goldman Sachs and other large Wall Street banks were reportedly instructed to deal with more than just the top 1% and this seemed like a good way to accomplish that.

 

****Goldman Sachs Bank USA, which does business as GS Bank will operate online in much the same way that GE Capital did. Minimum deposits at GS Bank will be as low as $1. As the New York Post notes, “a bit lower than the $10 million required for its private banking clients.”

 

General Electric clearly wanted out of the U.S. banking business and Federal Reserve oversight. While it still operates several GE Money Banks in other countries, its U.S. consumer credit card bank was split off in 2014 and now operates as ****Synchrony Bank, Draper, UT. Now, the online retail bank’s deposits have been sold off as well.

 

In addition to Living Wills, earlier this month the Federal Reserve proposed amendments to its rule requiring global systemically important bank holding companies (GSIB) to hold additional amounts of risk-based capital. Depending  on the systemic risk of each particular GSIB, a risk-based capital surcharge will be reported each quarter.

 

While the Big Banks are making adjustments to meet greater regulatory demands, regulators are seeking ways to ease regulatory burdens of community banks that were not major players in the 2008 meltdown. The latest such move allows banks with assets of less than $50 billion to request off-site loan reviews, as long as loan documents can be sent securely and with all necessary information. After all, security trumps all in this day and age.

 

 


 

 FDIC Chairman Martin J. Gruenberg grabbed our attention in recent remarks that both championed community banks and also tried to spur interest in de novo applications:

 
  • Banks that had less than $100 million in assets in 1985 were the most resilient  of any size group in the 30 years since.
  • 93% of the industry today meets FDIC’s research definition of “community bank” (less than $1 billion in assets AND operating in a traditional manner of lending and deposit gathering).
  • Community banks are the only banks with a physical presence in a fifth of all U.S. counties.
  • FDIC research has found that most economies of scale are reached at the $100 million dollar asset level; they cease to realize any significant benefits beyond the $300 million asset mark.
  • Community banks account for 44% of all small business and farm loans and most small business lending by large banks is only via credit cards.
  • Community banks have been outpacing the industry as a whole in many areas, including earnings growth, and loan growth in:  residential mortgages; C&I  loans; and CRE loans.
  • In spite of the drastic consolidation in the banking industry over the past 30 years, there are roughly the same number of banks with assets between $100 million and $1 billion today as there were in 1985, and they hold a higher volume of assets.
  • The FDIC is looking for ways to facilitate the process of establishing new community banks and has seen indications of increased interest in de novo charter applications in recent quarters.
 

And that is music to our ears.

 

From 1980-2000, an average of more than 200 de novos opened each year. Then it began to drop. By 2008, there were only 98 new charters and in the seven years since, there have been just 45. In fact, in three of the last five years there were zero.

 

Since there were so few, we were able to fit them all on page 7 along with their current status (either a star-rating or the date they ceased to exist). None of the de novos on the list failed. Most  merged into other banks and one closed voluntarily.

 

We included HarborOne on this list although it is not  technically a de novo. It was a charter change from a credit union to a bank.

 

You will note that most of these banks are very well rated ...so are the banks the others merged into. These de novos play an important role in community banking and kudos to Martin Gruenberg for recognizing the need to prompt more.

 











































 


















 













 


 













 


 



Jumbo Rate News 31:17 - May 5, 2014



Jumbo Rate News 31:15 - April 14, 2014

The Role of MDIs in Under-Served Communities

Twenty-five years ago, in the throws of the previous big banking crisis, Congress passed The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). One of the goals of this legislation was the preservation and encouragement of minority ownership in the nation’s banks. It was believed, and history has shown, that these Minority Depository Institutions (MDIs) can play an important role in under-served communities.

What is a MDI?

FIRREA defined “minority depository institution” as any depository institution where at least 51% of the stock is owned by one or more socially and economically disadvantaged individuals. The FDIC then changed the phrase “socially and economically disadvantaged” to “minority”. Minority was defined as: Black American, Asian American (includes Pacific Islanders), Hispanic American or Native American (includes Alaskan). American is an essential part of the definition as the stock must be held by U.S. citizens or permanent legal residents to be considered minority. Socially and economically disadvantaged was removed from the equation.

Why is it Important?

MDIs often play a large role in promoting the local economies of neighborhoods that would otherwise have no access to a bank branch. A designation of MDI can be a big benefit to the institution. MDIs are provided with education and training, and are afforded technical assistance to prevent insolvency. Failures are rare because the FDIC wants to preserve the number of MDIs. In the event that one does fail, the acquiring institution ideally qualifies for the same MDI designation.

 Then there are the burdens associated with being the primary source of a community’s economic viability. While 73% of the nation’s banks are recommended by Bauer, the percentage drops considerably when looking at the subsets of MDIs. Whether the MDI is actually in a socially and economically disadvantaged neighborhood, or if it is merely a reflection of the melting pot that it calls home, makes no difference when it comes to its rating from  BauerFinancial. Bauer uses the same stringent guidelines to rate ALL banks independently and fairly.

Here are some areas in which the MDIs seem to buck the industry trends:

Profitability: Return on Average Assets (ROA) for the industry is at 1.08%. (A healthy profit is generally considered to be 1% or better.) Only one subset of MDIs  (Asian) reached that level.

Loans to Deposits: Higher LTD ratios may indicate MDI banks are better at lending to their customers in need.

Asset Quality: Nonperforming assets (delinquencies + repossessions) are higher than industry averages in all MDI subsets except Native American.

Service Fees: Average service fees per transactional deposit dollar vary considerably from one group to another. The Asian subset is the only one that does not exceed the industry average.

 

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Jumbo Rate News 31:14 - April 7, 2014

Top Credit Unions by Assets Also Top Performers

On November 24, 1908, the first credit union opened its doors in Manchester New Hampshire. The brainchild  of a local pastor of Sainte-Marie’s parish, St. Mary’s Bank Credit Union (as it is known today) was a way to help local mill workers to save and borrow money. For a $5 investment (the price of one share of capital stock) anyone in the community could join.

That $5 initial investment may be the only thing that hasn’t changed in the 106 years since. Today, ****St. Mary’s Bank Credit Union boasts $772 million in assets, 87,000 members and 200 employees. In addition to attractive rates and low fees, it  offers a wide range of banking and financial services. It is one of many success stories in the credit union industry; but it is far from the only one.

Page 7 this week lists the top 50 U.S. credit unions by asset size. As of December 31, 2013, assets at these 50 institutions totaled $319 billion or 30% of total  industry assets. Most are also very well-rated by BauerFinancial (5-Stars or 4-Stars). Credit unions, unlike banks, seem to fare better as they get larger. But then, the largest credit unions are no where near the size of the $ trillion banks. In fact, even with industry assets growing by $40 billion in 2013, there are only 426 credit unions with total assets in excess of $500 million.

At just 6.5% of the total number of credit unions, these institutions hold 67% of all industry assets. They are also the most profitable with a 0.93% return on average assets and they have more growth in membership, loans and net worth than smaller credit unions.

The charts on page 2 detail how different asset segments fared with year-end 2013 financial data.

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Jumbo Rate News 31:13 - March 31, 2014

 Large Bank Holding Company Stress TestsThere are five different capital ratios under two different scenarios (adverse and severely adverse) that regulators evaluate under the Federal Reserve’s Bank Holding Company (BHC) stress tests. The capital ratios are listed in chart 1 below along with the minimum required to obtain a “well-capitalized” regulatory capital classification.

The key assumptions used for the two scenarios are listed in chart 2. The adverse  scenario reflects a weakened economy; the severely adverse  scenario assumes a deep recession. It is important to note that these are not forecasts. These are simply tests to determine how well our banking system would tolerate another crisis a la 2008.

Under the adverse scenario, projected losses at the 30 BHCs tested total $355 billion through 2015. Those losses rise to $501 billion under the more severe approach. These hypothetical losses would result in considerably lower capital ratios. The chart on page 2 shows the affect that these scenarios would have on the BHC Tier 1 leverage capital ratio. Page 7 lists the 30 BHCs with their bank affiliates.

 

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Jumbo Rate News 31:12 - March 24, 2014

 “The Buck Stops With Me”—Janet Yellen

Based on the remarks Janet Yellen made at the post Open Market Committee (FOMC) meeting press conference on Wednesday, the biggest difference between the Federal Reserve under Ben Bernanke and the Federal Reserve now, is that the buck stops with her.  She feels personally responsible for its successes and failures while she’s at the helm.

That’s great, but that’s not the biggest change that we saw.

Similarities:

1) Bond purchases continue to be tapered. Assuming they keep the same schedule, the Federal reserve will be done growing its balance sheet by the end of this year.

2) The Fed Funds rate remains at near zero.

3) The chairman states there is no preset course in determining when rates should begin to rise, but most agree it will begin in 2015.

Differences:

Bernanke gave us a 6.5% unemployment number to use as a guide for that rate rise. Yellen has lowered that considerably. She would like to see us at full-employment (wouldn’t we all) and believes that the recent drop in the unemployment rate has more to do with discouraged job-seekers dropping out of the hunt than anything else.

Full employment is a range generally considered to be between 5% and 6% which is considerably less than the 6.5% guidance Bernanke gave. That is subject to change again, though.

A particularly harsh winter has slowed economic growth and  inflation is stubbornly remaining below the 2% target. Current expectations (subject to change) are for short-term interest rates to start rising in 2015; to be 1.0% by the end of 2015 and to end 2016 at about 2.25%.

 

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Jumbo Rate News 31:11 - March 17, 2014

Troubled Banks at Lowest Level Since 2008

Bauer’s newly released star-ratings show continued progress by U.S. Banks and Credit Unions. As we reported last week, banks rated 5-Stars or 4-Stars, and therefore recommended, now represent 73% of entire industry while recommended credit unions now represent 76.5%. That’s even higher than the levels of 70.5% and 73.1% (respectively) at the end of 2007.

At the other end of the spectrum, the number of banks rated 2-Stars or below (Troubled or Problematic) currently represent 7% of total banks while just 3.3% of all U.S. CUs fall into that category. On the surface, that’s considerably higher than the 2% that each claimed six years ago. However, if you look at the assets represented by those problem institutions, less than 1% of each industry is affected. At their peak, assets in U.S. banks rated 2-Stars or below represented over 14.5% of the industry assets (4Q’08) and credit unions rated 2-Stars or below represented nearly 8% of total assets (4Q’09). At less than 0.9% now, that is a huge improvement.

The number of institutions continues to decline as both industries consolidate. And consolidate they have. At the close of 2007 there were 8,525 banks with average assets of $1.5 billion. Today, there are just 6,773 banks but average assets have ballooned to $2.2 billion.

During that same time-frame, 8,268 CUs with average assets of just $93 million have transformed into 6,685 CUs with average assets if $161 million.

Assets aren’t the only thing growing. Bank deposits have grown by a third in the past six years. Bucking that trend are Jumbo CDs, which are now close to 2003 levels. This too shall pass.

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Jumbo Rate News 31:10 - March 10, 2014

All Financial Data is Now as of December 31, 2013Membership in U.S. credit unions grew by 2.6% during 2013. There are now 96.3 million credit union members in the U.S. with shares or deposits of $910 billion—up 3.7% from a year earlier.

Assets also increased at the nation’s CUs, led by loan growth of 8% during the year. The “New Auto Loan” category, in particular, was 12.8% higher than year-end 2012. That signals a definite rise in consumer confidence. Delinquency and charge-off rates remained steady.

The aggregate capital ratio for the credit union industry stood at 10.78% at 12/31/2013. Not only is that 13 basis points higher than the previous quarter, it is the highest CR since the first quarter of 2009. That’s the good news.

Return on Average Assets, on the other hand, keeps dropping. It was 85 basis points a year ago, 80 basis points a quarter ago and 78 basis points now. In search of higher yields trying to stem that trend, credit unions are increasing their long-term investments. Long-term investments, which were just 3.4% of assets at the end of 2009, now stand at 11.8%.

The percent of Recommended Credit Unions (rates 5-Stars or 4-Stars), while up from a year ago, is down from  77.37% last quarter to 76.48% now. Those rated 2-Stars or below now represent 3.34% of the credit unions—up from 3.15% a quarter ago and 3.12% a year ago.

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Jumbo Rate News 31:09 - March 3, 2014

4th Quarter Bank Data, Eventually the Tortoise Wins 

Year-end data is in and our analysts are working feverishly to finalize star-ratings. The banking industry as a whole continues its slow but steady improvement. Net income for the fourth quarter was $40.3 billion bringing the total for the year up to an impressive $154.7 billion.

You can see from Chart A that net income has eclipsed that of 2006 (pre-crisis) yet the Return on Assets (ROA) in Chart B is still lagging. That’s because bank industry assets have increased by over 24% since 2006. At any rate, as a  benchmark indicator, an ROA that is greater than (or equal to) 1% is considered good.

Another caveat to bank earnings numbers is that $11.2 billion of the quarter’s $40.3 billion income can be directly attributed to lower provisions for loan losses and litigation reserves. That’s kind of a back door to earnings growth, but it’s still good news that the current environment allows for lowering these reserves. In fact, fourth quarter net charge-offs of $11.7 billion is its lowest fourth quarter since 2006 with residential mortgages leading the way.

 
 

While loan volume is creeping up, asset quality has improved considerably over the past year as noted below.

 

Using the regulatory capital standards defined for Prompt Corrective Action (PCA) purposes, almost 98% of the industry is currently well-capitalized. That’s up from 97.2% a year ago. The industry’s leverage capital ratio is at its highest level (9.41%) in the 23 years since  the current standards have been in effect. Seems like yesterday.

The number of institutions on the FDIC’s Problem List has dropped by 28% since last year-end.

 

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Jumbo Rate News 31:08 - February 24, 2014

America Saves Week February 24—March 1, 2014

As we head into America Saves Week (February 24—March 1), we want to review the benefits of compound interest, and like always, a picture really is worth a thousand words. The following chart indicates how $12,000 in principal can rack up $20, 416 in interest if deposited as a lump sum and left for 20 years to allow interest to continue compounding at 5%.

That same $12,000 broken down into $50 per month bites, will earn less than half of the interest. The motto for this year’s America Saves Campaign, “Set a Goal. Make a Plan. Save Automatically.”, is good advice, but don’t forget to save lump sums (like IRS refunds). They can add up more than you think.

The chart also shows how seniors in particular are being squeezed by the low interest rate environment. People who retired prior to 1998 had every reason to believe they would earn at least 5% on their deposits. Now that they are lucky to find a 1% APY, it’s easy to see how the loss of interest income can be devastating to those dependent on it for living expenses.

  

The beauty of compound interest is that your interest earns interest. This chart denotes the total balance of a bank account after the number of years noted. The blue bars depict a saver who faithfully deposits $50 per month and is earning a 5% annual percentage yield. After 20 years, the saver has deposited $12,000 into the account and has earned $8,552 in interest.

The red bars indicate how that same $12,000 would compound if it were deposited as a lump sum at the beginning of the 20 year period. The same $12,000 in principal yields $12,000 more in interest. Granted, not everyone has $12,000 laying around, but if you put $600 away each January instead of $50 a month, at 5% you would earn an extra $1,477 after 20 years.

The ideal scenario would be to start with a lump sum and then continue to make monthly deposits. That isn’t always feasible, But the most important thing is:  Don’t Withdraw Until You Have Reached Your Goal!

Whether you are saving for college, a wedding, or retirement, a premature withdrawal could cost much of the benefit of the compound interest.

While America Saves Week may not be on your Holiday Calendar or worthy of a call home to the family, it does serve as a reminder to start saving. Like the slogan says:

 Set a Goal.

Make a Plan.

Save Automatically.

The sooner you start, the more benefits you will reap. As always, don’t forget to check the star-rating of your bank or credit union at www.bauerfinancial.com.

 

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Jumbo Rate News 31:07 - February 18, 2014

Banks Have Big Incentive but Lack the Means 

When the Capital Purchase Program (CPP) of TARP (Troubled Asset Relief Program)  was launched in 2008, the consensus was that the banking crisis would be well behind us after five years. To incentivize banks to exit the program once they were healthy enough to do so, the Emergency Economic Stabilization Act (EESA) included an automatic jump in dividend payments (from 5% to 9%) if and when a bank hits the 5-year mark in the Program (JRN 30:40).

Originally 707 banks participated in the Capital Purchased Program (CPP) for a total investment of $205 billion. For the most part, those that were healthy, exited the program long ago. Three quarters of the approximately 80 that remain, have missed  dividend payments; 47 of those are on Bauer’s Troubled and Problematic Bank Report rated 2-stars or lower.

The Treasury announced the auction of its interest in six more banks on January 27th. Five have missed dividend payments and four are rated 2-Stars or below. They are representative of the banks still in the program.

1) AB&T Financial Corp. (parent of Zero-Star Alliance B&TC, Gastonia, NC) with $536,000 outstanding has missed 11 dividend payments;

2) Atlantic Bancshares, Inc. (parent of **Atlantic Community Bank, Bluffton, SC) has missed 11 dividend payments and still has all of its $2 million investment outstanding;

3) Centrue Financial Corp. (parent of  **Centrue Bank, Streator, IL) has missed 18 dividend payments—$1.402 billion of a $32.668 billion investment is outstanding;

4) Zero-Star Georgia Primary Bank, Atlanta has not paid any of its $4.5 billion and has missed 18 dividend payments.

5) ***Pacific Commerce Bank, N.A., Los Angeles has missed 13 payments. All investments and warrants are outstanding. Initial investment was $4.060 billion.

6) Community First Bancshares, Inc. (parent of  ***½ Community First Bank, Harrison, AR) is current on its dividend payments but has all of its $4.060 million investment plus warrants outstanding. 

The status of the banks that were part of the CPP is depicted below. Repayments  of $195.25 billion include $2.21 billion that was refinanced under the Small Business Lending Fund (SBLF) and another $0.36 billion that was converted into the Community Development Capital Initiative (CDCI).

While full repayments fall shy of the initial $205 billion CPP investment, dividend, interest and warrant income has more than made up the difference. The program has made $20 billion and as Treasury continues auctioning off its investments, that number will continue to climb.

From:

Jumbo Rate News 31:06 - February 10, 2014

From: Jumbo Rate News 31:06 - February 10, 2014

A New Era Begins, Yellen Sworn in 

Federal Reserve Governor Daniel Tarullo administered the oath of office to Janet Yellen, the first female chair of the Federal Reserve in its 100 year history. Dr. Yellen first took office as Vice Chair in October 2010 when she began a 14-year term as a member of the Board. Her four-year term as chairwoman expires February 3, 2018, while her term as a Board member runs through January 2024.

As a prominent world economist, Dr. Yellen has written numerous papers on a variety of macroeconomic topics. Her primary focus, though, has been unemployment: its causes, mechanisms and implications. While Bernanke came in as a student of the Great Depression to navigate us through the great recession, Yellen’s specialty is equally apropos as she will attempt to navigate us toward full employment.

Dr. Yellen, former president of the San Francisco Fed, and a member of the Clinton Council of Economic Advisors, was confirmed by the senate by a vote of 56-26. That show of support may have been dampened when the Dow closed at its lowest level in 7 months on the same day she was confirmed. But in actuality, one had nothing to do with the other.

In fact, the economy seems to be improving. What set the Dow back was a lackluster industrial production report, perhaps due to the inclement weather. It is making its way back, however.

In addition to unemployment, Dr. Yellen will be in charge while the Fed pulls back its unprecedented stimulus programs. She has been a supporter of quantitative easing from the beginning. It will now be up to her to wind down the bond buying programs and, eventually, start raising interest rates and getting this country back to some sort of normalcy. It’s a delicate task, but one we believe she is up to.

Maximum employment and optimal inflation are her primary goals as Fed Chair. She  has her work cut out for her, but with her background and knowledge of the situation, she is the best one for the job. 

 

From: Jumbo Rate News 31:05 - February 3, 2014

Partner With Your Bank, CU to Lower Fees

We have been reporting extensively on the financial disadvantage some people find themselves in when they opt-in to overdraft protection on debit card and ATM transactions. Now we’d like to discuss how to avoid those pitfalls. As we said last week, it is “buyer-beware”. You are responsible for what you sign ...but that doesn’t mean you’re stuck. Make your bank and/or credit union your financial partner.

Opting-Out is Still an Option:

If you previously opted-in with your financial institution, talk with them about what that means. It’s okay to change your mind. The opt-in form is generally a non-contractual permission slip. Now simply tell them you’d like to rescind that permission. It’s that simple.

Courtesy is a 2-Way Street:

Many banks and credit unions  call overdraft protection a courtesy, and it can be.  After all, nobody wants to be embarrassed by having their card declined at the check-out. The bank/credit union will do you the courtesy of letting you overdraft your  account. In return you will do them the courtesy of paying the $20—$30 fee associated with the transaction.

In most cases, it is much more prudent to be aware of how much you have available and stay within your means. In the rare instance that that’s  not possible, you could find a $30 courtesy charge on your account because you overspent by one dollar at the grocery store. If you still don’t know you’re overdrawn, you could theoretically continue swiping your card. At $30 bucks a pop, the fees can rack up quickly if you’re not careful.

Another Little Known Fact:

In that scenario, the customer is still unaware of the overdrawn account. Other fees could come in to play as well. Noted on the same form that you opt-in or out on, the financial institution also specified any other fees you could incur. There could be a per day fee for each day the account is overdrawn. Do you remember what the form that you signed said? There may be no limit on the total fees that can be charged for overdrawing your account, but they were all spelled out on that form. You may want to double check if you don’t remember.

Keep Track of How Much $ You Have:

This sounds simple enough, but there are a surprising number of factors that can be overlooked. Forgetting to log an ATM withdrawal; not knowing when an automatic withdrawal is deducted; forgetting to record fees are prime examples. It gets even more complicated if you have a joint account with more than one person making transactions. 

Record all of your transactions (even automatic bill pays) and review your monthly statements when they come in. That way your chances are pretty good that you won’t need overdraft protection.

Ask about linking accounts:

Opting out isn’t for everyone. Perhaps  you can’t stand the thought of having your debit or ATM card declined at the check-out. Or maybe you don’t know exactly when you’ll be making your next deposit. Don’t use overdraft protection as a payday loan, there are other options.

You can link a savings account to your checking.  Any overdraft amount will automatically come out of the linked account. There may still be a fee for the transaction but it will be far less. Some institutions have credit cards and/or lines of credit that can also be linked and used for this purpose. The key is to discuss your options openly with your financial institution. Make them your partner.

We can’t stress this enough: in just six months in 2010, consumers saved an average of $450 by simply opting out  of overdraft courtesy protection (JRN 30:23, 31:04). In the end, though, the choice is yours.


From: Jumbo Rate News 31:04 - January 27, 2014

Buyer Beware, Know What You are Signing 

Last week we reported that image and reputation were among consumers’ primary concerns when selecting a bank. So much so, in fact, that these two factors even trumped service fees in importance this year. Then we read an article in last week’s Wall Street Journal about how banks that cater to our U.S. military personnel are racking up those service fees. We wanted to know if that’s true. And, if so, why.

   On average, a domestic bank account carries a balance of just over $15,000. And, on average, 0.35% of that is charged in annual service fees (maintenance fees, overdraft protection and such). Then we singled out ten banks that either have branches on military bases or cater to the military in other ways. Nine out of the ten charge more than that average. A few, like *****Fort Sill NB, OK, (the highest, as the WSJ pointed out) charge considerably more (charts on page 2). So it is true, but why?

Last June we wrote an article, “Opting in Can Be Costly” (JRN 30:23) which cited a report released by the Consumer Financial Protection Bureau (CFPB) on the pitfalls of opting-in for overdraft protection. Without signing an authorization that allows a bank to overdraft your account, many of these charges would never happen.

“accountholders who previously had been heavy overdrafters were able to save, on average, $450 in the second half of 2010 alone, simply by not opting in for overdraft protection”   

We suspect that many younger depositors may not have understood the ramifications of   what they were authorizing when they opted-in. Over 20% of the U.S. military is younger than 21;  over 65% is 31 or less. While many hold at least a Bachelors degree, that does not seem to translate to fiscal responsibility. So, how can we stem the tide?

 

 The FDIC has a good place to start: http://www.mymoney.gov/. We haven't seen the verbiage on Fort Sill NB’s opt-in form. Maybe it could be clearer. Ultimately though, it is up to the depositor to know what they are signing. 

 

From: Jumbo Rate News 31:03 - January 21, 2014

Security and Reputation Trump Fees in 2014

There are a number of features people look at before opening a bank account and as times change, so do those features. For example, a mere two years ago, only 16% of survey respondents said that a bank’s website or mobile banking were a factor in whether or not they stayed with a bank. This year, in a report released last week by Ey.com (formerly Ernst & Young), 26% expect excellent online features.

That shouldn’t be surprising as the world is moving more and more into a virtual reality. What did surprise us though, was that 31% also demand branch and ATM access in their proximity. That is actually up two percentage points from 2012.

It seems customers have accustomed themselves to low interest rates. Two years ago 35% would consider leaving their bank for poor rates. Today, rates aren’t even a consideration. What has come to front line, however, is security. Thirty-five percent of respondents look for a bank that they feel will keep their personal information secure and another 35% (or perhaps the same 35%) said keeping their financial information secure is a big reason to choose or leave a bank.

Another thing that people seem to have come to accept is that fees are a fact of life. While 57% of respondents two years ago said that high fees would contribute to their seeking a new bank, today consumers seem to be content with transparency about the fees and a reasonable way they can avoid such fees.

A quick, pleasant response by a human being to a problem is just as important now as in 2012. But what has gained in importance over the past couple of years (probably because of the banking crisis) is the reputation of the institution. In 2012, reputation was near the bottom of the complaint list with only 14% of respondents saying they would change their bank based on a negative image.

This year, it’s all about positive image, with 24% saying they want a bank with an “excellent“ reputation.

 

From: Jumbo Rate News 31:02 - January 13, 2014

                                  What to Expect From Janet Yellen 

Janet Yellen was confirmed on Monday by a vote of 56 to 26 to be the next chairman of the Federal Reserve. Her term as the first women to head the 100 year old institution will begin on February 1st. What should we expect from her?

Clarity:

Clarity and openness. Ben Bernanke has attempted, with Janet Yellen’s help, to clarify his statements. It doesn’t seem to matter how hard he tries, people still read whatever they want into the statements. Yellen will find this to be a challenge as well. We have no doubt, however, based on her past communications that she will try to be as forthright as possible.

Another challenge Bernanke has faced has been the fallout from other board members speaking publicly about their divergent views. While divergent views are expected and even desirable in the policy decision-making process, providing a united front to the public may help to quiet the rumor mill. In fact the Board’s policy reads in part: “They are free to explain their individual views but are expected to do so in a spirit of collegiality...”

Openness:

The Federal Reserve’s projections make it clear that it is expecting the pace of economic growth to speed up. It expects a decline in the unemployment rate and projects that inflation will get up closer to its 2% target than the 1% that we’ve been seeing. We also know that it has much more confidence in these projections than it did even just a year ago.

Vigilence:

We also know from the minutes of its December meeting that the Fed is keeping a mindful eye on financial bubbles, specifically in the stock market right now.  We’ll bet Yellen will be on the lookout from every direction. Bubble is a scary word when talking about the economy, but being on the lookout for them is a good thing. Remember, Janet Yellen was one of the first to voice concerns about a housing bubble back in 2007. Nobody listened to her then... but they will now. 

Tapering:

Given what we know and what the Federal Reserve is projecting, we can expect a gradual continuation of the decline in monthly bond purchases. It decreased by $10 billion in December and, depending on how the numbers come in, could possibly terminate by the end of this year. That should put an end to quantitative easing. Hopefully forever. The forward guidance on interest rates, however, looks like it will favor borrowers over savers for some time.

Prolonged Low Interest Rates:

What is some time? That’s hard to quantify. Consumers are spending again, but not like they were before 2008. A more optimistic outlook and a greater sense of wealth is beginning to come over consumers as their homes regain value. But with unemployment still high and inflation still low, we can expect the Fed Funds rate to stay at near zero until at least 2015, possibly even longer.

We’ll let Yellen summarize expectations: “I approach this task with a clear understanding that the Congress has entrusted the Federal Reserve with great responsibilities. Its decisions affect the well-being of every American and the strength and prosperity of our nation... The Federal Reserve plays a role too, promoting conditions that foster maximum employment, low and stable inflation, and a safe and sound financial system.”

 

From: Jumbo Rate News 31:01 - January 6, 2014

                                           2013: The Year in Retrospect 

January brought with it the expiration of the Transaction Account Guaranty Program (TAG). TAG added unlimited insurance coverage to “noninterest-bearing transaction accounts” (like checking accounts) regardless of the balance of the account. As of January 1, 2013, deposits are subject to a $250,000 insurance limit regardless of whether they are checking or savings or interest-earning or not. Anything over $250,000, per depositor per bank or credit union, is not federally-insured.

February’s monthly TARP report to Congress showed that taxpayers had recovered $389 billion, or 93% of the total $418 billion that was disbursed in all programs. While many programs lost taxpayer money, the bank programs were in the black and still bringing in money. Of $245.1 billion initially invested in the bank programs, banks had repaid $268.2 billion to date, for a $23.1 billion gain. 

March: Outrage ensued when we learned that senior executives of Ally Financial were earning much more than the $500,000 cap suggested in the guidelines. Ally Financial (formerly GMAC) was one of 18 bank holding companies required to submit to stress testing. (It did not do well on the latest one.) It was also one of just seven TARP recipients  that, due to the amount and nature of their bailouts, were  classified as “Exceptional Assistance Recipients”.

Ally received TARP funds as part of the Automotive Industry Financial Program, not as part of the Capital Purchase Program (CPP) for banks (which  made money). It received over $16 billion from the Treasury, which still owned about 80% of the company. Total direct compensation of its 20 “most highly compensated employees”,  ranged from $1.9 million to $9.5 million. Granted, much of this is in stock and may not be  transferable until TARP is repaid.

 

Originally scheduled to start circulating in February 2011, a new $100 bill was finally unveiled in April and made its debut on October 8, 2013.

May: President Obama nominated long-time supporter, prominent fundraiser, and friend, Penny Pritzger, to be Secretary of Commerce, a position that had been vacant for almost a year. If her name sounds familiar, don’t be surprised. You may have heard the Pritzger name right here in the pages of JRN. The Pritzger family owned 50% of Superior Bank FSB, Chicago, which failed in July 2001. Penny Pritzger had stepped down as chairman in 1994, but her influence still permeated the bank.

The FDIC ended up going after Pritzger (and others) for the failure. Without admitting culpability, Penny Pritzger settled for $460 million, far more than the $255.5 million she initially pledged to recapitalize the $2.1 billion asset thrift. In spite of that, Pritzger was confirmed and began serving as the 38th Secretary of Commerce on June 26, 2013.

A Consumer Financial Protection Bureau report released on June 11th found that consumers who signed an opt-in agreement for the “courtesy” of being allowed to overdraw their account paid average account fees of $196 in 2011. Those who did not opt-in paid just $28.

Stricter capital rules Hit U.S. Banks in July. A proposed regulation aims to make the biggest banks also the strongest by making Big Banks have a minimum leverage capital ratio of at least 5% for the holding companies and 6% for the associated banks. The new ratios also address off-balance sheet items, like derivatives, in their calculations.

The final rules for community banks include a new Common Equity Tier 1 Capital (CET1) Ratio requirement of at least 4.5% (6.5% for a Well-Capitalized designation) + a 2.5% buffer. This new ratio will also be used to determine the need for Prompt Corrective Action. A new risk-weighting system has also been proposed with a Tier 1 risk-based capital ratio requirement of 6%  instead of 4%.

August: Vice Chair Janet Yellen earned Bauer’s recommendation for next Fed Chairman. In 1996, with Alan Greenspan at the helm, Yellen helped to usher in a near perfect economic soft-landing. She also saw the writing on the wall long before this latest financial crisis hit. 

It became official in September: Foreign Deposits are Not FDIC Insured. A Final Rule issued by the FDIC on the subject:  “Deposits in branches of U.S. banks located outside the United States are not FDIC-Insured deposits.” FDIC insurance is intended to maintain public confidence in our nation’s financial system. In order to do that effectively, it must, above all else, protect the Deposit Insurance Fund (DIF).

Note: The Final Rule does not apply to deposits at U.S. military facilities in foreign countries. They continue to be insured as they have been. 

October: Janet Yellen gets nod from President. President Obama nominated Janet Yellen, the current Vice Chair of the Federal Reserve’s Board of Governors, to replace Ben Bernanke at the helm when his term expires at the end of January. Her confirmation vote is scheduled for January 6th.

President of the Federal Reserve Bank of San Francisco from 2004-2010, Dr. Yellen has lots of experience as a bank regulator. The institutions in that district range in size from very small community banks to very large holding companies with Wells Fargo & Co. being the largest. 

November: As the cry to end “Too Big to Fail” (TBTF) gets increasingly louder here at home in the USA, it is actually a global problem. The International Financial Stability Board is taking a different approach than the US, however. Instead of trying to end TBTF, it is creating policies to address systemic and moral hazard risks associated with these Globally Systemically Important Banks (G-SIBs).

December: The stock market hit a new record high and the dollar climbed against a number of foreign currencies, all because Federal Reserve Chief Ben Bernanke signaled a change to its massive bond buying  practice. Beginning in January, the FOMC will only add $75 billion in bonds to its holdings per month instead of $85 billion. 

From: Jumbo Rate News 30:48 - December 23, 2013

The Taper Heard Round the World

The stock market hit a new high and the dollar climbed against a number of foreign currencies, all because Federal Reserve Chief Ben Bernanke signaled a change to its massive bond buying  practice. Beginning in January, the FOMC will only add $75 billion in bonds to its holdings per month instead of $85 billion.

The Federal Reserve’s holdings of long-term securities are massive, and will continue to grow, just slightly slower than they had been growing. The significance of the modest change, however, has not been lost. It seems to signal a confidence in the recovery that had been lacking up to now. And the markets have responded.

If (and when) warranted, the Committee will continue to cut the amount of its monthly purchases. The course will not change regardless of who is at the helm of the Fed. Bernanke is set to retire at the end of January and while not yet confirmed, the White House nominee to replace him, Janet Yellen, will proceed in the same manner. Eventually, perhaps by the end of 2014, there will be no more purchases.

The question is, what does the Fed see differently now than it did three months ago? Unemployment is still high, but it has dropped to 7%, a number it has not seen in five years. Industrial output in November was up to prerecession levels for the first time. Those two numbers factored largely in the FOMC decision but we would be willing to bet there was a third factor: over time the efficacy of a program like this diminishes. It’s possible that the value derived from purchasing bonds just isn’t there anymore.

We don’t want to minimize the effectiveness of what the Fed has done. When we compare our recovery to that of other areas (like the E.U.) there is no question that the U.S. Central Bank was on the ball.

 

In June 2009, the unemployment rate in the U.S. was 9.5%. It was a comparable 9.4% in the Eurozone. In the four and a half years since, it has dropped to 7% in the U.S. while surpassing 12% in Europe. The Fed is certainly tracking better the European Central Bank.

Inflation, the flip side of the Fed’s dual mandate, still “stubbornly” remains below the target of 2%. But it is much better than the annual inflation rate in Europe, which in November was just 0.9%.

Whether we like it or not, even with the risk of creating a new financial bubble, the Federal Reserve’s bond purchases have played a major role in these results. Unemployment is projected to hit 6½% by the end of 2014. Assuming inflation doesn’t drop, the Committee will finish  tapering and finally stop growing its balance sheet.

Actual tightening is another story. The Fed Funds rate is expected to remain at near zero as long as inflation is below 2%. That may not be until 2016. That’s bad news for CD investors.

From: Jumbo Rate News 30:47 - December 16, 2013

Third Quarter Banks, C.U.s, by the Numbers

Banking trends continue to show improvement in most areas but a couple of things stick out in the third quarter data. While U.S. banks earned $36 billion in the quarter, the industry posted its first year-over-year decline in net income in four years. That decline was due to two factors.

Rising interest rates on loans reduced refinancing demand  resulting in lower mortgage revenue but that wasn’t the main culprit. Without the $4.335 billion litigation expense posted by ***½ JPMorgan Chase Bank—Columbus, OH net income would have been $2.8 billion higher than a year ago.

The other thing that caught our eye was that $235.6 billion of the $247.8 billion increase in bank deposits occurred in accounts with balances greater than $250,000. It seems it doesn’t matter how much FDIC insurance covers, it will never be enough for some  people.

Here are the highlights from third quarter 2013 and how the numbers compare to September 30, 2012. 

From: Jumbo Rate News 30:46 - December 9, 2013

We’re Not Santa… But Over 70% of Banks on Nice List 

All star ratings are now based on September 30, 2013 financial data. While BauerFinancial isn’t Santa Claus, it does have a complete list of which banks and credit unions are financially “naughty” (problematic indicates a rating of 2-Stars or lower) or “nice” (5-Stars and 4-Stars are recommended ).

One thing to note when looking at these graphs is that the industry has shrunk in this 5-year time-frame by over 17%!

That adds up to 1,526 banks and 1,313 credit unions that existed at 9/30/2008 that have either been closed or merged in the years since. Not surprisingly, those that remain have done so because they are, for the most part, on the stronger side.

Of course there are exceptions. Over 7½% of existing banks and over 3% of credit unions are still operating in a manner that Bauer feels is “problematic” (thus the 2-Star  or lower rating). Don’t take anything for granted. Always make sure you are fully insured and check your star-ratings. 

 

 

From: Jumbo Rate News 30:45 - November 25, 2013

                                 Cost of Thanksgiving Dinner

Your wallet may indicate otherwise, but according to the American Farm Bureau Federation, for the first time since 2009 and only the second time in the past decade, the cost of feeding a family of ten a “traditional” Thanksgiving dinner went down this year. The decrease is minimal, less than .9% percent (from $49.48 last year to $49.04 this year) but a decrease nonetheless.

The price of the bird went down 3 cents per pound this year to $1.36 (or $21.76  for a 16 pound turkey).  Dinner rolls, peas and stuffing all decreased as well. Although the decreases were modest, it was enough to offset other ingredients, like milk, pumpkin pie and sweet potatoes,  that all went up.

The survey, while informal, tracks fairly closely (but not exactly) to the Bureau of Labor Statistics (BLS) for the past 12 months.

 

According to BLS, from September 2012 through September 2013, the “all-items” consumer price index (CPI) increased 1.2% (unadjusted). The food index was slightly higher with a 1.4% increase but the food at home index rose by just 1.0% (eating out increased by 1.9%).

The BLS release doesn’t break prices down into each component of the dinner like the Farm Bureau does, but the unadjusted increase of 1% for in-home food should reflect what consumers are actually paying for groceries as a whole over last year. This is what your wallet  likely reflects for everyday purchases.

As for Thanksgiving dinner, the Farm Bureau’s menu has remained constant since it began tracking these prices in 1986 so it’s a pretty good indicator of the “Turkey Dinner Index” (TDI), which has increased 72.7% in the past 20 years (37.4% in the past 10 years).

Last year’s TDI was up just over half a percent but two years ago (2011) the TDI jumped over 13%. So, fear not, go buy that turkey… but don’t eat too much.

From: Jumbo Rate News 30:44 - November 18, 2013

                                    Too Big to Fail a Global Problem 

While the cry to end “Too Big to Fail” (TBTF) gets increasingly louder here at home in the USA, it’s easy to overlook the fact that it’s a  global problem. Instead of trying to end TBTF, however, the International Financial Stability Board is creating policies to address systemic and moral hazard risks associated with these Globally Systemically Important Banks (G-SIBs).

The name is a little misleading because G-SIBs are actually holding companies that own banks and/or other companies. Each November the list is revisited by the Financial Stability Board which then comes out with a new list comprised of five buckets. The buckets are based on the overall size of the Holding Company and its associated risk profile with 5 being the riskiest.

In an effort to deter banks from growing any larger, each bucket carries a surcharge that gets increasingly burdensome as the G-SIB continues to grow. The lowest tier on the bucket scale (1) requires the G-SIB to have an 8% risk-based capital (common equity) to assets ratio 1% over the 7% already prescribed.

The top tier (Bucket 5) has a 3.5% surcharge and at this time, is empty. The hope being that the surcharge is high enough to keep it that way.

This year there are 29 G-SIBs: 19   of them operate FDIC-Insured banks in the U.S. (They are listed on page 2). The new requirements are not effective yet. They will  be phased-in beginning in January 2016 with full implantation by January 2019. Perhaps that’s playing a role in Royal Bank of Scotland’s (Bucket 2)  planned sale of RBS Citizens Bank (commonly known as Citizens Bank) by  2016.

As U.S. regulators focus on living wills, stress tests and finding a way to break up Big Banks (basically any bank or holding company with consolidated assets of $50 billion or greater), a disincentive like this may be an effective way to discourage further growth and add an extra cushion of capital in case disaster hits in the meantime.

Look at HSBC, for example, the first G-SIB on the list. Headquartered in London, HSBC operates/owns two U.S. banks. These banks, while FDIC-insured, have affiliates around the world, including North and South America, Europe, the Middle East and Asia. An extra 2½% cushion  (bucket 4) will help keep things like the storm in the Philippines or wars in the Middle East or recessions in Europe (or here) from compromising the stability of the entire organization. Sounds like a good idea to us.

From: Jumbo Rate News 30:43 - November 12, 2013

                        A Tale of Two Banks ...in One Small Town

Twenty-five miles south of Dothan, Alabama in the Florida Panhandle lies the small town of Graceville: population 2,230. With an estimated median income just a little over 50% of the rest of Florida,  Graceville’s residents are on the low end of the income scale. Housing prices in the small town also run on the low side.

For such a small town, though, Graceville has its fair share of businesses. In addition to frequent tourists travelling through, the Baptist College of Florida (BCF) was founded there in 1943. Originally known as the Florida Baptist Institute, (FBI) some of the college’s first students included World War II veterans as well as the great grandson of Chief Osceola of the Seminole War. Other employers in the town include a hospital, a newspaper, a prison, a nursing home and several family restaurants. Until last week, two community banks also called Graceville home.

In a rare mid-week action, regulators seized Bank of Jackson County on Wednesday, October 30th, making it the 23rd bank failure of 2013. Bank of Jackson County began its operations in 1934 as Bank of Graceville. When it opened a second branch in nearby Marianna, Florida in 1978, the name was changed to Bank of Jackson County.

Bank of Jackson County was rated Zero-Stars for the past three years; Bauer monitored as the bank teetered precariously, but it was not “Critically-Undercapitalized” by Regulatory standards until June 30th. At that point, regulators’ hands were pretty much tied. *****First Federal Bank of Florida, Lake City, which has been quietly picking up small banks in the Florida Panhandle and Gulf Coast since 2009, assumed $25 million in deposits and purchased most of the failed bank’s $25.5 in assets, including its two branches.

Lest you think that Graceville has a depressed economy that caused the Bank of Jackson County to fail, that’s not the case at all. In fact, Graceville is also home to a 5-Star community bank: ***** Peoples Bank of Graceville. Peoples Bank of Graceville was established in 1974 and although its asset size is about three times that of Bank of Jackson County, it operates through just one brick and mortar branch on Brown Street.

The following highlights from the two banks clearly indicate where the differences lay. For its diminutive size, Bank of Jackson County had too much overhead. Its salary expense (as a percent of assets) was almost three times that of its 5-Star counterpart. Loan underwriting was an issue as evidenced by the level of delinquent loans. Perhaps the worst indicator, though, is the Efficiency ratio. It cost the failed bank $1.58 to earn $1.

While Peoples Bank of Graceville is a stellar example of community banking, Bank of Jackson County should serve as a lesson on the dangers that lurk and pitfalls to avoid.

     

From: Jumbo Rate News 30:42 - November 4, 2013

The Federal Reserve, Unemployment & Politics (Fed-Up) 

CNNMoney coined the phrase “QE-Indefinitely”. Sad but true. The Federal Reserve will continue buying bonds at a rate of $85 billion per month as it has been doing since September 2012. There is still no end in sight.  In fact, the statement released after the Fed’s Open Market Committee (FOMC) Meeting on Wednesday didn’t change much at all from the September statement.

While the Federal Reserve still believes these asset purchases are helping to strengthen the economy, it called out the Federal Government for “restraining economic growth”. Rightly so. Not only has reckless spending turned into a perennial problem, the government shutdown has resulted in a new slump in consumer confidence. That’s exactly the opposite of what this country needs.

In fact, in Alan Greenspan’s new book: The Map and the Territory, he posits that fear is at least three times a stronger mover of financial markets than euphoria. Love him or hate him, we have been witness to the effects, rational or not, of both euphoric and fearful consumers, and his assessment does sound about right.

The FOMC has told us what it’s looking for before it raises the Fed Funds rate from the zero to 0.25% it has been stuck at since 2008. That’s not a secret. It wants: Unemployment at 6.5% or lower and 1-2 year Inflation projections no greater than 2.5%. The FOMC has also stated that there will probably be a considerable amount of time between A) when it begins tapering its bond buying and B) when the conditions will warrant a raise in the Fed Funds rate.

Everyone, including Bernanke, thought that the bond-purchase tapering, would begin this year. There is one more FOMC meeting scheduled for this year so he still has an opportunity to begin the tapering off process (i.e. slow the rate at which the Fed is buying bonds) but it is looking more and more likely that that task will be left to his successor, which has now turned into another point of contention.

BauerFinancial is supportive of the President’s nomination of Janet Yellen to be the next Federal Reserve Chairman  and by all accounts she has broad support on the Hill. That doesn’t make her a shoo-in, though. Some in Congress (headed by Senator Lindsay Graham R-SC) are warning they will stall any nominees the President selects, including Yellen, for something totally unrelated to the economy. (Benghazi to be exact, but we won’t get into that.)

We will, however, get into unemployment. By definition, the unemployment rate now stands at 7.2% which would be an improvement if not for the fact that so many people have stopped searching for work. Right or wrong, the definition used for the unemployment rate excludes anyone who is no longer searching for a job, regardless of the reason. That definition has not changed so, by definition, the unemployment rate is going down.

However, the part that most people are unaware of is: According to the Bureau of Labor Statistics, at 63.2%, the percentage of Americans that currently have a job or are searching for a job is at its lowest level since 1978! 

That’s terrible news but… that’s not the number that the Fed is looking at. For purposes of the FOMC, the unemployment rate is 7.2% and falling. That’s the number they are looking at to get to 6.5% or lower and that’s when we will hopefully get some upward movement in the Fed Funds rate which will translate to higher CD rates. 

We need someone steering the ship and all Congress does is make it take on more water. How can they not see that  their methods are counter-productive?

From: Jumbo Rate News 30:41 - October 28, 2013

                  Loan Quality Improving But Volume Lackluster 

In spite of pitiful interest rates, bank deposits in the U.S. have increased almost every quarter in the past five years. Total gross loans, on the other hand, dropped precipitously during the recession as consumers  have feverishly tried to lower their debt ratios. (See graph A below.)

While those gross loans have yet to recover, the quality of those loans is clearly on the mend. Graph B shows how delinquencies have behaved over the same time period. After peaking at $409 billion, or 3.1% of total assets, in the first quarter of 2010, loan quality has slowly, but surely, been improving.

Since it was housing that created much of the mess of the past several years, we wanted to take a closer look at how that particular segment of loans is recovering. It may come as a surprise, but as the numbers clearly show, single family home loans are still slowing.

Graph C indicates how the country’s residential real estate loan business is faring by region. (The caveat here is that financial data is reported at the bank level so the loans appear in the region in which the bank is headquartered, not necessarily where the property is located.) Due to several large acquisitions in 2008 and 2009, we didn’t go back beyond 2010 in this chart.

For example, JPMorgan’s government assisted acquisition of Washington Mutual (WaMu) in 2008 gave the New York bank a huge presence on the West Coast but moved  WaMu’s extensive residential loan portfolio from the Western region to the Northeast, at least on paper.

Bank of America, N.A. Charlotte, NC’s 2009 acquisition of Countrywide Bank, FSB, VA didn’t have any effect on the region (both Southeast), but…

Wells Fargo Bank, N.A., Sioux Falls, SD’s acquisition of Wachovia Bank, N.A., Charlotte, NC in March 2010 moved about $127 billion in residential loans from the Southeast Region to the Midwest.

There have obviously been more recent acquisitions that skew the chart too, but none since then have been quite so large.

             

From: Jumbo Rate News 30:40 - October 21, 2013

TARP—Five years On 

TARP, created in 2008 to restore stability to the nation’s banking system, is approaching a critical 5-year mark. For those banks still in the program beyond their five year anniversary, dividend payments will nearly double—from 5% to 9%.

TARP was originally passed by Congress as a “Troubled Asset Relief Program”. The intent was to purchase troubled assets from financial institutions. Treasury had other plans. It took the money allocated for TARP and created several different programs, one of which was the CPP (Capital Purchase Program).

Hundreds of banks originally in the  CPP have found ways to exit on their own terms well before they had to think about the 5-year dividend hike, and the Treasury itself has held dozens of auctions to divest others. In fact, the six most recently auctioned are expected to close this Monday, October 21st. (All six are behind in their dividend payments.) They are:

Of the 104 banks still in the CPP once you exclude those six, 71 have missed at least one dividend payment, most have missed many more. We’re wondering how an 80% increase in dividends will affect those payments.

The EESA (Emergency Economic Stabilization Act), which created TARP, became law on October 3, 2008; it was over the course of the next 14 months (through December 2009) that banks  and holding companies sought out those funds. They will encounter the 5-year mark over an equally staggered timeframe.

We’ve said it before and believe it warrants repeating: Even though the money was not used as it was earmarked, the bank programs of TARP made money. As of September 30, 2013, Treasury had recovered $273 billion from its $245 billion investment in the banking industry. If it doesn’t make another dime, the program has earned $28 billion for taxpayers.

The Treasury Department conducts an annual survey (chart below) to determine how the banks have put this money to use. Depending on the rate of return earned on their investment, banks may have differing views about the 9% dividend payments. We would expect the vast majority, however, to seek an exit route as quickly as possible.

Source: U.S. 'Department of the Treasury

From: Jumbo Rate News 30:38 - October 7, 2013

Community Banks Bruised, Far From Broken

While much of the Federal Government has been temporarily shut down, bank regulators continue to work. In his role as chairman of the Federal Reserve, Ben Bernanke welcomed guests last Wednesday (October 3rd) to a conference on issues that are important to community bankers and the unique challenges they face.

Bernanke and other regulators tend to classify all but the largest banks (those with more than $10 billion in assets) as community banks. By their definition all but 106 banks are currently considered community banks. Bauer takes a narrower view and you will see on the graph on page 2 that assets are broken into four size categories. The smallest group being the true community banks, we’ll call the second group community banks too, and the third group we’ll call the regional banks.

One problem that has plagued community banks in the past ten years is the narrowing of the net  interest margin (the difference between interest earned on loans and investments and interest paid on deposits). While larger banks can generate revenue through “non-traditional” avenues (i.e. investment banking  & trading), community banks rely on traditional banking (deposit taking and making loans). As a result, the current environment of low interest rates continues to weigh heavily on earnings.

In 2002, the average net interest margin (NIM) for all community banks was 4.2%. By 2012, that average had dropped to 3.7%. When you combine that with the expense of added staff needed to comply with the plethora of new regulations that have been adopted over the decade, you can see that community banks are suffering.

Perhaps the best way to measure performance variations by asset size is with the efficiency ratio (noninterest expense to net operating revenue (see chart). The efficiency ratio has increased in all asset sizes over the past ten years but the smallest banks now have to spend over 78 cents to generate $1 of revenue. According to the FDIC Community Banking Study (December 2012), “An  ‘efficiency gap’ in favor of noncommunity banks grew from 1.3% percent in 1998 to 9.7 percent in 2011.”

According to the study, even though Big Banks lost some efficiency, that 9.7% gap was due almost entirely to the deterioration of  the efficiency ratio at community banks... and most of that comes from the squeeze in net interest margins.

Mr. Bernanke says he  understands the concerns of community bankers and is committed to crafting policies and regulations that take size into consideration, but he hasn’t said anything about raising interest rates.

What he says instead is that community bankers are resilient and he has faith they will thrive in the years ahead. BauerFinancial also has faith in community bankers and believes that community banks will overcome current obstacles. They will be ready to serve their local communities for many years to come… in spite of low interest rates.  

From: Jumbo Rate News 30:37 - September 30, 2013

Community Banks, Local Credit Unions Team Up 

Zero-Star Second Federal S&L, Chicago, IL failed on July 20, 2012. The failure was no surprise. The thrift had a rather unique business model; it specialized in making home loans to undocumented immigrants (with taxpayer-identification) in Hispanic markets in and around Chicago. As you can imagine, with the turn of the economy went the bank’s profitability. Delinquent loans skyrocketed, nonper-forming loans as a percent of total assets reached the double digits in the fourth quarter of 2009. They never recovered.

When Second Federal was finally closed, 2½ years later, a local organization, The Resurrection Project, reportedly placed a bid, but failed to win the rights to the thrift. The Resurrection Project was established in 1990 with $30,000, one employee, and a strong desire to curtail the violence and neglect that had come to define the Pilsen community of Chicago.

By mandate, the FDIC is required to resolve banks in the least costly manner for the deposit  insurance fund. It was decided that the winning bid came from ****Hinsdale Bank & Trust, Hinsdale, IL (one of 15 Wintrust Financial banks). Second Federal’s deposits were sold for $100,000 and Hinsdale also purchased about $14.2 million of the failed thrifts assets. The FDIC held on to all loans, including consumer and mortgage loans for later distribution.

The Resurrection Project’s CEO, Raul Raymundo, posted a scathing letter on its website regarding the sale of Second Federal’s deposits to Hinsdale. According to Raymundo, his organization had teamed up with One Pacific Bank and Self Help Credit Union (One PacificCoast Bank, CA and Self-Help FCU, NC) to submit a higher bid than  Hinsdale’s.

We did find that two other bids were placed for Second Federal in addition to the winning bid: one of those was from One PacificCoast Bank. We also discovered that one bid submitted was for the whole bank and called for a 50% deposit premium plus a $130,000 discount on the total assets. (We cannot confirm that this was the bid from the Resurrection Project, Self-Help FCU and One PacificCoast Bank.) 

In the months that followed, One PacificCoast Bank dropped out of the partnership leaving The Resurrection Project and Self-Help FCU to figure out how and if they could service these people who now had their deposits at one place and their loans at another. It took 14 months, but the team succeeded. Self-Help FCU and the Resurrection Project formed an alliance with Wintrust Financial and Hinsdale to get the job done. First,  the team worked with the FDIC to secure $141 million in mortgage loans. Then, the three branches and all deposits previously sold to Hinsdale were sold to Self-Help FCU.

Second Federal Credit Union, a division of Self-Help Federal Credit Union, opened (or re-opened) for business on Saturday, September 21, 2013 in Chicago.

Second Federal is not the first bank to be acquired by a credit union, but there have been relatively few up until now. That may change as regulatory costs continue to rise, smaller community banks may find it more feasible to team up with a local credit union that shares its community values than going it alone or selling out to a big bank.

Ken Braun, president of **Hartford SB, Hartford, WI agrees: “The Banking industry is rapidly being transformed by an unprecedented volley of new laws and regulations. Some of these are welcomed, while others are not... One change which I believe will be beneficial will entail the combination of Hartford Savings with Landmark Credit Union… Our employees will continue to be employed... Our customers will enjoy many new services… enjoying the same personal service they have become accustomed to.”

Other small banks may agree.

             

From: Jumbo Rate News 30:35 - September 16, 2013

                             U.S. Deposit Insurance Not a Free-for-All

Who said it? “We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people's funds. They had used the money entrusted to them in speculations and unwise loans. This was of course not true in the vast majority of our banks but it was true in enough of them to shock the people for a time into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all.”

President Bush? President Obama? Fed Chairman Bernanke? Alan Greenspan? None of the above. These were words uttered by President Franklin D. Roosevelt on March 12, 1933 shortly before the establishment  of the FDIC.

Since the establishment of the FDIC, there has been a definite distinction between domestic and foreign deposits.

Foreign deposits (deposits at foreign branches of U.S. banks)  were not considered deposits at all for purposes of the FDIC, except under certain and rare circumstances. Banks were not assessed an insurance premium for these deposits, nor were they guaranteed by the FDIC like domestic deposits.

Dodd-Frank has changed part of that equation so that banks are now assessed on all liabilities, including foreign deposits, but it did not extend deposit insurance coverage to them.

This distinction is important as a Consultation Paper in the United Kingdom recently proposed that non—European banks that have depositor preference laws (as we do) be prohibited from accepting deposits at their U.K. branches.

In our opinion, insuring foreign deposits was not the intent of FDIC insurance coverage. A Final Rule just issued by the FDIC on the subject agrees. FDIC insurance is intended to maintain public confidence in our nation’s financial system. In order to do that effectively, it must, above all else, protect the Deposit Insurance Fund (DIF).

This ruling could garner an adverse reaction by U.K. authorities. But foreign branch deposits have doubled in the past twelve years and now total  approximately $1 trillion. If we allow those in the U.K. to be insured, what would prevent other countries/regions from demanding the same? An additional $1 trillion of insured deposits would undermine both of FDIC’s mandates: promoting consumer confidence in the U.S. banking system and protecting the Deposit Insurance Fund.

Currently 94 U.S. banks have foreign offices. Many of these offices don't handle retail deposits or retail banking at all. Their purpose is to provide services to multinational companies. Deposit insurance coverage doesn’t matter nearly as much to them as having a large institution that caters to their needs. If the banks are no longer allowed to take those corporate deposits, that’s another story. Total assets of those banks is $10.3 trillion—just 10 times more than the uninsured foreign deposit dollar amount. We don’t know how much of the $1 trillion in deposits is in the United Kingdom, but we can say with certitude that FDR and his Congress established the FDIC for U.S. citizens to have confidence it their banking system to protect our interests here at home, not to give deposit insurance protection the world over.

And, that’s what the Final rule states, with unusual clarity we might add: “Deposits in branches of U.S. banks located outside the United States are not FDIC-Insured deposits.”

"The final rule protects the Deposit Insurance Fund, while at the same time recognizing both the FDIC's commitment to maintaining financial stability through the prompt payment of deposit insurance and the evolving nature of the global banking system," said FDIC Chairman Martin J. Gruenberg.

Note: The Final Rule does not apply to deposits at U.S. military facilities in foreign countries. They continue to be insured as they have been.

From: Jumbo Rate News 30:34 - September 9, 2013

                         Loan Demand Inescapably Tied to CD Rates 

The Wall Street Journal reported last week that “small banks” had three times the annualized loan growth last quarter than the largest banks. The article didn’t specify how they defined “small banks”, but the big banks were just the largest 25.

That’s odd because the FDIC’s June 30, 2013 Quarterly Banking Profile clearly shows that loans were down from the previous year for every asset size group except the $1 billion to $10 billion banks. In fact, loans at the smallest community banks,  have been steadily declining for the past five years. (Although, as we mentioned last week, that group of banks is also shrinking the most.)

There is hope. A July survey by the Federal Reserve indicates things may be turning around. U.S. banks reported an easing in lending standards as well as stronger loan demand in most categories in the second quarter. That’s good new for CDs as loan demand translates to a need for deposits.

The charts track second quarter total loans and leases for the past five years.

                       

From: Jumbo Rate News 30:33 - September 3, 2013

                       

2Q’13 Bank Earnings, Loans, Loan Quality Up, Margins Down 

Earnings:

Second quarter numbers for the banking industry (released on Thursday, August 29)  reveal a healthier industry emerging. With an aggregate net income of $42.2 billion, this marks the sixteenth consecutive quarter that bank earnings have increased year-over-year. Only 8.2% of the industry posted losses for the quarter, down from 11.3% a year ago.

Another measure of profitability, the industry average return on assets (ROA) of 1.17% is the highest it’s been in six years (since second quarter of 2007).

Loans:

Not only is lending starting to make a comeback, but the quality of those loans is improved as well. Loan balances increased 1.8% ($73.8 billion) In the second quarter with commercial and industrial loans leading the way. Nonfarm, nonresidential real estate, credit cards and auto loans were all up as well. Home equity lines  and other loans secured by residential real estate witnessed a decline.

Loan Quality:

Charge-offs of loans deemed uncollectible declined over 30% from second quarter last year and loans 90 days or more past due or in nonaccrual status dropped 8%. The percent of noncurrent loans and leases was the lowest seen since 2008.

Another indicator of improved loan quality is the fact that banks only set aside $8.6 billion for loan loss provisions. That’s $5.6 billion (nearly 40%) less than a year ago.

Net Interest Margin:

Operating income at the nation’s banks increased by 3% from a year ago. But you have to look at the breakdown to get the full understanding. Noninterest income increased by 11.1%;, while interest income dropped 1.7%. The average net interest margin, which is the difference between what banks earn from the interest on loans and investments and what they spend to fund them, dropped to 3.26%.  If we don’t want banks to depend on fees and investments, interest rates will have to go up.

From: Jumbo Rate News 30:32 - August 26, 2013

The Difference Between Capital One & Capital One 360

That’s what the caller wanted to know. He called BauerFinancial for the rating on Capital One 360. Apparently he had called Capital One directly and was told that they had nothing to do with ING or Capital One 360. Huh? Capital One acquired ING Bank in February 2012 and the two banks were merged into one last November. Since then, former ING customers have been forwarded on the web to Capital One 360, which is one and the same with Capital One N.A..

The issue of banks operating under aliases (or more than one name) has always been a problem, but since the advent of the internet, it has become much bigger. In the past, the reason for an alias was usually an acquisition made an alias convenient, at least for a short time, until all operations couild be merged. Now, there are many and varied reasons for aliases and while we can’t go over them all here, we can give you some good examples.

New York Community Bank, Flushing, NY (cert #16022) has operated under many names over the years as it has pursued mergers with other local thrifts. Most have been retired, but seven aliases remain:

Queens County Savings Bank has 33 branches in Queens County; Richmond County Savings Bank operates 22 offices on Staten Island; eight branches in Brooklyn are called Roosevelt Savings Bank; 53 branches in Nassau and Suffolk counties (on Long Island) operate as Roslyn Savings Bank. Its 51 New Jersey branches are known as Garden State Community Bank; branches in Florida and Arizona are AmTrust Bank; and Ohio Savings Bank is the name used in Ohio.

Eight different names, but they are all one when it comes to deposit insurance coverage. That means, if you’re not careful, you could find yourself with too much on deposit. If you assume you can deposit $250k in Roslyn Savings Bank, for example and another $100k in Queens County Savings Bank, you could find yourself underinsured by $100k.

Glacier Bank, in Kalispell, MT (cert #30788) is another one. Its holding company, Glacier Bancorp, Inc. decided to merge all of its 11 member banks into one last year (JRN 29:05). To date, it still operates under all eleven names. They are: 1st Bank, Bank of the San Juans, Big Sky Western Bank, Citizens Community Bank, First Bank of Montana, First Bank of Wyoming, First Security Bank of Missoula, Mountain West Bank of Idaho, Valley Bank of Helena, and Western Security Bank are all divisions of Glacier Bank.

Not all aliases are the result of mergers, however. In 1992, for example, Bank of Galesville, WI (cert #8693) opened a branch and ATM in neighboring Trempealeau. This branch operates under the name, Bank of Trempealeau. In 2000 it opened another branch in the Town of Holland named Seven Bridges Bank. Naming new branches with different names is the exception, not the rule, but it does happen, and it’s up to you, the depositor, to know where your depots really are.

The newest group of alias names though, has come from the internet. While most URLs (web addresses) bear some resemblance to the real name of the bank, some are completely off the wall. Some banks, like Pacific Continental Bank, Eugene, OR (cert #20774) use their bank slogan as a web address. In their case, the bank’s URL is www.therightbank.com because its slogan is “The Right BankTM“. This is less confusing than some of the other aliases because the URL brings you to a clearly labeled web site for Pacific Continental Bank. That is not the case with these:

Flushing Bank, NY=igobanking.com;

Northeast Bank, ME=ablebanking.com;

River Valley Bk, WI=incrediblebank.com;

And perhaps our favorite—Bank of the Wichitas, Oklahoma operates as  Redneck Bank at redneckbank.com. Yee haw… check your FDIC certificate #s.

From: Jumbo Rate News 30:31 - August 19, 2013

It Isn’t Size or Strength but Risk that Matters Most

Regulators and lawmakers, desperately trying to end (or at least end the perception of)  “too big to fail” (TBTF), are at odds of how best to do so. The conversation seems to be moving forward, or is it really just deja vu?

Let’s go back 80 years or so. In the aftermath of the stock market crash of 1929 and Great Depression, lawmakers sought to curtail risk-taking by commercial banks. Their greed led to bad loans and bad investments which, in turn, led to the great depression. Sound familiar?

The Glass-Steagall Act of 1933 was passed effectively building a barrier between commercial banking and investment banking. The banks were given a year to decide which side of the wall they wanted to stay on. The authors of the bill believed that this wall would protect insured deposits from being used to cover for poor investments. And it worked for a while.

Little by little, however, big banks started pushing on that wall. Then, in 1999, pushed by Sanford (Sandy) Weill and Citigroup, certain key provisions of the Glass-Steagall Act were repealed allowing Citigroup to merge with Travelers Insurance. The wall had been knocked down.

To his credit, Sandy Weill has said that was a mistake. From a July 2012 interview on CNBC, “What we should probably do is go ahead and split up investment banking from banking. Have banks do something that’s not going to risk the taxpayers dollars, that’s not going to be too big to fail.” 

Would that have prevented the Great Recession of 2008? Probably not. It didn’t prevent the Savings and Loan Crisis of the 1980s. Nobody has yet figured out a way to legislate greed out of banking. But we don’t have to make it quite so easy. 

Support has been hard to come by. The Dodd-Frank Act of 2010 includes key elements, like the Volcker Rule, that prohibits banks from doing any proprietary trading or owning any part of a hedge fund or private equity fund. But it failed to get the support needed to limit the size of banks and prevent TBTF.

Regulators decided, if they couldn’t make big banks smaller, they could make them stronger. We all know about the stress-testing now required for the big banks. And now, new capital requirements should improve both the quality and quantity of capital held by U.S. banks.

And, just last month, a new 21st Century Glass-Steagall Act was introduced by Senators Elizabeth Warren (D-MA) and John McCain (R-AZ). It aims to, once again, separate traditional banks from those that deal in riskier transactions (investment banking, insurance, swaps, hedge funds and private equity activities). A step beyond Volcker, but still not a size limit.

Whether this one gets the traction needed to become law remains to be seen. But it has two heavy hitters behind it, and it’s bipartisan, so it has a shot.

In the meantime, Citigroup puts its money where its mouth is as it takes steps to exit the business of alternative investments. Citi raised a private equity fund in 2007 with $500 million of its own capital. The fund reportedly owns such assets as a water supplier in the U.K. and a toll road in Spain.

This is a perfect example, and may give Warren and McCain a boost. This is a holding that looks great. A water company and a toll road should be great investments. What could possibly go wrong? Shareholders love it. But if the economy turns and it starts losing money… they end up getting a taxpayer bailout because they are a federally insured bank that is TBTF.

We commend Citi for taking the initiative to exit alternative investments and for realizing the risks these activities put on the deposit insurance system. But it is just one fund at one bank. 

From: Jumbo Rate News 30:30 - August 12, 2013

 

                                         Is This the New Face of the Fed?

President Obama is not expected to announce his nominee to replace Ben Bernanke when his term ends in January at least for another couple of months. But that doesn’t stop us from speculating. And while there is no shortage of names to bandy about, only two seem like real contenders at this point.

Former Treasury Secretary Larry Summers is considered to be one of the front-runners, but not by us here at BauerFinancial. Dr. Summers has too many marks against him. Although highly intelligent and a brilliant economist (serving as the Chief Economist of the World Bank from 1991-1993 and U.S. Treasury Secretary from 1999-2001), he comes across as brash and divisive.

After leaving the Treasury, Summers became president of Harvard University but resigned his post in 2006 after a faculty vote of no-confidence. The vote stemmed from a combination of missteps that included financial conflicts of interest (which is pertinent because he currently does work for Citigroup) and comments he made regarding a lack of aptitude in science and engineering in the female gender (three of the seven current Fed board members are women).

One of those three female members of the Fed’s Board of Governors is Vice Chair Janet Yellen. Dr. Yellen also has ties to Harvard where she was an assistiant professor from 1971-1976. From there she became an economist for the Fed’s Board of Governors  (1977-1978) and then a faculty member at the London School of Economics and Political Science (1978-1980). In 1980 she joined the faculty of the University of California at Berkeley where she remained   until 1994 when she returned to the Fed as a Fed Governor. More recently, Dr. Yellen was President of the Federal Reserve Bank of San Francisco (2004—2010) and has been Vice Chair at the Fed since then. 

Her record remains spotless. 

Whether or not you agree with the Fed’s handling of the financial crisis (and the aftermath) you should agree that we need an individual experienced in monetary policy and familiar enough with the current policy be able to remove stimulus without triggering panic. Yellen fits those requirements.

In 1996, with Alan Greenspan at the helm, Yellen helped to usher in a perfect economic soft-landing. Not an easy feat, but great experience for the task at hand; the retreat of quantitative easing (QE).

Yellen has spent years regulating banks and steering the economy. She saw the writing on the wall long before the financial crisis hit and will likely be a tougher bank regulator if she sees loan underwriting practices getting out of hand again. The only thing critics can say about her is that she may not be tough enough on inflation... when that becomes an issue again.

We don’t see that as a problem. In a speech this past April, Yellen made her position on that quite clear. “The FOMC will take a ‘balanced approach’ in seeking to mitigate deviations of inflation from 2 percent and employment from estimates of its maximum sustainable level.” This statement addresses both of the Fed’s mandates of price stability and maximum employment.

Some believe that Summers would be tougher on inflation than Yellen. He has been a vocal critic of QE, which has pumped trillions of dollars into the economy and, if not controlled properly, could trigger inflation. The question is, which of the two would do a better job of putting a halt to all of the Fed’s easy money policies without creating chaos and triggering that inflation?

What we need is someone who can ease us out of these policies and back towards normalcy, someone who can bring together the Fed governors to form a consensus and who can effectively communicate what that consensus is. We believe Janet Yellen is up to that task.

Agree? Disagree? Email your comments to: jumboratenews@bauerfinancial.com.

From: Jumbo Rate News 30:29 - August 5, 2013

                                      Bauer’s Adjusted CR vs. the Texas Ratio

                       

Twenty-seven and a half years ago (January 1986) JRN started its third year with a new tool, Bauer’s Adjusted Capital Ratio.  By subtracting  delinquent loans and repossessed assets  from both the numerator and the denominator of the leverage ratio equation, we could easily see how a bank would look if it were to take a loss on all of its  nonperforming assets. Bauer’s Adjusted CR was a much needed predictive measure of the future health of a bank and it is just as valuable today as it was then.

Mr. Bauer wasn’t the only person to realize that delinquent loans were being sorely overlooked by regulators at that time. (Great minds do sometimes think alike.) Mr. Gerald Cassidy of RBC Capital Markets came up with his own method for evaluating troubled loans right around the same time as Mr. Bauer. Cassidy came up with an equation that divides non-performing assets by the sum of tier 1 capital and reserves. If this Texas Ratio exceeded 100%, the institution was considered doomed to fail. (The name “Texas Ratio“ was fitting due to the large number of Texas Savings and Loans that failed during the 1980s.)

So far in 2013, 16  banks have failed. All had Texas ratios greater than 100% and all had negative Bauer’s adjusted capital ratios. Similarly, 51 banks failed in 2012. All but one had Texas ratios greater than 100% and all but that same one had negative Bauer’s adjusted capital ratios. (List on page 2.)

The one bank that failed without  triggering either ratio was a $20 million, one branch institution that had no delinquent loans but was critically undercapitalized and was suffering huge losses. An additional predictor was not necessary to determine its fate.

Over the years, the results have been similar. Both ratios have merit; one is not better than the other. It comes down to what the user prefers. Our preference is Bauer’s Adjusted CR where negative means “Bad”. But  that’s just us.

                                                                                                 

From: Jumbo Rate News 30:23 - June 17, 2013

Opting-In Can be Costly 

As of three years ago (summer of 2010) financial institutions are no longer allowed to charge overdraft fees for ATM withdrawals or debit card transactions without permission.

Customers now have to sign an opt-in agreement for the “courtesy” of being allowed to overdraw their account and have an associated fee. Those who do not opt-in will simply be declined if they attempt to withdraw more than they have available.

A Consumer Financial Protection Bureau report released on June 11th found that consumers who opted in for this coverage not only have higher account fees, they are also subject to more involuntary account closures. The report found that accountholders who previously had been heavy overdrafters were able to save, on average, $450 in the second half of 2010 alone, simply by not opting in for overdraft protection on these transactions. In 2011, the average account fee per accountholder, was $196 for those who opted in; it was only $28 for those who did not.

That should be reason enough for consumers to rethink their  opt-in. But there’s more. Involuntary closure rates, accounts closed by the financial institution as opposed to by the accountholder, are 2.5 times higher for those who opted in to debit and ATM overdraft coverage. An involuntary account closure can leave a black mark that may make it difficult to open another account elsewhere.

The data in the report refers specifically to debit card and ATM overdraft charges, just part of a bank’s service charge income. New regulations and low interest rates have made fee income crucial to the industry, especially for smaller institutions that lack economies of scale. Now that consumers know how to avoid these ATM and debit card charges, banks have had to find creative new ways to generate fee income.

Fee structures vary by institution as well as by account type so the best way we found to compare was by using what we call a service charge ratio. Service Charge Income includes (but is not limited to) amounts charged depositors: for the maintenance of their deposit accounts with the bank; for their failure to maintain specified minimum deposit balances; based on the number of checks drawn on and deposits made in their deposit accounts; for checks drawn on "no minimum balance" deposit accounts; for withdrawals from non-transaction accounts;  for transactions through the use of ATMs; and for processing of checks drawn against insufficient funds. 

The service charge ratio tells us how much that amount is as a percent of transaction and savings deposits (basically all accounts except CDs and retirement accounts) for each U.S. bank as of March 31, 2013.

The findings may surprise you. Of the 100 banks with the highest service fee ratio, 16 can be found on Bauer’s Troubled and Problematic Bank Report; ten with our lowest rating (Zero-Stars). Also, in spite of charging high fees, 11 still posted a loss in the first quarter.

All but seven of the highest 100 have total assets less than $1 billion and 83 of them are community banks with less than $400 million in total assets. But the biggest variation seems to be location.

The Northeast region only has two banks in the highest 100: one in Delaware and one in New York.

The Western region has the second fewest; one in Arizona and four in California for a total of five.

The Central region has nine: five in Kentucky; two in Wisconsin and one each in Michigan and Ohio.

Then we head to the south. The Southeast region has 35 while the Southwest has 37. Oklahoma and Texas lead the pack with 15 each followed by Alabama (nine) and Georgia (eight).

Kansas tops the Midwest region with seven of the region’s 12. The moral of the story is, while consumers can’t avoid bank fees, they can shop around to minimize them… and opt-out.    

From: Jumbo Rate News 30:18 - May 13, 2013

Pritzger: Where Did You Hear That Name? 

President Obama has nominated long-time supporter, prominent fundraiser, and friend, Penny Pritzger, to be Secretary of Commerce, a position that has been vacant for almost a year. If her name sounds familiar, don’t be surprised.

The Pritzger family is well known in Chicago business circles as the owners of Hyatt Hotels Corp. According to Forbes magazine, ten members of the family are individually wealthy enough to be on the Forbes 400 list. Penny’s net worth is estimated at $1.85 billion. She has not rested on the laurels of her predecessors, though. Ms Pritzger holds both an MBA and a Law Degree from Stanford.

If you don’t recognize her from her fortune, you may recall that she was considered for this same position in 2008. She withdrew from the running that time amid public outcry. According to the The New York Times, the position has remained vacant so long because the vetting of all her assets took that long.

It’s no secret that the family has tax-free investments in offshore trusts. The overseas tax shelters were set-up long before Penny  took the reigns (some when she only 4 years old). While these tax shelters are illegal now, the Pritzger’s were able to take advantage of an old loophole in the tax laws that has since been closed. They would be illegal today but were grandfathered in.

There’s one more place that you may have heard the Pritzger name: right here in the pages of JRN. The Pritzger family owned 50% of Superior Bank FSB, Chicago, which failed in July 2001. Penny Pritzger had stepped down as chairman in 1994, but her influence still permeated the bank.

As we reported in 2001, “What got Superior into trouble was a combination of making high-interest consumer loans to applicants who would have been denied elsewhere, excessive residual assets and brokered deposits” (JRN 18:30). Superior Bank could have (should have) been saved, though. Under  Penny’s guidance, the Pritzger family and the other 50% owner, Alvin Dworman, had a deal with the Office of Thrift Supervision (OTS) to recapitalize the bank. No one outside of those walls can know for certain what transpired after that. What we do know is that the OTS forced Superior to write down many assets that had been overvalued on its books. This rendered the bank “Significantly Undercapitalized”, but still salvageable. Shortly thereafter, the Pritzgers called off the recapitalization. That was the end of Superior.

At the time of its failure, Superior Bank had $42.9 million in uninsured deposits including one depositor who reportedly had $1 million in an IRA. Most was lost. Some customers reported they were lulled into a false sense of security because of the “pristine” Pritzger name.

The FDIC ended up going after Pritzger, Dworman, and Ernst and Young for the failure. Without admitting any culpability, Penny Pritzger settled for $460 million, far more than the $255.5 million she had initially pledged to recapitalize the $2.1 billion asset thrift.

This was the second bank failure bearing the Pritzger and Dworman names. They  were part of a partnership that controlled River Bank America, a $1.5 billion bank liquidated in the 1990’s. Ms Pritzger may not have had day to day dealings at River Bank; she did at Superior.

Penny Pritzger has some high profile support. Jay Timmons, president/CEO of the National Association of Manufacturers, says of Pritzger:  “an extensive business back-ground ...understands what it takes for businesses to create jobs. ...comes from a family with a rich history in manufacturing ...partnered with manufacturers on important initiatives to address our nation’s critical need for skilled workers ...understands skills gap.” 

Roger Dow, president/CEO of the U.S. Travel Association, adds “Pritzger is a proven professional who is more than qualified to lead the U.S. Commerce Department.”

Although the responsibilities of Secretary of Commerce to promote growth and development of U.S. business interests should match her skill set well, we will  be keenly interested to see if she acknowledges her role in the Superior failure at her confirmation hearing.

From: Jumbo Rate News 30:16 - April 29, 2013

U.S. Currency, Then and Now

A newly redesigned $100 bill, originally scheduled to start circulating February 10, 2011, will finally make its debut on October 8th of this year. The new design features a number of enhanced security measures which  include a 3-D security ribbon with images of bells and 100s that change from one to the other as the bill is tilted. It also features a bell in the inkwell on the front of the note.

Challenges to banknote design are two-fold: A) they must be extremely difficult to counterfeit and B) they must be compatible with the millions of cash accepting and dispensing machines (ATMs) around the  world. This new $100 bill has the most advanced security features of any U.S. denomination. Its estimated life expectancy is 15 years, but rest assured, the old design will work perfectly well as long as you have it.

The last new bill added to circulation in the U.S. was a redesigned $5 bill on March 13, 2008. The first of these was spent at the gift shop of President Lincoln’s Cottage at the Soldiers’ Home in Washington, DC. The cottage had recently been restored and opened to the public. The estimated life expectancy of a $5 note is just 4.9 years.

The $5 and $100 notes finish the series of  “colorful” notes that came out beginning with the $20 bill in October 2003. This was the first to feature background colors other than standard black and green that we were so accustomed to. Touted as the most secure (to date) against counterfeiting, the $20 bill has  hints of green, peach and blue in the background. Life expectancy of a $20 bill is 7.7 years.

The colorful $50 note made its debut in September 2004 followed by the $10 note in March 2006. In addition to the new colors, these bills have color-shifting ink, security threads and watermarks that were not present in previous versions.

Paper currency in the U.S. dates back to 1861 when workers had to sign, cut and trim by hand. It wasn’t long before a mechanized process was set up in the basement of the Treasury building. However, the basic designs of all denominations we use today (except the $1 and $2 bills) were not adopted until 1928. The motto “In God We Trust”, which has come under some scrutiny lately, came much later. It first appeared on coins in 1864 but the inscription wasn’t mandated by law until 1955. Since then it has appeared on all paper and coin denominations.

George Washington will always be associated with the $1 bill, but his was not the first face to grace the note.  From 1861 to 1869, the portrait of Salmon P. Chase was featured on the $1 bill. Mr. Chase was Secretary of the Treasury from 1861–1864. President Washington’s portrait first appeared in the 1869 version. The $1 bill comprises roughly 45% of all currency production by the Bureau of Printing and Engraving. It has a life expectancy of 5.9 years.

Our nation’s first Treasury Secretary, Alexander Hamilton (1789—1795) was featured on the first $2 bills  - issued in 1862. Like the $1 note, that too was changed in 1869 when Hamilton was replaced by Thomas Jefferson. A newly designed $2 note was put into circulation in 1976 in celebration of the country’s bicentennial. Since it is not widely circulated, there is no life expectancy calculated for these bills.

From: Jumbo Rate News 30:15 - April 22, 2013

 What’s In Bauer’s Star-Ratings? Why Should You Care?

Last week’s chart showed that a bank’s leverage capital ratio doesn’t always rise and fall proportionally with star-ratings. Often, regulatory capital ratios are not a leading indicator of a bank’s health but a lagging one.

Take GulfSouth Private Bank, Destin, FL, for example, which failed on October 19, 2012. By regulatory capital standards, it was “Well-Capitalized” just one year before it failed. If you look at the trends of the bank, however, you see it was losing money for its last three years and delinquent loans and  repossessed assets kept climbing. (Its nonperforming assets  ratio was 21.5% just before it failed.) GulfSouth earned Zero-Stars from  Bauer since the fourth quarter of 2010.

SmartBank, Pigeon Forge, TN acquired all deposits, including brokered accounts (which is unusual). If you already had deposits at SmartBank, they remained separately insured until last week.

A suitable acquirer was not found in the failure of New City Bank, Chicago, IL.  In this case, the FDIC mailed checks to depositors for the insured portions. In order to retrieve any deposits over the insurance limit, depositors had to file a claim as an unsecured creditor within 90 days of the bank’s closing.

New City Bank was considered “Well-Capitalized” less than 9 months before it was shut down, but the writing was on the wall. Like GulfSouth, New City had been posting repeated losses and its nonperforming assets ratio was 21% shortly before it was closed.

If your deposits are under the $250,000 insurance limit, you may not care what your bank’s rating is or even if it fails. There are still things you should be aware of. If you decide to keep deposits in a poorly rated institution, at least you will have made an informed choice.

To begin with, verify that all of your deposits really are fully insured. Simple, right? But there are things you may not have considered. Many consumers title their accounts in ways they can get more than the standard deposit insurance. Consider this: You and your spouse have a joint account at the bank on Main Street with $400,000 fully-insured. If you or your spouse die, the survivor is left with $150,000 uninsured after a 6-month grace period.  If the bank happens to fail before the surviving spouse has a chance to move it, the excess is at risk.

Let’s say you have nowhere near that amount in any bank, but you switch jobs and decide to move your retirement funds,  or maybe you sell your house. For convenience you park the money at the bank that knows you …just long enough to get it rolled-over into a new retirement account ...Get the point?

Okay, so you’re sure your deposits are fully insured and, you have no intention of selling your home or moving your retirement. In fact, maybe you are already retired and your pension check gets deposited into your account every month without a hitch. Except, if the bank was New City and was closed down without an acquirer, there is no place for that check to go.

The same goes for any bills that you have automatically set up to pay from your checking account. Anything set up on the internet will have to be changed, but it’s not just virtual; any paper checks outstanding could be returned as unpaid if the bank fails and is shuttered. This  can trigger fees or worse.

For CD holders, an acquiring bank can lower the interest rate you are receiving although you will have a grace period in which you can withdraw the CD without penalty. Borrowers can lose their line of credit or have to start from scratch if a loan application is still pending. These are all things to consider above and beyond federal deposit insurance.

Federal guarantees are great but they should not be an excuse for complacency. The bottom line is, you are responsible for your own bottom line.

From: Jumbo Rate News 30:14 - April 15, 2013

Capital Alone is an Insufficient Barometer

In various attempts to avert another banking crisis down the road, national and international regulators and lawmakers are looking at several new requirements for banks. The first and foremost consideration is capital.

Capital is a very important indicator and an integral part of Bauer’s star-rating system, but it isn’t a great predictor of future performance. It is possible to have abundant capital and still face difficulties in other areas. 

In fact, nearly half of all U.S. banks had a leverage capital ratio of 10% or greater  at year-end 2007 (much higher than any current requirements). Essentially the same percentage do today as well. Of the 19 U.S. banks with total assets exceeding $100 billion, six have a leverage CR greater than 10%.

Another aspect of the new proposals  (particularly Basel III) is liquidity. Liquidity needs vary depending on the bank as well as on timing. As a gross generality, a bank should be able to meet short term funding needs with core deposits. In order to meet somewhat longer term funding needs, the bank should be able to unburden itself of certain assets at little or no loss.

Not only is this more difficult to measure, future funding needs are also more difficult to predict. U.S. banking regulators use noncore funding dependence as a measure of a bank’s liquidity. (Basel III proposes using a liquidity coverage ratio.) When using noncore funding dependence, lower is better.

Of the six Big Banks we referred to in the previous column that have a 10% or greater leverage capital ratio, only four have a noncore funding dependence ratio less than 5%. Three of those are rated 5-Stars (two) or 4-Stars (one) by Bauer.

Bauer’s rating system is proprietary, but we’ll tell you  this: there are 826 banks that have a 10% (or greater) leverage ratio but fail to qualify for Bauer’s recommended rating of 5-Stars or 4-Stars; 537 of those also have a noncore funding dependence ratio less than or equal to 5%. We have said it for years: capital classifications alone are inadequate barometers to measure performance or stability. Adding a liquidity measure is good, but still not good enough.

Every bank needs sufficient capital to cushion it from losses and enough liquidity to cover unexpected deposit withdrawals. But what seems to be escaping the spotlight is loan quality. Poor underwriting was a major contributor to the last crisis. Instead of trying to improve loan quality, the focus of these proposals has been put on having enough capital to cover the losses that result from the bad loans.

It is akin to building a ship that you fear may sink, and instead of trying to make it more seaworthy, you just put extra buckets on board. We don’t want to bail out more sinking ships.

That’s why Bauer’s adjusted capital ratio  was invented 30 years ago. Bauer’s adjusted capital ratio subtracts delinquent loans and repossessed assets from both the numerator and denominator thereby predicting the outcome were all nonperforming assets  written off. Like the Texas Ratio, over the years, this has come to be a very reliable indicator of the future health of the bank.

In fact, a quick glance at the chart and it is clear which is a better indicator: leverage capital ratio or delinquencies.

 

From: Jumbo Rate News 30:12 - March 25, 2013

Taxpayers Should be Outraged...

Background: Bank Holding Companies  with $50 billion or more in total consolidated assets are required by Dodd-Frank to submit annual capital plans to the Federal Reserve. The plan is to include all actions expected to impact capital over the next nine quarters. Based on these plans, the Federal Reserve projects what would happen to  each in a “severely adverse scenario”.

Ally Financial, Inc. (formerly GMAC) is one of the 18 bank holding companies that must submit to this stress testing. It did not do well on the latest one.

Further, seven of the more than 700 companies that received TARP money in 2008 were designated as “Exceptional Assistance Recipients” due to the amount and nature of their bailouts. Three are left: AIG, General Motors & Ally (GMAC).

Ally, a bank holding company, received TARP funds, not as part of the Capital Purchase Program (CPP) for banks (which  made money; JRN 30:07), but as part of the Automotive Industry Financial Program (AIFP). It received over $16 billion from the Treasury, which still owns about 80% of the company.

Now: On January 28, 2013, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) sent a scathing memo to then Treasury Secretary, Tim Geithner, regarding the executive compensation decisions of these three exceptional assistance recipients: AIG, GM and Ally. Even though the guidelines for executive compensation put a $500,000/year cap on cash payments, the Office of the Special Master,  aka Pay Czar, has approved at least that amount for 70% of the executives in question. The pay czar’s job is to look out for the interest of the taxpayers. Instead, according to the memo, “decisions were largely driven by the proposals of the same companies that historically, and again in  2012, proposed excessive pay”.

The Outrage: We got a hold of the actual 2012 salary structure that the Treasury approved for Ally Financial’s senior executives. Of the 20 “Most highly compensated employees”, total direct compensation (cash salary + stock salary + long term restricted stock) ranged from $1.9 million to $9.5 million. The cash portion increased 2.6% from 2011 for the 19 that remained on the list from 2011. Only eight were below the $500,000 guideline and five of those were just below, at $491,000.

Granted, much of this is in stock and may not be  transferable until TARP is repaid, but this “skin in the game” approach would probably be more effective if the guaranteed portion was lower. Their argument: they need high salaries to retain personnel qualified to implement an effective turnaround. Hmm.

The biggest U.S. bank holding company, JPMorgan Chase recently docked its CEO Jamie Dimon’s pay. What had been a $23 million annual cash + stock was cut to just $11.5 million after a $6 billion trading loss in London. Dimon heads the biggest bank, but he isn’t exactly a bellwether.

Forbes (6/20/2012) named Aurelio Aleman, president of First BanCorp (parent of **FirstBank of Puerto Rico) as the bank CEO with the lowest salary (at    banks between $10 and $500 billion in assets) at $855,000. The second lowest was Dennis Nixon of International Bancshares (parent of four 5-Star banks in Texas) at $1.242 million. 

Ally’s CEO, Michael Carpenter was not only allowed to earn $9.5 million in 2012, he’s asking for a raise. The company has requested approval to pay Carpenter $9.6 million in 2013 and Thomas Marano $8 million. (Marano is CEO of its Rescap subsidiary, which is currently in bankruptcy.) To date, Ally has only paid back one-third of its nearly $17 billion bailout. As taxpayers, we should be outraged.

From: Jumbo Rate News 30:11 - March 18, 2013

The Future of Community Banking in the U.S. 

In order to have a meaningful discussion on the future of community banking, we must first define the term: community bank. A community bank focuses on the needs of local residents and local businesses. As a small business themselves, community banks face many of the same financial challenges as their neighbors. As a bank becomes larger and more spread out, this local focus tends to wane. The actual size of a community bank varies depending who you ask.

William Loving, Jr., president and CEO of ****Pendleton Community Bank, Franklin, WV, a $262 million bank with five branches, is the new chairman of the Independent Community Bankers of America (ICBA). According to ICBA, all except for the largest banks ($10 billion or more in assets) may be considered community banks.

For us, that’s too broad, but it does explain why Mr. Loving was quoted in the American Banker (3/8/13) stating that consolidation among community banks will not be as severe as many predict. While we would “love” to agree with Loving, evidence from the past decade suggests otherwise. (Please see graphs.)

From the end of 2002 to the end  of 2012, banks with less than $100 million in total assets decreased in number by over 50%. Those from $100 million to $1 billion in assets, also undeniably community banks, gained about 2.5%. The next group, those with  $1 billion to $10 billion in assets, which the ICBA considers community banks but many consider Regionals, gained 23%.

Community banks are a critical resource for small businesses. Loan decisions at community banks are made locally and take into consideration much more than what a remote, mega-bank loan committee could possibly consider.

What’s more, deposits are taken and loans are made in the same area when dealing with a community bank. There is no taking cheap deposits from one state to lend in a more lucrative state. In this way, community deposits are working for the good of the community.

If a community bank takes a gamble, it’s because they know something about the character of the person on whom they are placing their bet. Conversely, a megabank may also take a gamble, but it is generally going to be numbers-based, not people-based.

We at BauerFinancial are unabashedly long-time advocates for community banks. They have always been, and continue to be, vital to the American way of life and the attainment of the American dream. Extreme? Maybe. But it is true for millions of small business owners across the country.

Mr. Loving will make it his focus to reduce regulatory burden and champion community banks and we wish him all the best. He has his hands full. 

From: Jumbo Rate News 30:01 - January 7, 2013

Changes to Deposit Insurance Coverage Jan. 1st, 2013

Since 2010, the Transaction Account Guaranty Program (TAG)  provided unlimited deposit insurance coverage on noninterest-bearing transaction accounts. No more. It expired as scheduled on December 31, 2012 (JRN 29:41 & 48).

A breakdown of exactly how much is now insured based on account ownership, can be found on page 2. At September 30th, there was $1.5 trillion in excess of the $250,000 insurance limit deposited into these noninterest-bearing transaction accounts. If still there, these deposits are now uninsured. While much focus has been put on the size of the banks that would likely see deposit outflows as a result of the insurance change, our focus now is on the strength of those institutions.

Only you know if you have deposits that are now uninsured because they fall into this category. If you do, we would suggest you double-check the rating of the bank(s) in which they are placed. Over 90% of the banks currently on Bauer’s Troubled and Problematic Bank Report (i.e. rated 2-Stars or below) reported having such deposits on their books as of September 30, 2012.

Here’s the breakdown: 180 Zero-Star banks reported over $2.7 billion of deposits in noninterest bearing transaction accounts; 111 1-Star banks reported over $1.8 billion; and 373 2-Star banks reported over $9.3 billion.

What’s more, seven of the eight banks that failed in the fourth quarter 2012 reported having these deposits on their books at 9/30/12. That’s 110 depositors that could have lost up to $90 million collectively had those banks failed after January 1, 2013. Protect yourself. Don’t take any chances. Check the rating of any institution(s) in which you have uninsured deposits. It’s easy at bauerfinancial.com

For more information and a breakdown of exactly how much is now insured based on account ownership, visit the FDIC at http://fdic.gov/deposit/deposits/dis/index.html.



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Ratings are independent. No institution has ever paid us to rate it, nor can any institution choose not to be rated.

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