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by Joseph B. Rubin and Peter DavisBank executives across the country are devoting considerable resources, toward refining their credit risk infrastructures in preparation for the, impending introduction of the new risk-based regulatory capital standards, known as Basel II., In particular, credit departments are designing dual risk-rating systems, to drive regulatory capital. That is permitted as long as banks meet the, Basel II Advanced Internal Ratings Based standards -- A-IRB., In the United States, regulatory expectations for A-IRB systems are, outlined in supervisory guidance issued in August 2003. The, internal-ratings-based approach provides the opportunity to reduce, regulatory, capital requirements at institutions that have demonstrated their ability, consistently differentiate credit risk. For commercial lending, meeting the, A-IRB standards typically requires institutions to introduce further, granularity in risk ratings within specific asset classes and to create, systems to capture the data supporting the grades., Banks are developing different grading methodologies for the various, types of credits in their portfolios. One asset class that is particularly, challenging is commercial real estate, which encompasses construction, loans,, loans, and mezzanine, financing, on a variety of property types, including multifamily, retail, office, hospitality., CRE lenders also provide financing for land acquisition and development, single-family home construction, condominium construction, and many other, development activities. Most banks currently rate all these loans within a, very narrow band of grades. However, there are distinct differences in the, risks presented by various types of loans., Most institutions find that they need to enhance their current grading, systems to meet the Basel II standards. Implementing these new standards, provides an opportunity to create an objective methodology for measuring, differential risk of the various credits in the CRE portfolio., The Basel II guidance warns against concentrating credits in a limited, number of grades, requires separate ratings indicating the probability of, default and the severity of losses in the event of default (loss given, default), and calls for capturing data to continuously validate the, risk-rating methodology., An informal Ernst & Young survey showed that a large number of banks rely, solely on the judgment of loan underwriters and credit administrators to, grade, CRE loans. The grading usually is supported by guidelines suggesting the, risk, factors the grader should consider. Often, however, quantitative, definitions, to support the assigned grade and the relative importance of the risk, factors, are not provided. Reliance on an individual's judgment results in the, potential for inconsistent grades across a portfolio, particularly in, large,, geographically dispersed institutions., The challenge, then, is to shift toward a more quantifiable, objective, grading approach., Unlike many other types of commercial loans, for which the analysis of, risk is based primarily on the borrower's readily available financial, statements, real estate borrowers are often single-asset, single-purpose, entities. Depending on whether the loan has recourse provisions, the lender, is looking to a sponsor, the real estate collateral, or both, repayment., As a result, while real estate is underwritten using dozens of factors, many are qualitative and judgmental., Depending on the type of loan, metrics such as debt service coverage and, loan to value are usually considered the key indicators of a real estate, credit's risk. However, more judgmental qualitative factors are also, considered, such as the location of the collateral in its market, experience of the borrower in developing or managing properties, or the, likelihood of new competitive developments in the next few years. In, enhancing their grading systems, institutions are usually looking to, convert, these qualitative judgments into quantitative scores., Finally, because moving to a transparent and replicable dual-grading, methodology is a major departure from current practice, designing a new, methodology is itself a challenge. It isn't always easy for the various, constituencies within a bank to reach consensus on the factors that drive, real estate risk, corresponding scoring criteria, and the relative, importance, of each factor., For example, while some might argue that the grade should be based solely, on debt coverage and loan to value, most believe that many other, considerations must be part of the grading algorithm., To promote consistency and objectivity in the dual-grading system, banks, are moving toward either rating scorecards or statistical models. In the, scorecard approach, a user determines scores for a set of predetermined, risk, factors, each of which receives a specific weight based on the relative, importance the bank places on it., When banks develop statistical models, participation from credit officers, is not required. The models produce default probability and loss severity, metrics based solely on available quantitative measures. Usually, models, are then vetted with credit officers, but the grading methodology remains a, statistical approach., While recently released real estate industry simulation models are being, tested, most institutions are taking a scorecard approach when designing, enhanced dual risk-rating systems for their CRE portfolios., When working with clients we stress that the objective of the new, methodology is not to change the bank's credit culture or create more work, for credit administrators. Rather, the scorecard should reflect how the, bank, currently views real estate risk and should leverage existing tools and, policies., We also encourage lenders to develop scorecards that are simple, practical, and easy to use. Though underwriters consider many factors in, assessing risk, any factor included on the scorecard must be assigned a, weight. The more factors, the more diluted the importance of each factor., Despite the challenges, implementing a dual risk-rating scorecard, methodology for CRE allows banks to more accurately measure the risk of, each, lending program and each credit in these programs., Well-designed probability-of-default and loss-given-default scorecards, are easy to use, promote consistency in the way underwriters and credit, officers think about risk, and provide a bank with the data it needs to, support credit grades. The scorecards enable A-IRB compliance and enhanced, credit monitoring in a cyclical sector and have the potential to reduce, regulatory capital., The ability to understand the risk components of a CRE portfolio better, particularly in this cyclical industry, makes the effort worthwhile., Mr. Rubin is a principal in Ernst & Young's real estate transaction, advisory services practice. Mr. Davis is a director of credit risk, services, in the financial services advisory practice. Both are based in New York.
Published in American Banker (2006)
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by Matthias RiekerContinued pressure from a flat yield curve has prompted several banking, companies to slash operating costs in recent quarters. Bankers and analysts, agree that staying lean in a tough business environment is important, what to do with the savings remains a question., Investors might applaud banks that give themselves an instant profit, boost with the money their efficiency initiatives save, but Diane Merdian, Keefe, Bruyette & Woods Inc. says that strategy cannot be sustained over, long term., In a March 14 report, Ms. Merdian said banks should reinvest by passing, on the cost savings to customers in the form of better prices. That would, ultimately benefit both customers and shareholders, interview, revenue growth is really what drives sustained, She noted the ability to offer attractive loan and deposit prices as one, benefit of strong efficiency., But Robert B. Albertson, the chief strategist at Sandler O'Neill &, Partners LP, Bankers are a, little bit blind to the idea that you can invest and grow faster, Ms. Merdian said banking companies with the lowest expense base are not, A cost advantage is, only worth something if you can actually do something with it, Her report praised the way Wells Fargo & Co. tackled the issue - the San, Francisco company has posted above-average revenue growth while keeping, expenses under control. Unlike some of it peers, the $481.7 billion-asset, Wells does not have a stated efficiency program. But it cuts costs wherever, it can, unless it would mean hurting service, said Howard Atkins, Wells', chief financial officer., Our philosophy is, you really can't spend too much money on your, Mr. Atkins said in an, interview Friday., Wells is constantly opening branches and looking to provide a better deal, for customers, while carefully managing back-office, suppliers, and other, You have to be very efficient in areas ... which don't compromise your, ability to grow your customer base and produce more business with your, Mr. Atkins said. Over the last five years, Wells' expenses rose, at a compounded 8.1%, but revenue increased 9.7%. Its efficiency ratio is, 57.7%., In order to keep the company growing, you have to reinvest in your, And that means not necessarily letting cost, savings directly fall to the bottom line in any given quarter. Investors, want, PNC Financial Services Group Inc. is one of several companies that, started an efficiency initiative last year. PNC's three-year One PNC, program,, which got under way in January *2005-, aims to trim $300 million of expenses, 2007 -- including through the elimination of 3, 000 jobs -- and to increase, revenue by $100 million., The Pittsburgh company doesn't plan to pass along the savings to, customers right away by paying higher rates on deposits or charging lower, interest on loans. In fact it raised fees for certain retail transactions, late last year and introduced fees on others., Richard J. Johnson, PNC's chief financial officer, said in an interview, becoming mores efficient now it will allow itself to be may be more, We only increased our pricing where we were below the peer group, and we, Mr. Johnson said., Gauging efficiency is a matter of debate. Some argue that while the, efficiency ratio is popular with analysts, investors, and banks that have, good ratios, it is an incomplete measure and is too varied among lines of, business. Generally, though a lower ratio is seen as desirable. PNC's, efficiency ratio was 69% last year., Mr. Johnson said investors should look at positive operating leverage or, whether revenues grow faster than expenses instead of focusing entirely on, the efficiency ratio. But he also said that at the end of next year, when, PNC is completed, the company's efficiency ratio will have fallen by 400 to, 500 basis points., The merger of the asset manager BlackRock Inc., with Merrill Lynch, Investment Managers Inc. will lower PNC's efficiency ratio by an additional, 300 basis points. PNC owns a 70% stake in BlackRock, the deal with Merrill, Lynch is expected to be completed in September, and would lower PNC's stake, to 34%., the end of *2004-, PNC had invested heavily in its risk management, program and procedures and its overall interest risk profile, so it started, to look at its efficiency ratio, Mr. Johnson said. In comparing PNC's ratio, saw that we are an outlier, and, Mr. Johnson said Wall Street likes what his company is doing. Merrill, Lynch & Co. analyst Edward Najarian wrote in a recent report that, investors, should focus on companies with the best potential to improve efficiencies, this year., PNC is one of those companies, Mr. Najarian says., Fifth Third Bancorp, which has assets of $105.2 billion and a 53.2%, ratio, has long been thought of as one of the nation's most efficient, banking, companies. But is also known for its aggressive loan pricing and teaser, rates, on deposits., The Cincinnati company hit a wall in *2002-, however, when regulators found, deficiencies in its risk management procedures. A resulting regulatory, agreement in 2003 was lifted in *2004-, and since then Fifth Third has been, investing heavily -- fine-tuning service and opening new branches - in an, effort to achieve the growth rates it is accustomed to. Now it's looking, inward., George A. Schaefer Jr., Fifth Third's president and CEO, told investors, in an earnings conference call in January that though the company would, focus, on improving productivity from the significant investments made in, recent quarters and remaining diligent on the expense side given our, overall, Investing in and expanding our distribution network remains a priority, Such investments are sound, but investors will wait for results before, Long-term, they have the, potential, of turning things around, but the market is not paying for it before it has, said., Only an efficient company can invest in future revenue, Ms. Merdian said, but that doesn't make driving costs down to please shareholders and lift, earnings a good idea. A banking company with an efficiency ratio of 53% --, which according to Ms. Merdian's report is 5 percentage points better than, the median -- could generate 12.9% more in net income than one with the, median efficiency ratio., But the bank with the 53% ratio could lower interest rates on loans by 40, basis points, or raise the rates it pays customers for deposits by 50 basis, points. It would then make the same profit as the other bank, and would, have, a competitive advantage. And if that causes more customers to take out, loans, and make deposits, the more efficient bank is worth more, Ms. Merdian's, report said., Pricing is driven more by the market than, Ms. Merdian conceded that low overheads mean little to a company, operating in a difficult environment. For example, it may not make sense to, be aggressive in lending when credit quality is bad. In that event, though, bankers can always shift their focus to deposits
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by Stacy KaperBy Monday, bank lobbyists had stopped celebrating their regulatory-relief victory and started worrying about two other bills Congress approved over the weekend in its rush to recess for the midterm elections., designed to target payday lenders, could restrict lending by credit card companies and others to military personnel, industry representatives said., We are quite concerned. We are still evaluating all the ramifications, said Floyd Stoner, the lead lobbyist for the American Bankers Association., Congress also passed a bill that would require financial services companies to block payments for Internet gambling sites, but at the last minute it added a provision that lobbyists said could confuse the issue., The military service cap could be especially problematic, industry representatives said., The provision, sponsored by Sen. Jim Talent, R-Mo., but does not require their assent -- something industry representatives said allows the department to craft the rule however it wants., It's conceivable every term that is well defined in banking law and regulatory practice could be upended by an agency not familiar with the law, said Robert Davis, They could have a wholly different definition of APR. They could have a wholly different definition of what constitutes finance, The provision creates specific exemptions for mortgage and auto purchases secured by a title, but leaves other types of lending up in the air., Oliver Ireland, a partner with Morrison Foerster LLP, You might find that the combination of the normal annual percentage rate or periodic rate that you charge and the fee result in an annual percentage rate that is over 36%, Banks must follow the disclosures and terms set forth by the Federal Reserve Board's Regulation Z, which implements the Truth in Lending Act. But the Defense Department has a free hand to come up with new rules and definitions, and could require banks to offer different disclosures to military personnel., You are probably going to have to disclose a ... [truth-in-lending] APR and another APR for the purpose of this legislation. ... How you do all this seems to me to raise a lot of issues, But a congressional staff member familiar with the provision said that the financial industry, congressional banking committees, and banking regulators had ample opportunity to address abusive lending to military personnel, but failed to act., The staff member expects the Defense Department will consult the banking agencies when writing the rules because the department is not versed in banking law, but said Congress could go further on the issue next year if the problem is not eliminated., Sen. Talent did not just lob a grenade out there and expect people to jump on it, It is intended to be a big first giant step. We expect -- now that this marker is down -- the banking committee to be very active in identifying the problems, A source at one large banking company said Congress would probably revisit the 36% cap before the law is implemented., This is not a way to make legislation. It should have involved the Financial Services Committee, The most likely solution is an amendment that would require the Defense Department to jointly write rules with the Fed, several lobbyists said. They said they would push for such language to be added during the lame-duck session., Industry representatives were also worried about the Internet gambling bill, which was attached to a port security measure and passed by the House and the Senate on Saturday., Most bankers had long ago made their peace with the bill, which they never supported but had been amended to address many of their concerns. However, lawmakers added a last-minute provision that would effectively force banks to determine if Internet gambling sites are legally operated., Under the provision, the banks would be required to block payments to illegal sites, but must allow them for legal ones., Mr. Ireland said that the payment networks and institutions cannot tell the difference between legal and illegal gambling sites., From the card associations' standpoint there are existing codes for Internet transactions and for gaming transactions, and we don't know if those are legal or not. So we've always assumed that in blocking some of those codes they would be blocking some legal transactions, and that's just, you know, the way it was going to have to work, The bill was changed to meet some industry concerns, however., For example, the bill requires the Fed and the Treasury Department to decide what type of systems banks need to block illegal payments, Before it adjourned, Congress also finally approved regulatory-relief legislation. The bill, which faced several obstacles, was approved by the House late Wednesday and the Senate on Saturday., The bill eases regulations for banks, thrifts, and credit unions. It allows the Fed to pay interest on sterile reserves starting in *2012-, lets banks, but not thrifts, increase investments in community development projects that are given Community Reinvestment Act credits to 15% of capital, and doubles the asset limit for banks to qualify for an 18-month exam cycle
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by OPEN FOR COMMENT, Structured Finance, A proposal by banking and securities regulators outlining best practices, for complex structured finance deals. The proposal revises a plan issued in, May *2004-, which industry representatives criticized as too prescriptive., Made, public May 9 and expected to be published in the Federal Register soon with, comments due in 30 days., Basel II, A proposal by federal regulators to more closely align regulatory capital, requirements with the risk profiles of the largest banks. Regulators are, collecting comments now and will continue to do so until 120 days after, publication, which is expected by the end of June., Assessment Credits, A proposal by the Federal Deposit Insurance Corp. for distributing a, one-time assessment credit that institutions can use to offset future, premium, payments. The credit -- totaling $4.7 billion -- is part of a sweeping, deposit, insurance reform law enacted in February that also gives the agency more, leeway to charge more banks deposit insurance premiums. Expected to be, published soon, with comments due in 60 days., FDIC Rebates, A proposal by the FDIC for distributing rebates to institutions when new, insurance premiums push the agency's fund to exceed a certain level. Under, the sweeping agency reforms enacted in February, half of the agency's, assessment income is returned to the industry after the Deposit Insurance, Fund exceeds 1.35% of estimated insured deposits. Total assessment income, rebated after the fund exceeds 1.5%. The agency has proposed an interim, two-year scheme that would base an institution's rebate share on its, portion, of the 1996 assessment share. Expected to be published soon, with comments, due in 60 days., Insurance Premiums, A proposal by the FDIC to change deposit insurance assessments. The, changes include collecting premiums at the end of each quarter and, requiring, institutions with $300 million or more of assets to calculate assessment, bases using average daily deposit balances. Expected to be published soon, with comments due in 60 days., FHLB Reform, A proposal by the Federal Housing Finance Board that would give the, Federal Home Loan banks a more active role in selecting directors., Published, April 18. Comments due June 2., CRA I, A proposal by the Office of Thrift Supervision to revise the agency's, guidance on Community Reinvestment Act enforcement. The proposal includes, questions and answers related to a recent revision of the definition of, and other topics. Published April 12. Comments due, June 12., Insurance Limits, An interim final rule by the FDIC to raise deposit insurance limits for, certain retirement accounts to $250, from $100, 000. The rule, mandated, the deposit insurance reform law enacted in February, took effect April 1., limit on general accounts will remain at $100, but the law also gives, FDIC the authority to tie future increases to inflation starting in 2010., Published March 23. Comments due May 22., FACT Act, An advanced notice of proposed rulemaking by the bank and thrift agencies, that asks lenders to detail how they provide information to credit service, companies, verify the accuracy of information, and handle consumer, inquiries., Published March 22. Comments due May 22., FHLB Retained Earnings, A proposal by the Finance Board that would require the Home Loan banks to, hold $50 million plus 1% of nonadvance assets in retained earnings. The, plan, would require banks below that threshold to slash cash dividends by 50%, until, it reaches its retained earnings target. The plan also would eliminate the, payment of dividends in additional stock, and it would limit the excess, stock, the banks could hold above 1% of total assets. Published March 15. Comments, due July 13., Money-Service Businesses, An advance notice of proposed rulemaking by the Financial Crimes, Enforcement Network aimed at improving the relationship between banks and, money-service businesses. It asks the industry to respond to several, questions, including what requirements banks have imposed on the businesses, since regulatory guidance was released in April 2005 and whether additional, guidance would be helpful. Published March 10. On May 9 the comment, deadline, was extended 60 days, to July 10., RECENT ACTIONS, Mutual Fund SARs, Fincen said May 4 that mutual funds will be required to file, suspicious-activity reports beginning Oct. 31., Agency Leadership, Sheila Bair, a former Treasury Department official, was nominated May 1, to be the FDIC chairwoman, and James B. Lockhart, the deputy commissioner, the Social Security Administration, was nominated April 27 to be the, director, of Office of Federal Housing Enterprise Oversight. Both agencies are being, acting directors., Hector Barreto, the administrator of the Small Business Administration, for nearly five years, said April 25 that he was resigning to become the, chairman of the Latino Coalition, a Hispanic advocacy group in Washington., The White House nominated Steven C. Preston, an executive with, ServiceMaster, Co. in Downers Grove, Ill., as his successor., Laundering Warning, Fincen issued an advisory warning on April 28 to U.S. institutions about, potential money laundering by financial institutions in Mexico. The agency, noted a rise in transactions between U.S. and Mexican institutions as a, sign, that criminal elements in Mexico are finding new ways to smuggle cash after, law enforcement officials curbed drug traffickers' ability to put funds, directly in U.S. accounts., Wal-Mart Hearings, On April 25 the FDIC wrapped up three days of hearings on Wal-Mart Stores, Inc.'s pending application to charter a Utah industrial loan company., Exam Revisions, The FDIC released revised procedures on April 19 to improve the, efficiency of exams. Examiners must request needed documents from an, institution no later than 45 days before the exam begins. As much, information, as possible must be gathered off-site, and the examimer is required to call, the bank before the exam begins to discuss it., CRA II, The OTS issued a final rule on April 12 revising the definition of, in CRA regulations., Assessment Rates, The FDIC voted Tuesday to keep the premium schedule for the second half, of this year the same as it has been for the first half. There will not be, new premiums as the agency works to implement elements of the deposit, insurance reform law. But the agency signaled the increasing likelihood of, new premiums for early next year., ACTIONS EXPECTED SOON, Designated Reserve Ratio, The FDIC is expected next month to decide the proper target ratio of its, insurance fund to estimated insured deposits. The new deposit insurance, reform law gave the agency responsibility for setting the designated, reserve, ratio every year. Since 1991 the target has been set at 1.25%, and federal, law required the FDIC to charge new premiums if the actual ratio fell below, the target. The new law, however, lets the FDIC set the ratio anywhere, between 1.15% and 1.5%. Many observers expect the FDIC to leave the target, 1.25% for the near future., Risk-Based Premiums, The FDIC is expected next month to propose changes to its risk-based, ranking system that would likely force more institutions to pay premiums., Under current guidelines, about 94% of the industry is considered, and does not pay premiums. But under, the deposit insurance reform law, the agency can rank those institutions, under other risk factors., Mortgage Lending, The Federal Reserve Board is scheduled to hold hearings this summer on, home equity lending. The fact-finding hearings will be held June 7 in, Chicago, June 9 in Philadelphia, June 16 in San Francisco, and July 11 in, Atlanta. They will focus on nontraditional mortgage products, predatory, lending, subprime mortgage lending, and changes implementing the Home, Ownership and Equity Protection Act., Basel IA, Regulators are expected to unveil a proposal this summer that would, create new capital standards for most banks and thrifts. The proposal is, designed to be a simpler version of Basel II. Final versions of both rules, are expected by early next year., OFHEO Report, An OFHEO report on its comprehensive exam of Fannie Mae's operations is, expected to be released soon.
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by Bill StonemanWhen Idaho Banking Co. was formed 10 years ago, its top executives frowned upon the idea of taking brokered deposits., Don D. Madsen, an executive vice president at the Boise company and its chief financial officer, said that many people associated brokered deposits with the savings and loan crisis of the late 1980s., But Mr. Madsen and his colleagues came to see them as a useful tool in managing liquidity, and Idaho Banking began accepting them about four years ago. Brokered deposits fill a need when deposit growth in the company's market lags loan growth, Mr. Madsen said., As we looked at the availability of brokered deposits, the ease in which they can be obtained, we said we're kind of silly not to have them, 14% of its deposit total., Many community bankers echo Mr. Madsen. Though small banks have been taking in brokered deposits for years, experts predicted that banks would use them less as interest rates rose and customers started putting their money in banks again., That has not been the case. Surveys show that, among community banks, brokered deposits are more popular than ever., Early users of brokered deposits said they came in handy when banks needed to fund loan growth, but at an expense - typically a higher interest rate than local deposits required. But bankers increasingly say there isn't necessarily a downside, as brokered time deposits are sometimes available at better rates than banks pay locally., PAB Bankshares Inc. in Valdosta, booked a three-year, $5 million deposit this summer paying 5.25%, said Donald Jay Torbert Jr., Buying brokered deposits can avert the updraft that bidding higher locally can create, In addition, raising rates locally to fill a short-term need puts pressure on a bank's entire book of deposit business., If I offered a juicy rate on deposits locally, I'd have to pay that to my existing customers as well, said Gary Canada, the president of the $168 million-asset Bank of England in England, Ark., At midyear about a third of banks with assets below $1 billion held brokered deposits, according to the Federal Deposit Insurance Corp., up from 8% in *1994-, 16% at the end of *2001-, and 25% at the end of 2004. The value of brokered deposits held by banks with assets of less than $1 billion has grown to $55 billion, from $14 billion at the beginning of 2000., A survey report the American Bankers Association published this year tells a similar story. About 30% of the banks, whose assets averaged $280 million, said they were making more use of brokered deposits than they were five years earlier, 8% said they were using brokered deposits less., Of course, that means many community banks are not using brokered deposits at all. Most large banks solicit brokered deposits, but according to the ABA survey, 46% of small banks never used them., The idea of taking deposits from out of their market has long violated many community bankers' sense of who they are, and many balk at using them., It really doesn't fit in with my philosophy of community banking, said John Porter, Moreover, there is widespread perception that brokered deposits have higher rates than local deposits, and many bankers and industry observers fear they are inherently unstable, vanishing quickly when a bank no longer offers the best terms around., Just the same, bankers and observers say, Mr. Porter's view is giving way to a different and perhaps more pragmatic one, for a range of reasons., however, typically require banks to pledge assets as collateral. Brokered deposits come with no such strings attached., In addition, Internet banks and rate-comparison Web sites appear to be making a difficult task - attracting enough core deposits to support a lending business - even more difficult., The ability to know what rates are and the distribution of that information are having a large effect, said Roy Hingston, a senior vice president and the chief balance-sheet strategist of Shay Financial Services Inc., a consulting firm that acts as a deposit broker., Observers say one reason loan growth exceeds deposit growth at many banks, at least from time to time, Bankers say regulators are also warming to brokered deposits., after booking brokered deposits, said Idaho Banking's Mr. Madsen. Not only did he hear no criticism, but examiners suggested, elliptically, that the bank's use of brokered deposits was a good thing because it enhanced its liquidity., Stock analysts who follow community banks are more blase about brokered CDs, which can raise a bank's funding costs., Banks with good core deposits do deserve to have a higher valuation, said Ramsey Gregg, an analyst with FIG Partners in Atlanta. But the difference is not so great, that banks should forsake good loans just because they cannot fund them with core deposits., Another issue is that deposit levels could plummet when CDs mature and money moves somewhere else, where the rates look better at a given time. But bankers say they can mitigate that risk by accepting deposits that match specific assets in duration., Bank of England's Mr. Canada said he mostly takes deposits maturing in less than a year to fund the bank's agricultural lending. But other maturities are widely available, If I wanted to do five-year loans for some kind of major construction, I could match them up with these deposits, Furthermore, the cost of arranging a sizable brokered deposit is negligible compared with the cost of operating branches, marketing, and processing transactions., said PAB's Mr. Torbert. Brokers package smaller deposits into one master certificate, he explained., There is a consensus among bankers that too much use of brokered deposits is not so good. There is less agreement, however, on how much is too much. About 4% of PAB Bankshares' $857 million of deposits are brokered, Mr. Torbert said. The company might go as high as 10%, but would be very unlikely to go to 20%, Brokered deposits make up nearly 19% of Bank of England's deposits. Idaho Banking will not allow brokered deposits, which are virtually always time deposits, to exceed 35% of CDs on its books. Brokered deposits currently account for 30% of CDs, Mr. Madsen said., Not everyone, to be sure, is entirely comfortable with the trend. James J. Clarke, the principal of Clarke Consulting, an asset-liability management consulting firm in Villanova, said community bankers are talking about using brokered deposits more than ever at conferences and other meetings that he attends., Mr. Clarke said. He worries that community banks will take their eye off of their retail business., When it's this easy to make a phone call, of operating branches and building relationships, and that could be very costly over time, but dependence on them is risky., But depositors and investors like being able to compare rates nationally with such ease. That will not change, and it means it will be tougher for banks to count of core deposits raised in their local market to fund lending, said Karl Nelson, the president and chief marketing officer of Institutional Deposits Corp. of Miami, which helps banks distribute to other banks participation in deposits greater than the FDIC's $100, 000 insurance limits., As more and more people gain access to information, they will choose to take the best deal, Mr. Nelson said., Mr. Stoneman is a freelance writer in Albany
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by Scott CooleyOver the past quarter century, we witnessed four major technology advancements in mortgage automation., The first was the development of PC-based loan origination systems. Combined with the laser printer (which spared us from having to feed forms into dot-matrix printers), these systems kept the cost of origination relatively stable even as loans became more complicated. Simply put, we can do more for less., The second major advancement was electronic communications - first electronic data interchange, then the Internet. Obviously, such communications can be far more productive than phone calls and faxes., The third was automated underwriting systems, which changed how consumers were evaluated. They allowed a tremendous amount of complexity in decision-making while remaining reasonably easy for the average loan officer to use., The fourth and final major advance was imaging systems. The ability to store, update, and send electronic images of documents is beginning to have significant productivity gains. We should note, however, that this is an old technology whose cost was hard to justify during the 1990s. Rapid declines in the price of hardware, increases in the speed of systems, and the rise of the Internet have made this the decade when imaging went mainstream., Some might argue there were more, but in my view the various technology developments not on the list above simply did not have much of an impact., And despite all the hoopla from all the vendors about the next revolution, I believe there is only one more major change forthcoming., Amazingly, I cannot find a single technology vendor actively working on such an important development., It's what I call the Virtual Loan Folder. Think of it as a place all parties in the industry would go to save and retrieve loan data and images., Here's how a VLF system would work., underwriter, and quality-control and servicing staff to view for years to come., This list goes on and on, as every person or entity needing access to a loan file would use VLF for everything., VLF is not an imaging system, since these are routinely in-house systems where the data or image is not easily shared with everyone else who has a need to know. VLF would best be considered a standardized collaboration tool., Similar efforts are under way in other industries such as health care. The hope is that in the future every doctor, given your permission, Without a doubt, VLF could save the industry and consumers several hundred dollars per loan and greatly simplify our industry., Perhaps most important, the thousands of interfaces in the industry today will become obsolete when every entity communicates to and from the eVaults. Instead of building interfaces between all the parties, each party simply builds an interface to and from the VLF system., Today, companies are spending heavily to buy or build imaging systems. Much of this would also become obsolete if the eVaults became the standardized storage locations for the entire industry., Even today, a lot of information is still sent by fax and overnight carriers. Electronic commerce has helped, but there are still a lot of disjointed communication methods. VLF would provide almost instant communications for everyone in the industry., For a consumer with a passcode in hand, a lender could access all the data entered the last time the consumer applied for a loan, regardless of which lender originated it. It's similar to accessing a credit report, except it's comprehensive to all of the consumer's information., Security should be improved, since the information is stored in one location rather than dozens. Further, we can assume that professional eVault firms would do a better job of securing the data than the myriad loan officers, mortgage brokers, real estate agents, and others., There are some roadblocks, most center on who manages access to the eVaults. Still, I consider VLF so vastly superior to what we have today that any issues can be overcome., Andrew Dubinsky, CEO of Encomia, one of the industry's leading image solution providers, Yet, he sees hurdles., Loan officers would be very resistant to giving up control, His Houston outfit is not actively working on a VLF solution, though Mr. Dubinsky said most of what it is developing would work in a VLF world., Another firm that could really help the industry adopt a VLF solution is Stewart Transaction Systems, a unit of Stewart Information Services Corp., also based in Houston. Tim Anderson, Stewart Transaction's vice president of e-mortgage services, real estate agents, title offices, and others. It can also let the owner control access., These are essential attributes of VLF, SureClose doesn't actually have to change ownership, it has rights, roles, and responsibilities on who can see and do what, Mr. Anderson said., SureClose is designed for use by one entity that allows others to access that entity's data and images. However, it's my view that VLF needs the ability to pass ownership from the real estate agent to the mortgage originator, the lender, and the servicer., SureClose also stores all the information on Stewart's proprietary Web servers. A VLF would allow for any number of eVault firms that can store the data and images. In fact, each loan file could have documents stored in many different vaults. Accessing them would require only a loan number and the passcodes., I hope that MERS, of Vienna, will provide one crucial piece. Its Mortgage Identification Number, an industry standard, The one other crucial piece is available today and that is an industry-standard method to store data and images. Thanks to the Mortgage Bankers Association and many hard-working individuals, we have the Mismo standards from the Mortgage Industry Standards Maintenance Organization. Mismo is another building block that is rapidly gaining industry adoption. With Mismo, everyone can agree on how to store data and images with VLF., If VLF took hold, Encomia, Stewart Transaction Systems, and a host of other firms wouldn't become obsolete, though their models would change somewhat. Each can easily adopt its systems to become one of the many eVaults the industry needs. In addition, the software they have developed for use by the mortgage companies would still be needed, though with modifications, to support VLF., government-sponsored enterprises. Since this is such a large undertaking, with political, consequences, we need the largest companies in the industry on board., Through education about VLF, we can obtain the broad industry support needed. Perhaps in a few years, we will start realizing the potential of an industry-standard Virtual Loan Folder., Mr. Cooley is a consultant in Las Gatos
Published in American Banker (2006)
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by Jim ColeTwo banking companies with big West Coast operations gave differing views Tuesday of the credit cycle during the third quarter., Wells Fargo & Co. in San Francisco became the latest banking company this earnings season to cite weakness related to the auto sector during the period, it said delinquencies in the sector climbed due to the merger of its prime and nonprime auto businesses this year. However, the $483 billion-asset company reported decent fundamentals and beat analyst estimates for per share earnings by a penny., Meanwhile, U.S. Bancorp in Minneapolis maintained its strong credit profile. Jerry A. Grundhofer, its chairman and chief executive officer, The $217 billion-asset company matched analyst estimates for per share earnings., In an interview Tuesday, Wells Fargo chief financial officer Howard Atkins said problems in the company's auto portfolio were an anomaly., With the exception of autos, Wells said third-quarter net credit losses were $663 million, up 23% from a year earlier and up 53% from the second quarter. Losses in revolving credit and installment loans rose by $176 million from the second quarter, it said, primarily due to losses in the consumer auto loan portfolio. Net chargeoffs were 0.86% of average loans in the third quarter, up from 0.54% in the second quarter and 0.73% a year earlier., That put some pressure on 90-day-past-dues, and that ultimately wound up in higher chargeoffs in the third quarter, Wells has since addressed the problem, by hiring 1, 000 people to work on collections and by slowing lending to some high-risk segments. Nonetheless, Joseph Dickerson, an analyst at Atlantic Equities LLP in London, The Wells news came after similar reports from Wachovia Corp. in Charlotte and M&T Bancorp. in Buffalo this earnings season. Both of the latter cited credit issues related to the auto sector., Wells Fargo's credit issues tarnished an otherwise solid quarter, marked by net interest margin expansion and solid loan growth., The company reported third-quarter net income of $2.19 billion, to $5 billion, and noninterest income grew 2%, to $3.9 billion., U.S. Bancorp reported net income of $1.2 billion, and noninterest income of $1.7 billion grew 10.9%., In a prerecorded earnings call Tuesday, Mr. Grundhofer said the company continues to focus on high-quality loans, We believe, however, that this strategy will serve us well during the next credit cycle, In an interview Tuesday, Gary Townsend, an analyst at Friedman, Billings, Ramsey Group Inc., said, One thing about these guys, as compared to Wells, is they don't do subprime, U.S. Bancorp's net interest margin fell to 3.56% in the third quarter from 3.68% in the second quarter and 3.95% a year earlier., On U.S. Bancorp's prerecorded call, chief financial officer David Moffett said, Based on the results of the past few months, and assuming the Fed has quit tightening, Wells Fargo's net interest margin expanded by three basis points from the second quarter, to 4.79%. Mr. Atkins said the company is benefiting from past balance sheet adjustments that entailed shedding lower-yielding assets and from access to low-cost core deposits, which rose 5% from a year earlier., It said its loans, totaling $304 billion, were up 3% from a year earlier. Excluding single-family mortgages (which declined due to the sale of adjustable-rate mortgages, which caused a $48 million loss), loans grew 14% from a year earlier. Average commercial and commercial real estate loans grew 10% from a year earlier, and consumer loans, excluding single-family mortgages, rose 16%, the company said., U.S. Bancorp said its total loans of $142.9 billion were up 5.6% from a year earlier. Consumer loans of $47 billion rose 4.2%, commercial loans rose 6.5% to $46.1 billion
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by Luke MullinsBankAtlantic Bancorp Inc. is under pressure from analysts to scale back its branch expansion to boost earnings, but its chief executive said the company is committed to its current strategy., BankAtlantic, in Fort Lauderdale, Fla., last week reported an 86% drop in its third-quarter net income, to $2.3 million, and blamed the decline on a $4.8 million loss at its investment banking subsidiary Ryan Beck & Co., sluggish net growth in low-cost deposits, and increased noninterest expenses., But chairman and CEO Alan Levan remains committed to the plan and said he will tweak the strategy rather than scrap it. Without being specific, Just keep in mind, this is the same company that has had extraordinary growth in low-cost deposits for the last four years ... and it's the same management team, Mr. Levan said Thursday in a conference call with analysts., We're just working as fast as we can, and as hard as we can to bring in the results that we expect and, of course, the Street expects, But it just doesn't happen overnight, without totally abandoning the strategy, Analysts who cover BankAtlantic, however, said they are losing confidence in its management team., Management's 'trust us' message is not winning over investors and is injuring credibility, Albert Savastano of Janney Montgomery Scott LLC wrote in an Oct. 20 research note., is a fabulous franchise, Laurie Hunsicker, with Friedman, Billings, Ramsey & Co. Inc., wrote in an Oct. 19 report., Ms. Hunsicker's report mentioned a Dec. 9, *2005-, investor lunch in New York. Mr. Levan said that day, she wrote, BankAtlantic's stock is down about 20% since reaching its 52-week high in mid-April. It was trading at $12.82 late Tuesday., Mr. Levan did not return phone calls seeking a response to analysts' comments., But Jefferson Harralson, an analyst at Keefe, Bruyette & Woods Inc., the frustrated investors in bringing the company back to industry-level profitability, Moreover, Mr. Harralson said, the seasonably weak third quarter, coupled with industrywide changes in funding mix and more competitive rates for certificates of deposit, make it difficult to evaluate the strategy's earnings impact., I'm not calling their credibility into question at this time, To make a knee-jerk reaction in your most seasonably weak quarter, in a quarter where we saw mass deposit mix change in the entire industry, That said, the time to put a critical eye on the strategy is now, Mr. Harralson added., Ms. Hunsicker, She wrote it must substantially reduce expenses by putting off branch openings, repurchasing stock, and selling or spinning off Ryan Beck., BankAtlantic, which has about 80 branches, N.J., which entered Florida last year and has said it plans to open 150 branches in the state within the next seven years., In July, BankAtlantic postponed an initial public offering for Ryan Beck because of a weakening market for investment banking stocks and the unit's poor second-quarter earnings. In the conference call
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by Matthias RiekerTD Banknorth Inc. chairman and chief executive William J. Ryan warned investors last month that third-quarter earnings would come in below expectations, and on Wednesday the lower guidance was borne out., Mr. Ryan also told investors yesterday that significant improvement was unlikely any time soon., Operating earnings were 51 cents, a penny below the average analyst estimate, TD Bank-north earned 38 cents a share., The Portland, Maine, company announced its results two days after announcing that its president, Bharat Masrani, would become CEO in March. Mr. Masrani joined TD Banknorth in September from Toronto-Dominion Bank, which owns a 56% stake in TD Banknorth., On Monday, On Wednesday, however, he did not have good news about the profit outlook. TD Banknorth's third-quarter net income fell 3%, to $86.1 million, and Mr. Ryan gave shareholders little hope that an improvement is near., When you're looking at the numbers for *2007-, we don't want you to be pessimistic, but we don't want you to be optimistic at the same time, He also said that he had no immediate plans to pursue any new acquisitions if deal prices remained high., Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP, TD Banknorth did report that revenue rose 22% from a year earlier, to $429.8 million, and said its January acquisition of Hudson United Bancorp of Mahwah, N.J., was one reason for that increase. Revenue was down 1% compared with the second quarter, however., However, Anthony R. Davis, an analyst with BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc., Expense growth, meanwhile, was well ahead of revenue. Expenses rose 39% from a year earlier and 2.8% from the second quarter, to $294 million, helped by an ongoing advertising campaign that started June 7 and that TD Banknorth said has brought in 15, 000 new accounts., The company took charges of $2.3 million, or 4 cents a share, related to the Hudson United integration, and $24 million, or 10 cents a share, related to the amortization of intangible assets. It also took a $3 million reserve against a lawsuit Mr. Ryan would not discuss in detail. However, a discontinued energy investment, a Hudson United legacy, added $2.5 million, or 1 cent a share, to results., Kevin T. Timmons of CL King & Associates Inc., rating on TD Banknorth's shares, said he does not expect operating leverage to become positive until well into next year., Mr. Ryan said he would like to pick it up again next year., TD Banknorth's loan book rose 29% from a year earlier, to $25.5 billion, but excluding the Hudson United purchase, loans increased only 5.5%, below the company's 8% target., John W. Fridlington, TD Banknorth's chief lending officer, told investors during the call that the commercial and industrial loan pipeline, usually at $1 billion, My feel is we're probably having a good 30% or so of the deals that we normally would be successfully winning ... going elsewhere, on smaller deals, while on larger loans some bigger rivals are offering more favorable rates, Mr. Fridlington said., Mr. Ryan said in an interview Wednesday that TD Banknorth is facing more competition from some of the nation's largest banks, which are chasing specific loans rather than the entire customer relationships., It's hard to see that you can make money at under Libor, That pricing strategy has helped TD Banknorth's net interest margin, which remains higher than that of many banking companies. The margin fell 6 basis points from a year earlier and 8 basis points from the second quarter, to 4.01%, but Mr. Ryan said the high margin is mainly a result of TD Banknorth's two recent balance-sheet restructurings., Deposits were flat from a year earlier excluding the Hudson acquisition, but they rose 3.3% from the second quarter, We're doing well and we're succeeding in it, but it is coming at a very high cost
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by Jody ShennAlthough it has not been widely publicized, one of the hottest topics in mortgage circles is the hefty up-front pay packages lenders are offering to hire away rivals' salespeople., Rumors of high-six-figure or even seven-figure signing bonuses -- or variations such as advances against or guaranteed minimums for commissions -- have circulated lately., Brian Hale, Countrywide Financial Corp.'s retail mortgage chief, Countrywide has let some potential hires it liked go to competitors because the bidding got extreme, and tries to minimize risk by structuring contracts a certain way, Mr. Hale said. It will, however, In the mortgage business, it is my view, and I think the organization's view, that A talent, A-plus talent is something of a rare commodity, if you keep working for the other company, I have a zero chance of making a profit on you and those loans, he added., that it has been nearly flawless with sign-on incentive deals for cream-of-the-crop salespeople, Mr. Hale said, with the next tier down., Although the absolute size of dollars involved might not be that big, and they failed. And if you do that enough, to deciding on what to pay based on an originator's performance., A benefit of hiring rivals' top producers is the ability to cut into those companies' market share, but Countrywide has not been looking to hire loan officers from any particular outfit, Mr. Hale said., Despite some investors' concerns, its longtime head. (Mr. Hale replaced Mr. Anderson.), The highest credit I could ascribe to Joe is like any good executive, he constantly focused on making sure he wasn't a one-man band
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