Milton's Memo Area
A Decade of Change
FDIC data reveals that, for the nine months ended September 30, 2013, Insured banks reported an aggregate annualized return on
equity of 9.5%, well beneath the 15.0% attained during the ten-year earlier period. Between those intervals, the industry Net
Interest Margin, which is largely related to market interest rates, fell from 3.7% to 3.3%.
Industry statistics which can be affected by bank managerial decisions are set forth in the following manner:
| | 9/30/2003 | 9/30/2013 |
| Assets (Billions) | $8,945.7 | $14,596.2 |
| | | |
| Equity/Assets | 9.1% | 11.2% |
| | | |
| Construction Loans/Assets | 2.9% | 1.4% |
| Commercial Real Estate Loans/Assets | 7.4% | 7.5% |
| Residential Mortgage Loans/Assets | 18.5% | 12.6% |
| Commercial & Industrial Loans/Assets | 10.4% | 10.8% |
| Credit Card Loans/Assets | 3.0% | 4.6% |
| | | |
| Nonperforming Assets/Assets | 0.8% | 1.8% |
The foregoing sets forth a substantial decrease in residential mortgage lending, which is undoubtedly due to necessitated
charge-offs, heightened credit criteria, and a more than doubling of the industry's nonperforming asset ratio.
The January 6, 2014
edition of "Bloomberg BusinessWeek", in an article entitled "It's About to Get (a Little) Harder to Buy a House", stated:
"Tough new mortgage rules from the Consumer Financial Protection Bureau kick in on Jan.10. But bankers-who fought other
regulations imposed after the financial meltdown- have voluntarily tightened up so much on lending that most borrowers won't
notice much of a difference, at least for now."
Reducing nonperforming asset percentages, either through write-downs or asset sales, offsets the need for loss reserves, allows
for increased holdings of strongly performing assets, and possibly lowers the need for a capital cushion.
As a long-term strategy, reductions of assets that add nothing to the bottom line will please current owners, who seek returns,
and foster independence.
772 Problem Institutions:
The Federal Deposit Insurance Corporation's March 2012 Quarterly Banking Profile states that, as of that date,
the Agency categorized 772 banks and thrifts as "problem" institutions.
Regulatory criteria that determines such designation are, of course, not within the public domain, but an even very cursory look
at the condition of Montgomery Bank & Trust of Ailey, Georgia, which was closed last Friday (July 6, 2012), reveals conditions
that are extremely difficult to imagine among still operating financial institutions.
Before the end of last year, capital was very weak; nonperforming asset numbers were "off the chart"; net losses were exorbitant;
and reliance upon non-core (non-Insured) deposits was quite high. Interestingly, Montgomery B&T had our lowest rating of Red
with No Stars for 5 consecutive quarters prior to (and at) failure. We had identified Montgomery B&T as a highly
troubled institution beginning with our second quarter of 2009 rating of Red with No Stars.
VERIBANC has always strived to add transparency to the process of determining financial strength within the financial services
sector. We want our clients to know the warning signs of trouble. Accordingly, with respect to both industry norms and our
own levels of concern, we offer the following:
| | Industry Average | Our Concerns |
| Equity/Assets | 11.4% | < 5.0% |
| Nonperforming Assets / Equity + Loss Reserves | 19.9% | > 70.0% |
| Return on Assets | 1.0% | < 0.0% |
VERIBANC ratings and reports, covering all U.S. financial intermediaries are always available to clients of our firm.
For the convenience of our clients, we segregate, and offer as a new product, ratings and in depth reports on institutions
that meet any of the benchmarks of "Our Concerns."
Do not allow yourself to be caught by surprise. If either you or your firm has dealings with, or Uninsured deposits at,
a U.S. financial intermediary, call us today and ask about the Briefing Report.
FED Stress Test - a simpler model Memo:
In her March 22nd "American Banker" Editor At Large column, entitled "Fed Stress Tests Are More Mess than Early Warning", Barbara Rehm states:
"The capital stress tests the Fed just administered to the country's 19 largest banks are too complex, costly, time consuming,
and redundant."
Ms Rehm concludes her editorial with:
"While the goals of the stress tests are good, there is a better way to do them."
For quite some time, our analyses have incorporated a series of early warning indicators that have proven to be quite predictive
with respect to future safety and soundness ratings. Our factors, all components of our proprietary "CAMELS" methodology are
based upon FDIC Call Report and, for thrift institutions, TFR information as well as Regulatory Enforcement Actions.
Set forth below are five areas that we believe would provide much broader insight than the narrowly focused capital
stress tests, yet would be simpler to administer:
1) Net Interest Margin - Currently the norm for all FDIC Insured institutions is approximately 3.6%, and, in our view, a ratio below 3.1% is cause for inquiry and possible concern.
2) Nonperforming Assets/Equity plus Loss Reserves - The current industry average is slightly above 20%.
Significant reservations begin at 65%, and we would consider a percentage above 75% to be very troublesome and a
sign that regulatory intervention is quite possible.
3) Asset Growth - Between December 2010 and December 2011, total assets of all FDIC Insured institutions increased
by 4.2%. We have traditionally held that annual, non-merger related asset growth in excess of 25% should be thoroughly investigated.
4) Capital Adequacy - All FDIC Insured banks and thrifts reported, as of year-end 2011, an Equity/Assets ratio
of 11.3%. In our studies, we have determined that a percentage below five percent, especially if accompanied by poor asset
quality or profitability weaknesses, might ultimately require a capital infusion. Hence, an Equity/Assets ratio below five
percent would be a reason for further analysis.
5) Profitability - A core issue for any business is the ability to make a profit. Over the years we have been asked to
model what would happen to profits if interest rates increased or decreased by 300 basis points. This type of stress test seems
equally as appropriate to consider as are the Fed's capital tests.
Although the above is a mix of some of our early warning indicators along with some common sense tests, we believe that the
use of this sort of system as an initial screening mechanism would provide a much more efficient model than the FED stress tests.
Briefing Memo:
You should definitely check out the Briefing Report. This multi-page analysis
of any bank, thrift, or credit union will provide you with insight into the
VERIBANC rating as well as what an examiner would look for.
Moral Hazard Memo:
A recent edition of the "American Banker" described how, in 1932, Judge E.S. Richards, then president
of the East New York Savings Bank reacted to the threat of a run by stating:
"The things that are needed are........cash, courage, and good friends."
We have come quite a distance from those days and that advice. In response to the 2008 banking crisis,
the FDIC increased basic deposit insurance coverage from $100,000 to $250,000 per account and provided
temporary unlimited coverage to domestic, noninterest bearing transaction accounts. Such actions
provided liquidity to the banking system and instilled the depositor confidence necessary to prevent
large scale disintermediation. However, the negative consequence of those actions was a heightened
level in the presence of moral hazard.
The 1993 report to Congress on the origins and causes of the savings and loan debacle, by the National
Commission on Financial Institutions Reform, Recovery, and Enforcement, stated:
"Above all, deposit insurance of the kind provided gave the industry incentives to assume risks that
would not have been taken by firms responsible for the consequences of their actions."
Had that warning been heeded many of today's economic problems could have been avoided. Clearly, we
cannot, as a nation, tamper with FDIC Insurance in the current environment. We now must focus upon
enlightened regulation that permits healthy banks and thrifts to provide credit in a prudent manner
and that impedes only the operations of demonstrated high risk takers, whose actions work against the
interest of U.S. taxpayers, the ultimate guarantor of bank deposits.
Just as professional bankers know that bad loans are made during good times, legislators and regulators
need to take advantage of the eventual return of good times to heed those words of the National Commission
on Financial Institutions Reform, Recovery, and Enforcement by modifying FDIC coverage and thereby reducing
the dangers of moral hazard. Only by so doing, will our nation be able to avoid these repeated crises that
are so painful to our economy.
Deposit Insurance Reform Memo:
As a response to the nation's thrift crisis, originating more than thirty years ago, the National
Commission on Financial Institution Reform, Recovery and Enforcement provided to the President and
Congress a report entitled "Origins and Causes of the S&L Debacle: A Blueprint for Reform."
That
document states, on page number 3, "Above all, deposit insurance of the kind provided gave the
industry incentives to assume risks that would not have been taken by firms responsible for the
consequences of their actions."
Had deposit insurance reform been implemented in 1993, at the time the referenced report was published,
the current crisis might have been averted. However had coverage not been expanded as the present banking
crisis unfolded, our nation's financial system would likely have collapsed. When economic conditions return
to normal Deposit Insurance coverage must be re-examined.
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