Update on Banking

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					Update on Banking

                Thomas Gronstal
       Superintendent of Banking
                         NUMBER OF IOWA BANKS
                             State and National Banks


                  500   454 445 442 431
                  450                   417 410
                                                400 395 392
                                                            383 372
Number of Banks




                  400
                  350
                  300
                  250
                  200
                  150
                  100
                   50
                    0




                                   As of December 31
                                 Tier One Leverage Ratio

10.5

10.0   9.80
                                                                                 9.49   9.51   9.48
              9.45   9.35       9.36                9.30     9.32      9.39
9.5                                       9.23

9.0

8.5

                                                    7.83     7.85      7.82      7.91   7.86
8.0                  7.79       7.70      7.79
       7.56                                                                                    7.64
              7.54
7.5

7.0
       1997   1998   1999       2000      2001     2002     2003      2004      2005    2006   2007

                            Iowa State Chartered Banks     All U.S. Commercial Banks
                                        Ag Loans to Loans

20%


      18.3%
              16.7%
15%                   15.9%     16.3%     16.1%
                                                   15.6%    15.2%
                                                                      14.6%                     15.0%
                                                                                14.5%   14.5%



10%




5%

      1.5%    1.4%     1.3%     1.3%      1.2%     1.1%      1.0%      1.0%     1.0%    0.9%    0.9%

0%
      1997    1998    1999      2000      2001     2002      2003      2004     2005    2006    2007

                      Iowa State Chartered Banks    All U.S. Commercial Banks
                        Noncurrent Loans to Total Loans

2.00

                                          1.41      1.46
1.50                                                                                             1.30
                                                              1.20
                               1.12
              0.97   0.95
       0.96                                                             0.86
1.00                                                                               0.75   0.80
                                                                                                 1.07

                                          0.78      0.84
0.50                                                          0.75      0.69              0.71
              0.65             0.60                                                0.66
                     0.59
       0.52

0.00
       1997   1998   1999      2000      2001       2002      2003      2004      2005    2006   2007


                            Iowa State Chartered Banks     All U.S. Commercial Banks
                      ADVERSELY CLASSIFIED LOANS TO TOTAL LOANS
                                        Iowa State Chartered Banks



                   3.00                                         2.78
                                                                       2.45
                   2.50                 2.33 2.38 2.43                                      2.29
                                 2.16
                                                         2.02                        2.03
Percent of Loans




                          2.00                                                1.91
                   2.00

                   1.50

                   1.00

                   0.50

                   0.00




                                              As of December 31
                          Adversely Classified Assets as a Percentage of Capital

                                                  State Banks Only


                     25

                                                               20.3
                                                                      19.1
                     20
                                                        17.0                                  17.6
                                                 16.1
Percent of Capital




                                                                             16.0 15.3
                                          14.6                                         15.2
                     15            13.4
                            12.1

                     10


                     5


                     0




                                                  As of December 31
                     Loan Loss Reserves to Total Loans

2.00
                                      1.86      1.85
         1.84 1.77
                                                        1.74
1.75                 1.68    1.68



                                                                  1.50
1.50

                                                                                          1.34
              1.42   1.40                                                  1.28
       1.39
1.25                         1.31               1.31    1.32
                                      1.28                                         1.17
                                                                  1.26
                                                                           1.20
                                                                                   1.15   1.14
1.00
       1997   1998   1999   2000      2001     2002     2003     2004      2005    2006   2007

                       Iowa State Chartered Banks      All U.S. Commercial Banks
                                           CAMELS COMPOSITE RATINGS
                                              Iowa State Chartered Banks




                                                                                                 12/31/2000

                                                                                                 12/31/2007
                  300
Number of Banks




                                          198 185
                          157 141
                  200

                                                             19   6               3   0           0     0
                  100


                    0
                        One         Two              Three                 Four           Five
                                   Net Interest Margin


4.40
       4.21

              4.07      4.07                      4.09
4.10
                                  3.95
       4.08                                3.91
                                                          3.83

3.80          3.89                                                 3.75
                        3.83                      3.88                        3.70
                                                          3.72                       3.56
                                           3.67
                                                                   3.61       3.61          3.47
3.50
                                  3.49
                                                                                     3.39   3.35
3.20
       1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007



                     Iowa State Chartered Banks   All U.S. Commercial Banks
                                         Return on Assets

1.50
                                                          1.40
1.40
                                                  1.33                        1.33   1.33
                       1.31                                         1.30
1.30   1.27

              1.19               1.19             1.27    1.27      1.27
1.20   1.23            1.15               1.15
                                                                              1.23
              1.19
1.10                                     1.12                                         1.13
                               1.07                                                                1.08
1.00
                                                                                            0.95
0.90
       1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
                     Iowa State Chartered Banks   All U.S. Commercial Banks
                                              Return on Equity

16.00
                        15.31                                   15.33
15.50
15.00   14.68                                          14.47
14.50           13.93
14.00                                 14.02
                                                                                13.72
13.50                                         13.12                                        13.26
                                                                                                    13.02
13.00                                                                       12.70
        12.53                                         12.65     12.62
                                                                                        12.37
12.50           11.98   12.05
12.00                                                                                              11.46
                                   11.30      11.25
11.50
                                                                                                              10.86
11.00
10.50
10.00
9.50                                                                                                       9.29
9.00
        1997    1998    1999       2000       2001      2002     2003       2004        2005       2006       2007

                                Iowa State Chartered Banks     All U.S. Commercial Banks
                            LOANS-TO-DEPOSIT RATIOS
                          Iowa State and National Banks



             100
                                                                     85.5 87.5   89.1
             90                     79.2                      82.1
             80    72.4 71.0 76.2          73.6 70.1   72.6
             70
Percentage




             60
             50
             40
             30
             20
             10
              0



                                            Year End
                            Core Deposits to Total Assets

80%


75%   77%
             75%
                    75%
70%                                      72%        72%     72%
                               71%                                     71%
                                                                                 69%
65%                                                                                     67%    67%

60%


55%
      50%    49%                         49%        49%     49%
50%                 47%                                                48%       47%
                               46%
                                                                                        45%
45%                                                                                            43%


40%
      1997   1998   1999      2000       2001      2002     2003      2004       2005   2006   2007

                           Iowa State Chartered Banks     All U.S. Commercial Banks
        Commercial Loans as a Percentage of Total Loans

30%
             28%      28%      28%
      27%

                                         25%

25%

                                                 22%
                                                                                            21%

                                                        20%
20%                                                                         19%     19%
                                                                  19%               19%    18%
                                                                            18%
                      17%                17%     17%    17%       17%
             17%               17%
      16%

15%
      1997   1998   1999      2000      2001     2002   2003     2004     2005      2006   2007


                    Iowa State Chartered Banks          All U.S. Commercial Banks
        Real Estate Loans as a Percentage of Total Loans


                                                             61%                 60%   60%
                                                                      61%
                                               59%     59%
60%                                  57%
                             56%                                                 57%
                                                                       56%             55%
                    54%
      53%   53%                                               53%
                                                       51%
                                               50%
50%                                             2003
                                     46%

                    43%      44%
      42%   42%

40%


                  Iowa State Chartered Banks         All U.S. Commercial Banks
         Real Estate Loans as a Percentage of Total Assets

50%


45%                                                                                  43%    43%
                                                                            42%
                                                                   40%
40%                                                      38%
                                      37%         37%
                             36%
                    35%
35%   33%    33%

                                                                                      34%
30%                                                                          33%             33%
                                                                    31%
                                                          30%
                                                   29%
25%                                    27%
                     26%      27%
      25%    25%

20%
      1997   1998   1999    2000      2001        2002   2003     2004     2005      2006   2007

                     Iowa State Chartered Banks          All U.S. Commercial Banks
          Commercial RE Loans as a Percentage of Total Loans


20%
                                                                                18.3%    18.4%
                                                                     18.0%                         18.0%
18%
                                                            16.7%


16%                                                15.3%


                                           14.0%
14%

                      12.1%     12.4%                                            13.7%     13.6%
                                                    13.4%    13.6%    13.6%
                                           13.0%                                                   13.0%
12%   11.5%   11.4%
                                  12.2%
                        12.0%
              11.1%
10%
      10.3%


 8%
      1997    1998     1999      2000      2001    2002     2003     2004       2005      2006     2007


              Iowa State Chartered Banks            All U.S. Commercial Banks
         Off-site Monitoring
 IDOB   surveyed 33 State Chartered Banks
  with more than 300% of Capital in CRE
  loans
 Portfolios ranged in size from $3.5 million
  to $160 million
 Survey    asked for Borrower Name,
  Outstanding Balance, Type of Property,
  and the Principals of the Borrower
           Off-site Monitoring
 What we    Learned:
     Large developers have multiple projects
      financed with numerous banks
     These large concentrations hold many
      types of property
     Many large concentrations involve a large
      number of LLCs with many different
      partners
CRE Concentration Example A
 Property Type    Balance      Number of   Number of
                                Banks      Principals

Dev. Land         $3,382,000       4          11


Comm. Non-        $9,009,000       4          14
owner

1-4 Family Dev.   $2,934,000       3           2


1-4 Family          $709,000       1           1
Rentals
 CRE Concentration Example B
   Property Type      Balance      Number of   Number of
                                    Banks      Principals

Bare Land             13,224,000       8          13


Comm. Non-Owner        6,873,000       4           7
Occupied

Comm. Dev.             5,479,000       3           7


Res. Dev. Lots &      17,169,000       6          15
Spec Homes

Multi-Family Rental    3,966,000       1           2
       Other concentrations

 $40,000,000, 11 Banks, 18 Principals
 $47,000,000, 4 Banks, 34 Principals
 $20,500,000, 2 Banks, 2 Principals
  Summary of Survey Findings
 Largest  concentrations had several types
  of property and multiple borrowers.
 Most of the banks and most of the
  properties were in the Des Moines metro
  and eastern Iowa.
 The concentrations are difficult to analyze
  because so many principals are involved &
  lack aggregated cash flow.
  Summary of Survey Findings
 Developers   own a large amount of
  undeveloped land and lots which may not
  be in demand due to the downturn in
  housing market.
 Lenders may have to work together to
  reduce loss exposure as developers’ cash
  flows slow.
                   Examination
   IDOB sees CRE as a significant risk area.
   Examination scope will include all significant
    CRE exposure.
   Loan Policy will be reviewed.
   Risk management practices will be evaluated.
   CRE loans will be analyzed for appropriate
    underwriting.
   Is the Board of Directors adequately informed?
              FFIEC Guidance
 Generally   applies to banks with:

     Total loans for construction, land development,
      and other land equal to or greater than 100% of
      total capital; or

     Total CRE loans equal to or Greater than 300%
      of total capital and the CRE portfolio has
      increased more than 50% in the last 36 months.
      Importance of Guidance
   Provides valuable “Best Practices” for CRE
    lending.
   Banks with small exposure to CRE may be
    able to improve credit administration by
    incorporating parts of guidance into their
    processes.
   Banks with significant exposure to CRE will
    be evaluated against the guidance.
   Keep the Board properly informed of CRE
    exposure – very important.
         Other Real Estate

 Propertyacquired through foreclosure or
 other satisfaction of debts previously
 contracted.
 Unfinished development property
 presents two primary questions:

 Are banks allowed to invest additional
 funds to finish development?

 When   must the IDOB be notified?
     Banks may make additional
    expenditures if the advances:
 Arereasonable and calculated to reduce the
 shortfall between the market value and the
 bank’s recorded investment amount;

 Are not made for the purpose of speculation
 in real estate; and

 Areconsistent with safe and sound banking
 practices.
When must the bank notify the IDOB of
  planned additional expenditures?

 The bank must notify the IDOB at least 30
 days before implementing a development
 or improvement plan for ORE when:

     The bank’s planned additional
      expenditures plus any unpaid prior liens
      exceed 10% of the bank’s aggregate
      capital.
The notification must include a Board
 approved business plan providing:
 Market  value of the property “as is”
 Cost to finish the project
 Estimated completion time
 Expected selling price of the completed
   project
 Marketing plan
 Description of accounting for balance
   sheet and income statement
   Holding ORE in a Subsidiary
 Banks  can hold title to ORE in operating
  subsidiary.

 Subsidiary must be approved by IDOB
  before bank invests in it.

 IfORE results from a participation loan,
  participating banks may form subsidiary to
  own ORE subject to IDOB prior approval.
AVERAGE VALUES ALL GRADES
         1950-2007
2007 AVERAGE VALUES




     Dollar Values
     Less than $3,500
     $3,500 - $3,999
     $4,000 - $4,500
     More than $4,500
POSITIVE FACTORS AFFECTING
  LAND VALUES 2003-2007
WHO PURCHASED FARMLAND
Iowa Division of Banking

  Post Examination Financial
    Institution Assessment
      Comparison 2007
The examiner’s requests for information
  prior to and during the examination
            were reasonable.

           1.50



  1                2         3      4             5
Strongly          Mostly
 Agree            Agree    Agree    Mostly    Strongly
                                   Disagree   Disagree
During the course of the examination,
management was:
a) Informed of relevant issues.
       1.16



   1           2         3         4             5
 Strongly     Mostly
  Agree       Agree    Agree       Mostly    Strongly
                                  Disagree   Disagree
During the course of the examination,
management was:
b) Given opportunity to respond
   to issues.
       1.32


   1           2         3      4             5
 Strongly     Mostly
  Agree       Agree    Agree    Mostly    Strongly
                               Disagree   Disagree
 During the exit meeting, the examination
team clearly and effectively communicated
               their findings
              and concerns.
        1.31



   1            2         3      4             5
 Strongly      Mostly
  Agree        Agree    Agree    Mostly    Strongly
                                Disagree   Disagree
Quality of the Report of Examination:
a) The tone and content of the report were
   consistent with the exit meeting.
           1.39



  1                2         3      4             5
Strongly          Mostly
 Agree            Agree    Agree    Mostly    Strongly
                                   Disagree   Disagree
Quality of the Report of Examination:
b) Findings and recommendations were clear
   and easy to find.
        1.36



   1            2         3      4             5
 Strongly      Mostly
  Agree        Agree    Agree    Mostly    Strongly
                                Disagree   Disagree
Quality of the Report of Examination:
c) The recommendations were useful to your
   organization.
            1.44



   1                2         3      4             5
 Strongly          Mostly
  Agree            Agree    Agree    Mostly    Strongly
                                    Disagree   Disagree
The examination team completed the
examination in a timely manner.
           1.47



  1                2         3      4             5
Strongly          Mostly
 Agree            Agree    Agree    Mostly    Strongly
                                   Disagree   Disagree
The examination team caused minimal
disruption to our day-to-day operations.

           1.46



  1                2         3      4             5
Strongly          Mostly
 Agree            Agree    Agree    Mostly    Strongly
                                   Disagree   Disagree
The examination team conducted
themselves in a professional manner.

      1.24



  1           2         3      4             5
Strongly     Mostly
 Agree       Agree    Agree    Mostly    Strongly
                              Disagree   Disagree
Your satisfaction with staff
knowledge of:
a) Laws, regulations, and policies.
       1.34



  1            2         3      4             5
Strongly      Mostly
 Agree        Agree    Agree    Mostly    Strongly
                               Disagree   Disagree
Your satisfaction with staff knowledge of:
b) Operations.
           1.51



  1                2         3      4             5
Strongly          Mostly
 Agree            Agree    Agree    Mostly    Strongly
                                   Disagree   Disagree
Your satisfaction with staff knowledge of:
c) Lending.
       1.35



  1            2         3      4             5
Strongly      Mostly
 Agree        Agree    Agree    Mostly    Strongly
                               Disagree   Disagree
Your satisfaction with staff knowledge of:
d) Your financial institution.
           1.41



  1                2         3      4             5
Strongly          Mostly
 Agree            Agree    Agree    Mostly    Strongly
                                   Disagree   Disagree
Written Responses to Questions
  Thinking about the future of the financial services
industry, what do you see as the key emerging trends
      that will impact us in the next five years?


     Competition from non-bank lenders

     Ag economy

     Credit card debt

     Shrinking margins

     Regulatory burden

     Fraud/identity theft
What new products or services are you considering
         adding in the next 12 months?

Internet banking
Imaging
New branches or merging offices
Remote deposit capture
Secondary market servicing
Check 21
ACH conversion
Create products to attract Hispanic relationships
 Suggestions for improvements in future examinations?

New secure E-mail is nice. Would like to see secure Internet
drop site much like FDIC has.

In an attempt to drive down costs, examinations need to be
stretched out further than they are now. Needs to be a joint
effort with the FDIC.

Pre-exam requests for electronic data a lot of time to
complete – was easier to have examiners look at files at the
branches.

Examinations are thorough and the feedback from examiners
creates a great business partnership.

More emphasis on loan quality and less policy and procedure
emphasis.
                   Other comments?


Outside audits are becoming expensive and many times
they do not know as much about what should be done as the
banks do.

Having an experienced IDOB staff has made the exams
much easier since they are familiar with our operations.

We had a new crew examine us this time and it took some
getting used to. They didn’t know our bank as well.
However, the fresh perspective is beneficial and they were
very prepared, professional, and easy to get along with.
IDOB LEGISLATIVE MATTERS
           Legislation Allows:
 “Bank”   in Holding Company name.

 Bank may establish its “principal place of
 business” anywhere it has an office.

 Codifiessuccession plan for replacement
 of Superintendent until Governor appoints
 a new one.
 Legislation Allows (continued):

 Gives  Superintendent authority to approve
 special branches and authorize expedited
 activity in emergency situations.

 Provides increased enforcement authority
 over non-bank mortgage brokers and
 originators.