Community BankingSummits
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Liquidity CheckPg. 5
Perception vs. Fact:The Truth behind
Investment ProgramsPg. 17
2 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015
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View a complete calendar andregister for CBI-sponsored webinarsand events at www.cbiaonline.org
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SEPTEMbER 2015 WEbINAR LINE-UP
Sep. 2 StrategicPlanningYears1,3&5:Scope,Techniques&Elementsin DraftingYourWrittenPlan
Sep. 3 AdvancedACHSpecialistSeries:Defining&IdentifyingThird-PartySenders: Risk,Liability&AuditRequirements
Sep. 9 DirectorSeries:UDAAPfortheBoard&SeniorManagement
Sep. 11 MortgageAdvertising:KeepingYourPromotionsCompliant
Sep. 15 Managingthe8CategoriesofRiskAssessment
Sep. 16 LoanUnderwritingBasics:Interviewing,CreditReports,DebtRatios &RegulationB
Sep. 17 ImagedDocuments:WhattoKeep,WhattoDestroy,WhatHoldsupinCourt?
Sep. 22 IRASeries:AuditingIRAsStep-by-Step
Sep. 23 BasicBankingforNewEmployeesPart1:BankingSystem,Deposit Operations,Lending
Sep. 24 RegulatorGuidance&IssuesinATMSecurity
Sep. 29 HRDangerZones:Regulations,Requirements&BestPracticestoKeep YouOutofTrouble
Sep. 30 MandatoryComplianceRegulationsforDepositOperations
COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 3
In This Issue
September2015WebinarLineup....................... 2
FallCommunityBankSummits............................ 4
LiquidityCheck...................................................... 5
SteeringClearoftheUDAAPTrap........................ 6
CommunityBankersforComplianceFallSession........................................................... 7
FromtheTop.......................................................... 8
FinePoints............................................................. 9
LowNetInterestIncome...............................10-12
RuralMainstreetSurvey...............................14-15
TheTruthBehindInvestmentPrograms............17
Community Bankers of Iowa1603 22nd St, Suite 102
West Des Moines, Iowa 50266Phone: [email protected]
Bank Architecture
& ConstructionPre-design
Master PlanningSite Development
ArchitectureProject Management
ConstructionPost-project SupportSecurity & Signage
TrustPersonalityExperienceIntegrityTeamwork
Steph Weiand (L) Suzanne Meyers (C) Jim Christensen (R)
112 W. Park Lane, Waterloo319-232-6554
EVENTS CALENDARCommunity Bankers for ComplianceFall Session......................Sep. 22 & 23
Community Banking SummitsCarroll.........................................Oct. 13Johnston.....................................Oct. 14Algona.........................................Oct. 15
LOT Quarterly Meeting.............Nov. 19
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4 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015
800.967.2645 | eojohnson.com
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WCF Financial Bank.
What Matters?
“ Locknet® has more than proved themselves to us. They have been involved in our core conversion, an acquisition, and the
new construction of our main location. They thoroughly knew our new system and worked seamlessly with our vendor.
Having that expertise on our team is very comforting.“— Kyle Swon, Market President – Webster City, WCF Financial Bank
• Budget predictability• Proactive instead of reactive IT• 1 – 3 – 5 year budgeting
• A solid foundation of security and efficiency
BUSINESS PROFILE:WCF Financial Bank is a community bank with two locations – Webster City and Independence, Iowa.
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When security matters – Locknet®’s Keysuite™ fully managed IT services provides:
CBIinvitesIowa’scommunitybankerstotheFallCommunityBank
Summits.Eachmeetingbeginsat3:00p.m.,withadinnerreceptionanddoorprizegiveawaytofollow.Attendtheseafternoonevents
andbuildrelationshipswithyourpeerswhilegainingvaluableeducation.
AppearingateachSummitwillbelegendarywrestlerDan Gable,1972OlympicGoldMedalistandmultiple-timechampionandcoachatthestate,nationalandworldlevels.AstheFallSummitKeynoteSpeaker,Gablewillprovideinspirationandadviceonteambuilding,motivation,andovercomingadversity.
GuestSpeakersincludeBill Northey, IowaSecretaryofAgriculture,presentinganAg EconomyupdateattheCarrollandJohnstonmeetings,andLisa Shimkat,IowaDirectoroftheSmallBusinessDevelopmentCenter(SBDC),who’lleducateattendeesonRural Economic DevelopmentattheAlgonameeting.
TheregistrationfeeforeachSummitisonly $35 for bankers,and$50forCBIEndorsed/Associate/Affiliatemembers!Visitwww.cbiaonline.orgtoregisterfortheFallSummits,ortoviewtheEventBrochure.Stillhavequestions?Callusat515.453.1495orcontactJackie [email protected].
Tuesday, Oct. 13 - CarrollSanta Maria Winery
FALL COMMUNITY BANK SUMMITS COMING IN OCTOBER
Dan Gable, Olympic Wrestler & Coach
Bill Northey, Iowa Sec’y of Agriculture
Lisa Shimkat, Iowa Director, Small Business Development Center
Wednesday, Oct. 14 - JohnstonHilton Garden Inn
Thursday, Oct. 15 - AlgonaAlgona Country Club
Speaker Lineup
THANK YOU SPONSORS: ICBA Securities/Vining Sparks, SHAZAM, Secure Banking Solutions, Bankers’ Bank, Investment Professionals, Inc., United Bankers’ Bank, Deluxe Corp., Bell State Bank & Trust, Storey Kenworthy, and Midwest Independent Bank.
COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 5
It’sinterestinghowcommunitybanks’balancesheetstravelthroughcycles.Ittakesanimblemanagementteamindeedtoaccountforallthedynamicsofloandemand(orlackthereof),depositfluxes,newregulations,investmentcashflowsandcapitalneeds.Intheolddays(definedhereaspre-2008),atleastthebusinesscyclehadthegoodmannerstoturnroughlyeveryfiveyears.
Now,however,itreally,trulydoeslooklikewe’reintoanexpandingeconomyforthefirsttimeinafulldecade,mutedthoughitmaybe.TheFDIChasreportedthatloandemandforcommunitybanksgrewahealthy8.6percentforallof2014,whichisthehighestratesince2008.
WhiletheFederalReserveponderswhatitsnextmovewillbewithregardtomonetarypolicy,itmaybehightimeforyouandyourmanagementteamtoconsidertheconditionofyourcommunitybank’sliquiditypolicyandprocedures.Ifyourcommunitybankislikemostoftherestintheindustry,ithasn’thadtoputthatpolicytoworkinthebetterpartofadecade.Solet’sreviewthebestpracticesinbriefandmakesomerecommendationstoensureadequatefundsareatyourcommunitybank’sdisposal.
Regulator expectationsThemostrecentregulatoryguidanceisn’trecentatall.It’sprobablybeenassignedtothecredenzawithothermiddle-ageddocuments.TheFFIECissuedaJointPolicyStatementonFundingandLiquidityRiskManagementinMarch2010,anditremainsthecontrollingdocumentforthatparticularrisk.Thejointpolicystatementhastwokeythemes:prudentliquiditymanagementincludestheabilitytomeetexpectedandunexpectedcashflowneeds;andabank’sfinancialconditioncanbecompromisedbyalackofasoundliquiditypolicy.
Theagencies’statementhelpfullyalsoliststhefivemajorcomponentsofeffectiveliquiditymanagement:
• cashflowprojections,• diversifiedfundingsources,• stresstesting,• aformalcontingencyfundingplan,and• acushionofliquidassets.
Need may be growingAsevidencethatacashcrunchmaybecoming,weneedonlytoconsidertwofinancial-servicesmetrics.OneistheabsoluteamountofmortgageloanssecuritizedrecentlybyFannieMae,FreddieMacandGinnieMae.Thosethreeissuedatotalof$981billioninmortgage-backedsecuritiesin2014,whichsoundslikealot.However,thenumbersforthetwoprioryearswere$1.6trillionand$1.7trillion,respectively.Theupshotofthatisprepaymentsonmortgage-backedsecuritieshavealreadysloweddramatically,andtheycouldslowevenmoreifmortgageratesweretobegintorise.Yourbank’sinvestmentportfoliocouldseeafurtherdropincashflowasaresult.
ThesecondmetricofnoteisthevolumeofoutstandingFederalHomeLoanBankadvances.Therehasbeenadequatedocumentationofthecollectiveshrinkageofthebalancesheetsofthevariousregionalbankssince2008.Whatmayhavemissedyournoticeisthatadvanceshaveactuallyincreasedforthreeconsecutiveyears(see chart above),andasofDec.31,2014,wereupafull30percentfrom2011.Whatthisillustratesisanindustry(traditionalbanking)thatisfinancingitselflesswithavailablecashandmorewithborrowings.
Portfolio benchmarksWhatthenshouldacommunitybankerdoaboutallthis?Thefirstmostobvioussuggestionistomakesurethatacomprehensiveliquiditypolicyisinplace.Thepolicyshouldquantifywhatadequateliquiditymeansforyourinstitution,whatitssourcesare,andwhatPlansBandCareif“contingencies”emerge.
Asitrelatestoinvestmentportfoliomanagement,ithaslongbeentherecommendationofViningSparkstobuildaliquidityladderouttoeightquartersinthefuture.Theaggregatecashflowsfromtheinvestmentportfoliointhenexttwoyearsshouldequalabout15percentoftotalassets.Thenumberthatisrightforyourcommunitybankwillbeaffectedbyvariablessuchasseasonalloandemand,stabilityofthedepositbase,growthtrajectory,capitallevelsandoptionalityintheinvestmentportfolio.
Yourasset-liabilitymodelproviderandyourcommunitybank’sbrokersshouldbeabletogiveyousomehandyadviceregardingyourbank’soptimumliquiditylevel.Justasimportant,theycanhelpconstructasolidpolicyforanycurveballthatcomesyourway.Itappearsthebusinesscycleforcommunitybanksislikelytoserveoneup.
Jim Reber ([email protected]) is president and CEO of ICBA Securities/Vining Sparks, ICBA’s institutional fixed-income broker/dealer for community banks and an Endorsed Member of Community Bankers of Iowa.
Written By: Jim Reber, President & CEO - ICBA Securities/Vining Sparks
Liquidity CheckRising loan demand could test cash flow management
6 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015
7 Steps to Steering Clear of the
Written By: Amber GoodrichCompliance Strategist, CSI Regulatory Compliance.
UDAAP:isthereamoreconfusingacronymincurrentfinancialregulatoryjargon?Thisall-encompassingregulationisrelativelynew,butits
biteisprovingasinjuriousasitsinitialbarkhadforeshadowed.
TheConsumerFinancialProtectionBureau(CFPB)continuestousetheUnfair,Deceptive,andAbusiveActsorPractices(UDAAP)regulationasaprimarytoolforsafeguardingconsumersagainstharmfulpracticessurroundingthecollectionofconsumerdebt.Anditsresultingenforcementactions—whichin2014ledto$2.5billionincivilmoneypenalties—serveasareminderoftheregulation’sseverity.
Unfortunately,theCFPB’sdefinitionofwhatconstitutesaUDAAPremainsvague,bydesign,toencouragefinancialinstitutionstoconsiderconsumerprotectionthroughanenterprisewidelens—leavingmanyofthemchasingtheirtailsinanefforttostaycompliant.
Assomethingofapeaceoffering,theCFPBhasmadepublicitsSupervisionandExaminationManual*tohelpfinancialinstitutionslearnaboutUDAAPandprepforexams.
But,whatelsecanyoudotopreventaccidentalviolations?
Passing Your Next UDAAP ExamRegulatorsexpectfinancialinstitutionstocompleteariskassessmenttoensureeveryproductandservicetakesUDAAPintoaccount.Thiscanbedifficult—becauseyoudon’treallyknowwhatyou’relookingfor—butmakingtheefforttoprotectconfidentialinformationandITassetsgoesalongway.Inaddition,financialinstitutionsshould:
1. Evaluate New Products and Services.Reviewnewsolutions toensureallrelated,properdisclosuresareincluded. Disclosuresshouldbeoverlyclearsothereisnoquestionasto whetherconsumerscanfullyunderstandthem.Thisprocess shouldoccureachtimeanewsolutionisintroduced,aswellas forsuchadd-onoffersasrewardsand“notransferfee” programs.
2. Review Advertising Materials.Asabestpractice,ensureall advertisementsarereviewedbybothyourmarketing departmentandyourcomplianceofficertosafeguardagainst misleadingordeceptiveverbiage.
3. Create a UDAAP Policy.Gobeyondtheriskassessmentto createformalUDAAPpoliciesandprocedures.Andsince there’snoclearpathtodoingso,it’sagoodideatoincorporate UDAAPlanguage—forexample,rulesregardingproper disclosures—intoyourloan,BSA,creditcardandotherpolicies asanextraprecaution.
4. Stay Vigilant on Mortgage Rules.Payextraattentiontothe newmortgagerules,whichhavebeenahotbedofUDAAP violationsandensuingenforcementactions.Violationsofloan originatorcompensationrules,inparticular,arecitedregularly.
5. Make Sure Free Means Free.Ensurethat,whenmarketing freeproductslikedebitorcreditcards,theyaretrulyfreeofany andallfees.Otherwise,thiswillbeconsidereddeceptive.
6. Monitor Customer/Consumer Complaints.Payattentionto complaintsagainstyourinstitutionandothersusingtheCFPB’s publicconsumercomplaintdatabase.Youcansearchthrough thedatabasetogaugewhichtopicsarebuzzing.Andaheads up:whentheCFPBstartsseeinglotsofsimilarcomplaints—for example,onoverdraftprotectionordebtcollection—oddsare they’llputitontheirrulemakingagenda.
7. Evaluate vendor relationships.Financialinstitutionsare increasinglyheldaccountablefortheactionsoftheirthird-party serviceproviders.Sinceyourinstitutionisresponsiblenot onlyforitsownactionsbutalsoforthoseofitsvendors, includingUDAAPcomplianceexpectationsineverythird-party contractmakesforasolidvendormanagementprogram.
AlthoughtheUDAAPdefinitionwilllikelyremainvague,followingthesestepswillhelpyousteerclearofunknowinglycommittingconsumerviolationsaswellastheirresultingenforcementactions.
*Find CFPB’s Supervision and Examination Manual here:www.consumerfinance.gov/guidance/supervision/manual
Amber Goodrich serves as a compliance strategist for CSI Regulatory Compliance, and has more than 10 years of financial industry experience. For more information about CBI Endorsed Member Computer Services, Inc., visit csiweb.com.
UDAAP TRAP
COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 7
Compliance Officers and Lenders: Attend This Valuable SeminarCBC Program Fall Session Seminar - September 22-23 in Johnston
CBI Members:$350 for each 1-day session
$150 for each additional representative
Non-Members:$550 for each 1-day session
$250 for each additional representative
FALL SEMINAR SESSIONSEPTEMBER 22-23, 2015
Hilton Garden Inn8600 Northpark Drive, Johnston, Iowa
2015 Community Bankersfor Compliance Program
Register Online at www.cbiaonline.org
CBI’sCommunityBankersforComplianceProgram(CBC)FallSeminariscomingupSeptember 22-23 attheHiltonGardenInninJohnston,Iowa.Thistwo-dayLIVEseminarprovidesyouwithup-to-dateinformation,guidanceforstructuringandmaintainingyourbank’scomplianceprogram,andaforumtodiscussissuesandexchangeideaswithothercommunitybankers.
Thissession’sdiscussiontopicsincludeinformationonRegZ,RESPAchangesandAuditingRegBonDay1oftheseminar,andDODRuling,SAFEAct,RegO,Dodd-FrankchangestoRegZ,andARMLendingonDay2.Send your bank’s Compliance Officers and Lenders to get in-depth knowledge on these complex regulations!
ForcurrentmembersoftheCBCProgram,attendanceattheFallSeminarisincludedwithprogramenrollment.CBCmembersandnon-membersmaychoosetoattendjustoneorbothdaysofthisinformativeregulatorypolicyseminar.Themostsuccessfulandlongestrunningcompliancetrainingprograminthecountry,theCBCProgramwasdevelopedandispresentedbyCBIincollaborationwithCBIAffiliateMemberYoung&Associates,Inc.
FormoreinformationandtoregisterfortheFallSeminarorthefullCBCProgram,visittheProgramstabatwww.cbiaonline.orgorcontactPretty [email protected].
8 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015
Meaningful MembershipWritten By: Jack Hartings, Chairman of ICBA
Ascommunitybankerswebecomemembersofvariouslocalcivicorganizations,clubsandboards—oftenservingonseveralatthesametime.AndasyouandIbothknow,weareleadersnotonlyatourbanks,butinourcommunitiesaswell.Icallitanunofficialpartofthecommunitybanker’sjobdescription.
Whilewearehappytogiveofourtimeandourselvestosuchmeaningfulcommunitycauses,sometimesitmayfeellikevolunteergivingispartofourofficialjobdescription.That’swhy,asanICBAmember,it’snicetohavethetablesturnedabit.Insteadofyoudoingallofthegivingandwork,it’sgoodtoknowthatwehaveanationaltradeassociationdedicatedtohelpingusdoourjobsbetterandtocreatingandpromotinganenvironmentwherecommunitybanksflourish.
ICBAmembershipprovidesyouwithsomanybenefits,includingtop-notchindustryadvocacyforcommunitybanksandonlycommunitybanks,reliableandprofitableproductsandservices,professionalandcareerdevelopment,aswellasaward-winningpublicationsandplentyofcommunicationsresources.
BeingpersonallyinvolvedinICBAformorethan15years,IknowfirsthandthebenefitsthatICBAhasofferedmeandmybankthroughoutmycareer.Infact,mybankhasbeenamemberfor66years.MyfirstventureintoICBAvolunteerterritorycamewhilebeingontheassociation’sLendingCommittee,whichatthattimealsohandledaccountingissues.
Around2000,thecommitteemadeatriptotheFinancialAccountingStandardsBoard’sheadquartersinConnecticut.Irememberthinking,whatamIdoinghere?Ihadbeenalendermyentirecareer,butweweretalkingaboutaccountingissues.Ifeltlikeafishoutofwater,butthatwaswhenIrealizedthatifwecommunitybankersdon’ttellourstorytobringaboutconstructivechange,nobodyelsewill.OneofthemostvaluablecontributionsImadetothecommitteewastellinghowrulesandregulationstrulyaffectedmycommunitybankday-to-day.Itwasmywayofgivingbacktoourindustry,butit’salsohoweverycommunitybankercancontributesubstantiallyaswell,andtherebycreateanevenmoremeaningfulICBAmembership.
WhileIknowyouallhavesomuchonyourplates,IencourageyouandyourstafftogetpersonallyinvolvedinICBA.Whetherit’scontactingyourmembersofCongressthroughanICBAGrassrootsAlert,servingonanICBAcommitteeorboard,orgettinginvolvedwithyourstateassociation,theleadershipopportunitiesarenumerous.
WithICBAmembership,youalwayshaveaplacetocomehomeasacommunitybanker.AtICBA’spremierevents,suchasICBACommunityBankingLive®,theWashingtonPolicySummitandhundredsofeducationaleventsthroughCommunityBankerUniversity®,youcannetworkwithyourindustrypeers,accessanimportantproductorservice,orlearnfromourindustry’stopexperts.
ThebottomlineisthatopportunitiesaremanythroughICBA,soIencourageyoutoexploreyourmembershipandseehowitcanhelpyou,yourstaffandyourcommunitybankthemost.
Jack Hastings is Chairman of ICBA, and President and CEO of The People’s Bank in Coldwater, Ohio.
TOPFrom the
“...if we community bankers don’t tell our story to bring about constructive
change, nobody else will.”
COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 9
It’sourfrenetic,modern-dayblessing(orcursedependingonyourpointofview).Theworldiscontinuallyevolving,churningandacceleratingwithnewideasandinnovations.Knowledgeismultiplyingexponentially—andsharedrapidlyandwidely.Technologyisconstantlyprovidingnewwaystoworksmarterandleaner,todoandknowmore.It’spartofadynamicimperative.
Consideringtheremarkableproduct,serviceandoperationalchangesyourcommunitybankhasadoptedinthepastfewyears,thisisnosecrettoyou.Butit’snodifferentforICBAeither.Becauseyourcommunitybankisn’tthesameasitwasadecadeago,ICBAisn’tthesamenationalassociationasitwasthen.Andbecauseyourcommunitybankwon’tbethesamefiveyearsfromnow,ICBAwillchangetootokeeppacewithyourneeds.
Certainly,ICBA’sprinciplesandpurposesdon’tchange.SinceitsfoundingduringtheGreatDepression,ICBAhasremainedtheonlynationaltradeassociationthatexclusivelyservesthenation’scommunitybanks.Wewillonlyservefinancialinstitutionsupholdingthephilosophyandvaluesoftruerelationshipbanking—andnoothers.Becauseofthis,ICBAhasnodividedloyaltiestoserve.Wewillneverbeconflictedaboutwhatwesayordo.Wewillalwaysspeakwithaclearanduncompromisingvoice.
Fromfightingcounterproductiveandunnecessaryregulationsandconcentratedfinancialpower,topreservingthevalueoffederaldepositinsuranceandouruniquelydiversifiedfinancialsystem,timeandagainICBA’sdecisiveadvocacyhasmadeapivotaldifference.Infact,ICBA’spositionasthevoiceofcommunitybanksisundisputedinthenation’scapital.Forthepastsevenyears,asjustoneexample,The Hillnewspaper,aCapitol
Hillinsider’spublication,hasidentifiedICBAasoneofthemosteffectiveandinfluentialtradeassociationsoperatinginthenation’scapital.That’sanimpressivetributetoICBA’sgrassrootsmembershipandthepoliticalcloutofcommunitybankers.
ButICBAknowsthatwecan’trestonourpastsuccesses.Recognizingthedynamicworldinwhichweserveourmembersandinwhichourmemberscompete,ICBAwillalwaysbeseekingnewwaystoworksmarteranddelivermore.OurfocusoncontinualeffectivenessisreflectedinICBA’sexpandingdigitalandsocialmediaadvocacyresourcesthathelpcommunitybankerscommunicatequicklyandinformatively—bothindividuallyandcollectively—tomembersofCongress.OurresponsivenessresultedinCommunityBankerUniversity,ICBA’snewcomprehensiveeducationprogramthatisofferingcommunitybanksandtheiremployeesanexpandingrangeofcareerandprofessionaldevelopmentoptions,fromcollege-levelinstructiontothemosttimelyandaccessibleonlinecourses.OurawarenessforinnovationdrivesICBA’smanyproductandserviceprogramstoexpandandevolvecontinuallyinstepwithnewindustrydemands,opportunitiesandinnovations.
Icouldcitemoreexamples.ButmymainmessageisthatwhileICBA’smissionandcoreprincipleswillneverchange,wewillcontinuetoevolvetoserveourmembers.Bylookingtothefuturewhilekeepinganeyeontoday,ICBAwillcontinuetobeyourcommunitybank’sfirst,mosttrustedandmostdynamicresource.Thisistheonlywaytoservethevital,dynamicandessentialindustrythatiscommunitybanking.
IchallengeAmerica’slawmakersandregulatorstodowhat’srightandtoholdWallStreettothesamelawsandregulationsasMainStreet.Onlythenwillwetrulyhaveaneconomicandregulatorysystemthatisbuiltuponlibertyandjusticeforall.
Continual ChangeWrittenBy:CamdenFine,PresidentandCEOofICBA
Following Mr. FineMore than 1,000 people are following Camden Fine’s tweets @Cam_Fine— are you? Visit www.twitter.com/cam_fine.
FINEPOINTS
“I challenge America’s lawmakersand regulators[...] to hold Wall Street
to the same laws and regulationsas Main Street.”
10 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015
Low NetInterest Income
Communitybankprofitabilitydeclinedsharplyduringthe2007–09financialcrisisandrecession.Profitabilityhasimprovedsincethecrisis,primarilyduetodeclinesinloan-lossprovisions.Netinterestincome—thelargestsourceofrevenueforcommunitybanks—hasremainedflat,however,andisbelowprecrisislevels.Accordingtomanyobservers,includingcommunitybankers,thelowinterestrateenvironmenthasmadeitdifficultforfinancialinstitutionstoearnanadequatespreadonloanssincetherecessionended.Inaddition,bankerssayweaklendingopportunitiesandloandemandhavecontributedtoreducedinterestincome.
Thisarticlesummarizesthefindingsofarecentstudythatdiscussesthefactorsthatmostinfluencecommunitybanknetinterestincomeandtheextenttowhichthesefactorsarecontributingtothecurrentlowlevelsofnetinterestincome.1Additionally,thearticleexamineswhethernetinterestincome(sincethecrisisandrecessionbegan)isabnormalrelativetohistoricalexperience.Theresultsofthestudysuggestthelackofrecoveryincommunitybanknetinterestincomesevenyearsafterthestartofthefinancialcrisisandrecessionisnotunusualgiveneconomicandbankingconditions.
Historical BackgroundCommunitybank2netinterestincomehasvariedsignificantlyoverthepast38years.Inordertocomparehownetinterestincomeperformedduringthemostrecentrecoveryrelativetopreviousrecoveries,weconductedananalysisofnetinterestincomestartingin1977.The1973–75and1981–82recessions,along
withthe2007–09recession,werethethreelongestrecessionssincetheGreatDepression.Figure1(lower left)showstheaveragenetinterestincomeoverthestudyperiod.Duringthestudyperiod,averagenetinterestincomeforcommunitybanksvariedfromahighof4.75percentofaverageassetsinthefirsthalfof1981toalowof3.35percentinthefirsthalfof2013.Netinterestincomeforthesecondhalfof2014was3.41percent.3
What Banking and Economic Factors Affect Net Interest Income?Giventhevariabilityofnetinterestincome,itisnotsurprisingthatthebankingandeconomicfactorsexpectedtomostaffectnetinterestincomealsovariedsignificantlyoverthisperiod.From1977to2014,therewerelargevariations,asmeasuredbystandarddeviations,inthe1-yearU.S.Treasurybillrate,theaverageloan-to-assetratio,andtheaveragenonmaturitydeposit-to-liabilityratio(Table 1, below).Understandinghowthesefactorsshouldaffectnetinterestincomeisimportantforunderstandingiftheresultsfromamodelthatestimatestheireffectsmakesense.
Changesinmarketinterestrates—boththeabsoluteandrelativelevels—haveperhapsthemostsignificanteffectonnetinterestincomeintheshortterm.Wheninterestrateschange,thedegree towhichnetinterestincomechangesdependsonabank’sassetandliabilitymaturitystructureandtheextenttowhichabank’sloananddepositratesresetwhenmarketrateschangepriortomaturity.Abankissaidtobeassetsensitiveifitsassetshaveashortermaturityorrepricefasterthanliabilitiesandisliabilitysensitivewhentheconverseistrue.4Theserelativesensitivitiesimplythataparallelincreaseintheyieldcurveincreasesnetinterestincomeforasset-sensitivebanksanddecreasesnetinterestincomeforliability-sensitivebanks.Theserelationshipsareshowninthefirst(1)columnofTable2(below left).
Theeffectsofchangesintheslopeoftheyieldcurveonnetinterestincomenotonlydependonwhetherabankisassetorliability
Reprinted with permission of Community Banking Connections®. Copyright 2015 Federal Reserve System.
LegalDisclaimer:TheanalysesandconclusionssetforthinthispublicationarethoseoftheauthorsanddonotnecessarilyindicateconcurrencebytheBoardofGovernors,theFederalReserveBanks,orthemembersoftheirstaffs.Althoughwestrivetomaketheinformationinthispublicationasaccurateaspossible,itismadeavailableforeducationalandinformationalpurposesonly.Accordingly,forpurposesofdeterminingcompliancewithanylegalrequirement,thestatementsandviewsexpressedinthispublicationdonotconstituteaninterpretationofanylaw,rule,orregulationbytheBoardorbytheofficialsoremployeesoftheFederalReserveSystem.
Written By: Charles S. Morris, Vice President and Economist, Federal Reserve Bank of Kansas City and Kristen Regehr, Assistant Economist, Federal Reserve Bank of Kansas City
At Community Banks?
What Explains
COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 11
sensitivebutalsoonwhetherthechangeintheslopeisduetoachangeinlong-termorshort-terminterestrates,asshowninthesecond(2)andthird(3)columnsofTable2.Iflong-termratesincreasesothattheyieldcurveissteeper,netinterestincomewillincreaseregardlessofwhetherbanksareassetorliabilitysensitive.Thisisbecausehigherlong-termratesaffectonlynewandmaturinglong-termloansandinvestments,bothofwhichwillearnhigherreturnsandcanbefundedwithshort-termliabilitiesatunchangedrates.
However,whenshort-termratesincrease,whichdecreasestheslopeoftheyieldcurve,theeffectonnetinterestincomedependsonwhetherthebankisassetorliabilitysensitive.Foranasset-sensitivebank,ariseinshort-termrateswillcausenetinterestincometoincreasebecausetheinterestincomefromnewshort-termassetsandcurrentassetsthatrepriceoffshort-termrateswillrisemorethantheinterestexpenseonshort-termdeposits.Incontrast,foraliability-sensitivebank,anincreaseinshort-termrateswilldecreasenetinterestincomebecausetheinterestexpenseonshort-termdepositswillrisemorethantheinterestincomeonnewshort-termandcurrentrepricingassets.
Netinterestincomeisalsoaffectedbythecompositionofassetsandliabilities.Amongabank’sassets,loansgenerallyhaveahigherinterestratethanmarketablesecuritiesdobecauseloanstendtoberiskier.Amongliabilities,non-maturitydepositstendtohavethelowestinterestexpense,partlybecausealargeshareofnon-maturitydepositsgenerallypaylowerinterestratesthancomparabledepositsthatdonotprovidetransactionsservices.Asaresult,netinterestincomeshouldincreaseastheloan-to-assetornon-maturitydeposit-to-liabilityratiosincrease.
What Does Regression Analysis Tell Us About Why Net Interest Income Is So Low?Todeterminewhynetinterestincomehasnotrecoveredinthesixyearssincetheendofthefinancialcrisisandrecession,a“base”regressionmodelisconstructedtoestimatetheinfluenceofvariouseconomicandbankingvariablesonnetinterestincome.Variablesusedinthemodelincludemarketinterestrates(1-and10-yearU.S.Treasuryrates),bankbalancesheetitems(loan-to-assetandnon-maturitydeposit-to-liabilityratiosandinflation-adjustedtotalassets),andmacroeconomicconditions(realGDPgrowthandinflation).
Thebasemodelalsoincludesvariablesthatcapture“interactive”effectsbetweentheinterestrateandbalancesheetvariables.5Theeffectofchangesininterestratesonnetinterestincomemaydependonthesizeofbalancesheetitems.Forexample,if
theloan-to-assetratioisrelativelyhigh,anincreaseininterestratesmaycauseinterestincometorisemorethaniftheloan-to-assetratioislow,becauseloanratesaretypicallyhigherthanthereturnsonotherassets.Thebasemodelassumestherelationshipbetweeneachvariableandnetinterestincomedoesnotchangeovertheentiresampleperiod;thatis,therecentrecessionandexpansionarenotfundamentallydifferentfromanyotherrecessionandexpansioninthesampleperiod.
Resultsfromthebasemodelaresummarizedinthefirst(1)columnofTable3(above right).Thetophalfofthetableshowstheestimatedimmediateeffectsofa100-basis-pointincreaseineachvariableonnetinterestincome,holdingconstantallotherfactorvalues.Becauseachangeinthevariablesgenerallytakestimetofullyaffectnetinterestincome,thetablealsoshowsthecumulativeeffects,whichareshowninthebottomhalfofthetable.Approximately80percentofthecumulativeeffectsoccurwithintwoyearsofachangeinthevalueofafactor,andabout90percentwithinthreeandahalfyears.6
Themainfindingsofthebasemodelindicatethatcommunitybanksareassetsensitiveonaverage.Aparallelincreaseintheyieldcurveandanincreaseinlong-andshort-termratesareestimatedtoincreasenetinterestincome,whichisconsistentwith theasset-sensitivityeffectsinTable2.Forexample,theestimatedimmediateeffectofa100-basis-pointparallelincreaseintheyieldcurveisa5-basis-pointincreaseinnetinterestincome.Asexpected,anincreaseintheloan-to-assetornon-maturitydeposit-to-liabilityratiosincreasesnetinterestincome,whichsupportstheimportanceoflendingandthedepositmixforcommunitybanknetinterestincome.
Thecumulativeeffectsprovideagoodmeasureofthedegreetowhichtheeffectsofthevariablesonnetinterestincomeareeconomicallymeaningful.Ingeneral,wefoundthesizesofthecumulativeeffectstobeeconomicallymeaningful.7Forexample,theestimatedcumulativeeffectofa100-basis-pointpercentage-pointparallelincreaseintheyieldcurveisa14.5-basis-pointincreaseinnetinterestincome,withabout12basispointsoftheincreaseoccurringwithin2years.Thus,thebasemodelresultscombinedwithlowinterestrates,fewerlendingopportunities,and arelativelyflatyieldcurveduringallorsomeoftheyearssincethestartofthefinancialcrisisandrecessionareconsistentwiththepersistentlylownetinterestincomeatcommunitybanks.
Has the Behavior of Net Interest Income Changed Since the Crisis?Toallowforthepossibilitythatthedeclineinnetinterestincome(Low Net Interest Income continued on next page)
Get a closer look at this article’s tables by visiting CBI’s Community Banking News Blog. Find it at cbiaonline.org in the News section.
(Low Net Interest Income continued from previous page)
isoutoftheordinary,asecondmodelisestimated—thefinancialcrisisbreak(FCB)model.TheFCBmodelincludesthesamevariablesasthebasemodelbutallowsforthepossibilitythattheirestimatedeffectsonnetinterestincomechangeafterthestartofthefinancialcrisisinthesecondhalfof2007.
TheFCBmodel’sresultsareshowninthesecond(2)andthird(3)columnsofTable3(previous page, right).Theestimatedeffectsareconsistentwiththebanksbeingassetsensitiveinboththepre-andpost-crisisperiods,andthebalancesheetitemshavetheexpectedpositivesignsinbothperiods.8Thesizesofthecumulativeeffectsgenerallyareeconomicallymeaningfulinbothperiods.
Theestimatedimmediateandcumulativeeffectsappeartohavechangedsomewhatinthepost-crisisperiod.9Someoftheeffectsaresmallerinthepost-crisisperiodandothersarelarger.Thelargestchangesinthecumulativeeffectsarethe1-yearTreasuryrate(+6basispoints)andthe10-yearTreasuryrate(–7.9basispoints).Thus,basedontheseresults,itisunclearwhethertheFCBmodelisbetterthanthebasemodelinexplainingwhycommunitybanknetinterestincomeremainssolow.
OnewaytodetermineiftherelationshipbetweencommunitybanknetinterestincomeandthevariableshaschangedistoseewhetherthebaseorFCBmodelisabetterpredictorofnetinterestincomeinthepost-crisisperiod(Figure 2, top right).10TheFCBmodel(greenline)under-predictscommunitybanknetinterestincomeoverthepost-crisisperiodwitharelativelyconstantgapand,overall,predictsa62-basis-pointdeclinefromthefirsthalfof2007relativetoanactualdeclineof47basispoints.Inotherwords,eventhoughcommunitybanknetinterestincomeisalreadyneara40-yearlow,theFCBmodelpredictsitshouldbe15basispointslower.Althoughthebasemodel(darkredline)generallyover-predictsnetinterestincome,thepredictionsaremorereasonable.Thepredictedvalueofnetinterestincomeinthesecondhalfof2014isjust6basispointsgreaterthantheactualvalue,sotheoveralldeclineinnetinterestincomeoverthepredictionperiodismuchclosertotheactualdeclinethanintheFCBmodel.Asummarymeasureofpredictiveerrorsisthe“root-mean-squareerror”(RMSE).11TheRMSEofthebasemodelis8basispoints,whichismorethan50percentbetterthanthe18basispointsoftheFCBmodel.Thus,thebasemodelappearstoforecastsomewhatbetterthantheFCBmodel,suggestingthebehaviorofnetinterestincomeinthecurrentrecoverymaynotbethatunusualgivenhistoricalexperience.
How Would Net Interest Income Change If Key Variables Return to More Normal Levels?Togetasenseofhowareturntomorenormallevelsofthekeyvariablesmightaffectnetinterestincome,thebasemodelisusedtoestimatewhatnetinterestincomewouldbeifthesevariablesreturnedtotheir2004–06averagelevelsinthefirsthalfof2015andremainedatthoselevelsoverthefollowingtwoyears(Table 4, right).Thetwo-yeartimeframeischosenbecauseapproximately80percentofthecumulativeeffectofchangesinthevariablesonnetinterestincomewouldberealizedbythefirsthalfof2017.Thebasemodelpredictsthatnetinterestincomewouldbe3.79percentinthefirsthalfof2017—a38-basis-pointimprovementfromthecurrent3.41percent—althoughitwouldstillbe19basispointsbelowthe2004–06average.
SummaryThisanalysisshowsthatthelackofrecoveryincommunitybanknetinterestincomeinthesevenyearssincethestartofthefinancialcrisisandrecessionisnotunusualgiveneconomicandbankingconditions.Theregressionresultsfromthebasemodelindicatethatlowinterestrates,fewerlendingopportunities,andarelativelyflatyieldcurveduringallorsomeoftheyearssincethestartofthefinancialcrisis
andrecessionhavecontributedtothecurrentlowlevelsofnetinterestincome.Theseresultsalsosuggest,however,thatlownetinterestincomeisnotthenewnormalforcommunitybanks.Althoughnetinterestincomemaybeunlikelytoreturntothehighlevelsoftheearly1990s,astheeconomyimproves,netinterestincomeislikelytoreboundsignificantly.
NOTES:1SeeCharlesS.MorrisandKristenRegehr,“WhatExplainsLowNetInterestIncomeatCommunityBanks?”EconomicReview,FederalReserveBankofKansasCity,2014SecondQuarter,atwww.kansascityfed.org/~/media/files/publicat/econrev/econrevarchive/2014/2q14morris-regehr.pdfforadescriptionofthedata.2WhiletheFederalReservetypicallydefinescommunitybanksasthosewith$10billionorlessintotalassets,forthepurposeofthisanalysis,communitybanksaredefinedasbankswithtotalassetsof$1billionorlessin2012dollars.3ThedataaresemiannualinsteadofquarterlybecausetheincomeportionoftheConsolidatedReportsofConditionandIncome(commonlyknownastheCallReport)wasfiledonlysemiannuallypriorto1983.4Therepricingeffectshereincludethetotaleffectsthataccountforfactorssuchasfloorsonloanratesandthehistorical“stickiness”ofdepositrateswheninterestratesrise.5Theinteractiveeffectsinthebasemodelaretheinterestratesmultipliedbythelevelsofbalancesheetitems.Thebasemodelalsoincludestwolagsofnetinterestincome,toaccountforthepersistenceinnetinterestincome,andothervariablestocontrolforotherfactorsthataffectnetinterestincome.Forthecompletebasemodelspecificationandestimatedresults,seeMorrisandRegehr(2014).6Table3focusesontheprimaryvariablesofinterestforthisarticle.SeeMorrisandRegehr(2014)foralltheresults.Asnotedinthetext,thebasemodelallowsfortheeffectofinterestratesonnetinterestincometodependonthelevelsofbalancesheetitemsandviceversa.InTable3,theimmediateandcumulativeeffectsofinterestratesandbalancesheetitemsincludeboththedirectandinteractiveeffects.7Formalstatisticaltestsshowthattheestimatedimmediateeffectsofthevariablesaredifferentfromzerowithahighdegreeofconfidence.8Formalstatisticaltestsshowthattheestimatedimmediateeffectsofthevariablesaredifferentfromzerowithahighdegreeofconfidence.ForthecompleteFCBmodelspecificationandestimatedresults,seeMorrisandRegehr(2014).9Itisnotpossibletodetermineifthechangesarestatisticallysignificantfortechnicalreasonsrelatedtotheinteractiveeffectsinthemodel.10Thepredictionsareout-of-samplepredictionsofcommunitybanknetinterestincomefromthesecondhalfof2007tothesecondhalfof2014.Theout-of-samplepredictionsusetheactualvaluesofthevariablesbutthepredictedvaluesoflaggednetinterestincome.11Theroot-mean-squareerrorisdefinedasthesquarerootofthesumofthesquaredpredictionerrors.
COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 13
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August Survey Results at a Glance:• TheRuralMainstreetIndexsinkstogrowthneutralforAugust.• Farmlandpricesdeclineforthe21ststraightmonth,butcash
rentsremainstrongat$263peracre.• Onaverage,bankersexpectfarmlandpricestodeclineby
another5.8percentoverthenext12months.• Housingsalesexpandatahealthypace.
OMAHA,Neb.–TheCreightonUniversityRuralMainstreetIndexfellforAugustfromJuly’stepidreading,accordingtothemonthlysurveyofbankCEOsinruralareasofa10-stateregiondependentonagricultureand/orenergy.
Overall:TheRuralMainstreetIndex(RMI),whichrangesbetween0and100,sanktogrowthneutral50.0from53.4inJuly.
“ThisisthefirstdeclineintheoverallindexsinceMarchofthisyear.Weakerconditionsamongbusinessestieddirectlytoagricultureandenergyaccountedforthedownturninthereading,”saidErnieGoss,JackA.MacAllisterChairinRegionalEconomicsatCreightonUniversity’sHeiderCollegeofBusiness.
Farming and Ranching:ThefarmlandandranchlandpriceindexforAugustincreasedslightlyto32.7fromJuly’s31.4.“Thisisthe21ststraightmonththeindexhasremainedbelowgrowthneutral.But,asinpreviousmonths,thereisagreatdealofvariationacrosstheregioninthedirectionandmagnitudeoffarmlandprices,”saidGoss.
Thismonththesurveyaskedbankerstoprojecttheexpectedchangeinfarmlandpricesoverthenextyear.Onaverage,bankersreportedanestimateddeclineof5.8percentoverthenextyear.LastAugustwhenthesamequestionwasasked,bankersreportedanexpected4.8percentdecrease.
“BankCEOswerealsoaskedtoestimatecurrentcashrentsfornonpasturecropland.Onaverage,bankersreported$263peracre,whichisupfrom$258reportedlastyearatthistime.
Additionally,bankersreportedanincreaseintheshareoffarmlandfinancedfrom74percentlastAugustto77percentthismonth,”saidGoss.
TheAugustfarmequipment-salesindexsanktoaveryweak14.2fromJuly’s17.9,butwasupfromJune’srecordlow12.5.“Withfarmincomeexpectedtodeclineforasecondstraightyear,farmersremainverycautiousregardingthepurchaseofagriculturalequipment,”saidGoss.
Banking:TheAugustloan-volumeindexclimbedto73.0from72.1inJuly.Thechecking-depositindexroseto55.0fromJuly’s53.4,whiletheindexforcertificatesofdepositandothersavingsinstrumentsdroppedto34.0fromJuly’s38.6.
Hiring:Despiteweakercroppricesandpullbacksfrombusinesseswithclosetiestoagricultureandenergy,RuralMainstreetbusinessescontinuetoaddworkerstotheirpayrolls.TheAugusthiringindexincreasedtoastrong63.3from60.3inJuly.“RuralMainstreetbusinessescontinuetohireadditionalworkers,whileruralMainstreetcommunitiesaregrowingjobsatasolidannualpaceofapproximately1percent,primarilyinbusinessesnotlinkedtoagricultureorenergy,”saidGoss.
Confidence:Theconfidenceindex,whichreflectsexpectationsfortheeconomysixmonthsout,slumpedto42.0from46.6inJuly.“Declinesforagriculturalcommodityandenergypricespushedbankers’economicoutlooklowerforthemonth,”saidGoss.
Home and Retail Sales:TheAugusthome-salesindexdeclinedtoastrong70.4fromJuly’s73.3.TheAugustretail-salesindexdecreasedto50.0from53.4inJuly.“HomesalesonRuralMainstreethavebeenveryhealthyoverthelastseveralmonths,”saidGoss.
Eachmonth,communitybankpresidentsandCEOsinnonurbanagriculturallyandenergy-dependentportionsofa10-stateareaaresurveyedregardingcurrenteconomicconditionsintheircommunitiesandtheirprojectedeconomicoutlookssixmonthsdowntheroad.BankersfromColorado,Illinois,Iowa,Kansas,Minnesota,Missouri,Nebraska,NorthDakota,SouthDakotaandWyomingareincluded.ThesurveyissupportedbyagrantfromSecurityStateBankinAnsley,Neb.
Thissurveyrepresentsanearlysnapshotoftheeconomyofruralagriculturallyandenergy-dependentportionsofthenation.TheRuralMainstreetIndex(RMI)isauniqueindexcovering10regionalstates,focusingonapproximately200ruralcommunitieswithanaveragepopulationof1,300.Itgivesthemostcurrentreal-timeanalysisoftheruraleconomy.GossandBillMcQuillan,formerchairmanoftheIndependentCommunityBanksofAmerica,createdthemonthlyeconomicsurveyin2005.
Colorado:Colorado’sAugustRuralMainstreetIndex(RMI)dippedto51.5fromJuly’ssomewhatstronger53.2.Thefarmlandandranchlandpriceindexexpandedto38.4from12.7inJuly.Colorado’shiringindexforAugustadvancedtoahealthy65.5fromJuly’s52.9.
Main Street Economic Survey
C r e i g h t o nU N I V E R S I T Y
Rural Mainstreet Index Falls to Growth Neutral for August:Cash Rents Expand as Farmland Prices Slump
Ernie Goss
COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 15
Illinois:TheAugustRMIforIllinoisdeclinedto50.0from53.6inJuly.Thefarmland-priceindexdroppedto29.5fromJuly’s31.6.Thestate’snew-hiringindexincreasedto62.0fromJuly’s60.5.
Iowa:TheAugustRMIforIowadroppedto53.4fromJuly’s56.6.Iowa’sfarmland-priceindexforAugustroseto44.0fromJuly’s43.9.Iowa’snew-hiringindexforAugustjumpedto67.8from65.4inJuly.
Kansas:TheKansasRMIforAugustslidto49.8fromJuly’s52.3.Thestate’sfarmland-priceindexforAugustincreasedto27.8fromJuly’s24.6.Thenew-hiringindexforthestateexpandedto61.3from57.7inJuly.
Minnesota:TheAugustRMIforMinnesotafellto48.4fromJuly’s53.9.Minnesota’sfarmland-priceindexdeclinedto33.7from37.4inJuly.Thenew-hiringindexforthestatedeclinedtoahealthy58.2.
Missouri:TheAugustRMIforMissourideclinedto43.2from47.1inJuly.Thefarmland-priceindexgrewto29.5fromJuly’s13.9.Missouri’snew-hiringindexdecreasedto51.3fromJuly’s53.4.
Nebraska:TheNebraskaRMIforAugustslumpedto48.4from50.1inJuly.Thestate’sfarmland-priceindexfellto19.6fromJuly’s21.4.Nebraska’snew-hiringindexadvancedto58.0from56.4inJuly.AccordingtoJonSchmaderer,CEOofTricountyBankinStuart,“ThehighlevelofmoistureinJuly-Augusthassubstantiallyreducedthecostofirrigationthisseason.”
North Dakota:TheNorthDakotaRMIforAugustdecreasedto47.1from50.6inJuly.Thefarmland-priceindexfellto24.8from36.5inJuly.NorthDakota’snew-hiringindexdeclinedto60.1fromJuly’s62.4.
South Dakota:TheAugustRMIforSouthDakotaslippedto55.1 fromJuly’s56.7.Thefarmland-priceindexroseto47.2from43.0inJuly.SouthDakota’snew-hiringindexclimbedto69.1from65.0inJuly.
Wyoming:TheAugustRMIforWyomingsankto49.2fromlastmonth’s52.5.TheAugustfarmlandandranchland-priceindexexpandedto47.2fromJuly’s27.9.Wyoming’snew-hiringindexclimbedto60.9fromJuly’s59.0.
Tables 1 and 2 summarize survey findingsNext month’s survey results will be released on the third Thursday of the month, September 17.
Table 1: Rural Mainstreet Economy One Year Ago and Last Two Months: (index > 50 indicates expansion)
August2014
July2015
August2015
Area economic index 48.3 53.4 50.0
Loan volume 73.4 72.1 73.0Checking deposits 46.7 53.4 55.0
Certificates of deposit and savings instruments 32.5 38.6 34.0Farmland prices 41.4 31.4 32.7Farm equipment sales 25.5 17.9 14.2Home sales 59.5 73.3 70.4Hiring 56.8 60.3 63.3Retail business 47.5 53.4 50.0Confidence index (area economy six months out) 39.9 46.6 42.0
Table 2: The Rural Mainstreet Economy, August 2015Percentage of bankers reporting
Less than 10% 10% - 19% 20% - 32% 33% - 50% 51% - 75%
Whatpercentoffarmlandpurchasesinyourareadoyouestimatearecashsales(notfinanced)? 12.2% 28.6% 38.8% 16.3% 4.1%
Decline morethan 12%
Decline6% - 12%
Decline1% - 5%
NoChange Increase
Overthenextyear,whatchangeinfarmlandpricesdoyouexpectinyourarea? 6.1% 40.8% 38.8% 14.3% 0.0%
Below $100 $100 - $199 $200 - $299 $300 - $400 Above $400
Whatistheaverageannualcashrentperacreforcropland(notpasture)inyourarea? 2.0% 20.8% 47.9% 27.1% 2.2%
Follow Ernie Goss on Twitter: www.twitter.com/erniegossFor historical data and forecasts, visit: www2.creighton.edu/business/economicoutlook
16 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015
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COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 17
It’sbeenmorethan30yearssincethefirstbankofferedfinancialproductsandservicestoitscustomersthrougharelationshipwithathirdparty
brokerdealer.Sincethen,regulationshaveevolvedtosimplifythesenetworkingarrangements,andthousandsofbankshavecapitalizedbyofferingtheseservicestotheircustomers.Doingsoaddstothebank’snoninterestincomebyluringtheircustomersbackfromthelargestbanks,brokeragefirms,insuranceagentsandfinancialplannersacrosstheU.S.
Withcontinuedcompressedspreads,thesearchfornoninterestincometopsU.S.communitybankwishliststhisyear.Suchfocusmakessense.Forexample,areviewofTexas-basedcommunitybanksbetween$100millionand$5billioninassetsrevealedthatthosewiththebestperformance–returnonaverageassets(ROAA)exceeding1percent–averagednoninterestincomeasapercentofaverageassetsof1.12percent.Thisiscomparedtoanaverageofonly0.69percentforthosebankswithROAAbelow1percent.1The62percentdifferenceisasignificantperformancedriverandislikelyapplicabletootherstatesandregionsaswell.
Investments Programs Mean All Around SuccessOneofthemostsuccessfulmethodstomeetandexceedincreasednoninterestincomegoalsistoimplementaninvestmentprogram.Notonlydowell-managedprogramsgeneratenoninterestincome,theyalsostrengthenclientrelationships.Infact,studiesshowthatcustomerswithinvestmentaccountsthroughtheirprimaryfinancialinstitutionare:
•58percentmorelikelytohaveacreditcard•122percentmorelikelytohaveafirstmortgage•613percentaremorelikelytohaveasecondmortgagethroughthatinstitutionthanotherhouseholds2
Householdsthatowninvestmentproductspurchasedthroughtheirprimarybankdonotcannibalizebankdeposits.Infact,thesecustomersareamongthebank’smostprofitablerelationshipsoverallbecauseoftheirlargerthanaveragecheckingandsavingsaccountbalancesandtheirincreasedlikelihoodtoutilizecreditproducts.
Investmentaccountownersmaintaina38percentlargeraveragecheckingaccountbalancethanthosehouseholdswithoutaninvestmentrelationship.Averagesavingsaccountbalancesareevenmoretellingwithanaverageof$28,000insavings,or140percentmorethanotherhouseholds.
Then Why Don’t More Bank’s Use Them?Whilemanyfinancialinstitutionsenjoypositiveresultsfromin-houseinvestmentprograms,morethan50percentofthebanksinthestatehavenotyetimplementedtheseofferings.Perceivedregulatoryandcompliancerelatedconcernsstilltopthelistofreasonswhyfinancialservicesarenotmorewidelyadopted.Belowareafewfactstohelpminimizeperceivedregulatoryconcernsincomparisontoreality.
PERCEPTION: We’re a community bank. A broker dealer doesn’t understand our needs. Our institution is very different compared to a big-name bank.
FACT:Manyconcernsareeasilyaddressedthroughagreatrelationshipwithabrokerdealerwellversedandspecializinginthecommunitybankbrokerageindustry.
PERCEPTION: I don’t have the time, resources or internal expertise to supervise an investment program. They’re just too much work and outside of our wheelhouse.
FACT:Brokerdealersareresponsibleforsupervisingallinvestmentrelatedactivitiesonbankpremisesandprovidethebanksupportivesolidindustryexpertise.
PERCEPTION: We’re concerned about the risks involved with a third party financial program and the associated responsibility.
FACT:Brokerdealersmustfinanciallyindemnifythebankforanyactionresultingfromthesaleofnon-depositinvestmentproducts.
PERCEPTION: How do we know the broker isn’t all about the “sell?” How do we know they’re going to do what is best for our customers? As a community bank, our relationships with them are very important to us.
(Investment Programs continued on next page)
Written By:David DoerflingerRegional Director
Investment Professionals, Inc.
Perception vs. Fact: The TruthBehind Investment Programs
Source: Kehrer Bielan Research & Consulting, LLC
Source: Kehrer Bielan Research & Consulting, LLC
18 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015
Written By: Jim Reber, President & CEO - ICBA Securities
(Investment Programs continued from previous page)
FACT:Likebanks,brokerdealersarehighlyregulatedbytheFinancialIndustryRegulatoryAuthority(FINRA),theSecuritiesandExchangeCommission(SEC)andstatesecuritiesadministrators,withscrutinyfocusedprimarilyuponsuitabilityofinvestmentsbasedonindividualcustomerneeds.Mostbank-focusedbrokerdealershaveexcellentcompliancerecordsandworkhardtomaintaintheirgoodstanding,puttingthemonthesamesideofthetablewiththeirbankpartnerswhenitcomestocomplianceandcaringforthecustomer.
The Right ChoiceSelectinganexperiencedbrokerdealertopartnerwithisparamountwhenbeginninganinvestmentprogramastheimplementationprocessandoperationoftheprogramrequiresattentionfromprofessionalsthatareexperiencedinthefollowing:
•ProgramStructure•Recruiting•Compensationdesign•Territorydesign•Complianceandoversight•Internalandexternalpromotionoftheprogram
Withsomuchoftheprogram’ssuccesstiedtotheadvisor(s),it’snosurprisethatupgradingoraddingadvisorsmaybeanimportantpartofthesolutionandonethatshouldbelefttoyourpartner.Chooseafirmthatnotonlyinterviewscandidatesandconductbackgroundchecks,butalsohelpsinproactivelycallingthepotentialadvisorsinthecommunity.Somefirmsalsogivestheirpartneringbankthefreedomtodecidetheprogramstructurethatbestsuitsitsneeds–whetherthatmeanstheadvisorisemployedbythebrokerdealerorthefinancialinstitutionitself.Additionally,somefirmsprovidecompensation,financialprojectionsandstructuralguidance,includingsampleagreements,toinsurefaircompensationtoboththebankandtherep.
Whiletheintricaciesofoperatingasuccessfulfinancialprogrammayinitiallyappearchallengingoroverwhelming,thetopbrokerdealerdedicatedtothecommunitybankchannelcontinuallyhonerepeatableblueprintsforsuccess,allowingbankstoprovidethesevaluableservicestotheircustomers,whilegeneratingmuch-neededanddesirednoninterestincome.Additionally,withnoregulatorybarrierstoentryandarelativelyspeedyimplementationprocess,fewbetteroptionsexistforbankstoenhancetheircustomerrelationshipsandincreaseprofitability.
Ifyou’venotconsideredandinvestmentprogramforyourcustomers,orifyouhaveand/orcurrentlyrunanunsuccessfulprogram,rethinkyouroptions.Investmentprogramsareanuntappedopportunitytoincreaseyourfinancialinstitution’snoninterestincomeeasilyandstrengthenyourrelationshipsalongtheway.
Sources:1.SNLFinancial,LC;2.KehrerBielanResearch&Consulting,LLC
David Doerflinger is a Regional Director for Investment Professionals Inc (IPI). For more information on this CBI Endorsed Member, visit www.invpro.com.
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