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Annual Reviews of Commercial Credits

Written by admin on . Posted in Uncategorized.

What is the overall condition of your commercial loan portfolio? Do you focus on net charge-offs? Delinquencies? Financial statement exceptions to policy? Number and level of TDRs and non-accruals? The percent of the ALLL to total loans? While all of these broad measures can be helpful, the number and nature of grade changes coming from internal annual reviews are likely to be timelier and more accurate than all of the other measures combined.

Does your credit policy contain specific criteria describing relationships which must receive annual reviews? If so, have you recently evaluated whether that level remains appropriate for your portfolio today? The commercial annual review threshold should be set at a level where the required reviews will cover at least 50% of commercial exposures. Each bank should do a sort of the commercial portfolio and determine what level of exposure will yield the desired coverage ratio. The annual review requirements should differ from the Watch List or Special Asset requirements as the annual reviews should be separate from those assets already identified with some level of weakness.

Now that you have set an annual review requirement, what elements of a credit analysis should be completed? Although the ultimate goal is to determine the accuracy of the risk rating, regulators will be looking for the robustness of the annual review in order to “sign off” or accept the annual review results. In addition to providing executive management and the board with timely and accurate results, a solid and meaningful annual review process can help to build confidence in your systems with the regulators and potentially allow for a more efficient third-party loan review.

Minimum requirements for annual review activities should be built into the loan or credit policies so that management and the board can demonstrate to regulators that they are determined to ensure risk ratings and, therefore, that the ALLL and criticized and classified reporting is accurate.

The annual review procedures should include the following:

  • Detail of the relationship being reviewed including borrower, guarantors, SBA or other guarantees, and note numbers included.
  • Update of all borrower/co-borrower financial information used in the original approval or the latest renewal which would include spreads, debt coverage calculations, loan-to-value calculations, borrowing base analysis, etc.
  • Update of all guarantor financial information including a new complete and signed personal financial statement, most recent tax returns and, for individuals, an updated credit report.
  • A statement of how the account has been handled since the previous annual review (or approval) including any delinquency of payment, financial information, or supporting information such as insurance, borrowing base reporting, etc.
  • In most cases, site visits by the loan officer or relationship manager or other representative of the company should have occurred since the previous annual review or approval. For CRE loans, the documentation of the visit should include perceptions by the representative of the condition of the property, occupancy trends, whether or not any deferred maintenance was noted, and if there were any changes in the neighborhood. For all credits, the representative should also use this visit to become updated on any material changes in the customer base, management, operating personnel, market conditions, condition of equipment or other fixed assets, and any other information that would help to understand the customer.
  • An update of any approval conditions and whether the borrower is maintaining those conditions, including any promises of deposit accounts, financial reporting, property improvements, and compliance with any financial or other covenants.
  • A confirmation that the existing risk rating is accurate or recommendations to change the risk rating, up or down, and the factors that the change is based on.

The financial institution that is covering 50% of its commercial portfolio with robust and timely annual reviews every year should provide executive management and the board with sufficient information to understand the level and direction of credit risk and whether these are in accordance with the desired risk appetite.

For more information on this article or on how Young & Associates, Inc. can assist your institution in this area, please contact Dave Reno, Director of Lending and Business Development, at 330.422.3455 or dreno@younginc.com.

Dealing With Pandemic Disruption

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For years banks have had pandemic policies, but never really thought the day would come when it would represent more than another examiner-required policy. Then came COVID-19, and in a matter of days, our world changed.

Managing Bank Policies and Procedures

When we teach in live seminars, we always ask, How many of you believe that your policies are up to date? That always gets some hands, but not 100 percent of attendees. Then we ask, How many of you believe that your procedures are up to date? Seldom does anyone raise their hand. These two situations are revealing.

Keeping policies current is the easier of the two. But many banks rubber stamp policies that could be much more effective. If it is a Regulation B policy, it usually follows the regulation and indicates that the bank intends to comply. That is fine for that type of policy. But other policies, notably operations and loan policies, need to do more than restate a regulation they need to be a document that can be read and used. And, a pandemic policy needs to cover a wide range of subjects and issues.

It might be time to review these types of policies and add significant language as to how you will address situations such as we have experienced lobbies closed or restricted, limited staff, staff working from home, and the same job to be completed. At a minimum, these policies should address:

How jobs are done in an off-site world

How electronic solutions are to be used

Safeguards that must be used to protect customer data

What types of paper documents can be used at home by staff working off site

Proper disposal and the safekeeping of any documents that are off site

Other protections, such as how the computers being used at home are protected from intrusion

With a little brainstorming, we are sure that you can add to this list.

Procedures are more difficult to maintain. A consultant from our company was recently in a bank and was examining procedures. Most of the procedures could be summed up as Bill takes care of that. As long as Bill is there, things probably work well. But if Bill is out sick, is working from home, on vacation, or no longer there, how does someone accomplish the task?

Procedures are always changing. It is far too easy to tell the three people that need to know about the change and then make a mental note to update the procedures someday. That elusive someday often never materializes. We believe that each bank should have a formal procedures review at least annually, and for some areas, maybe more often. For many banks, the inadequate procedure manuals that they have will not offer sufficient information for anyone to complete a task correctly. And with the staff more scattered, this can really complicate the situation.

The Future

Many banks have switched to imaging all files and documents. The banks that have made that decision generally are in a little better shape for off-site work, as it is easier to send employees home and still get the work done in a timely manner. If your bank has not made the transition to electronic files, this may be your cue to consider the advantages of this technology. We have talked to numerous banks recently that in the past have said NEVER to imaging only to discover that never may not have been the right answer.

As the world becomes more electronic, and the cost of maintaining offices and buildings continues to increase, this may also be a time to reconsider the locations from which employees work. This may be especially critical if your brick and mortar buildings are getting close to capacity. Many tasks, with the right policies, procedures, equipment, and software, can easily be done from home, saving wear and tear on your building, perhaps reducing occupancy costs, and maybe, as a side benefit, resulting in happier and more productive employees.

Of course, everyone working from home is not going to be effective for banks. But it can be a great tool. For instance, you have a long-term excellent employee who does a job that could be done from home. While they are currently working in the office, their spouse gets transferred 300 miles away. In the past, that probably meant a resignation. But, properly managed, there may be no reason why you could not retain that employee by just letting them work from home even if that home is not local.

The authors of this article are most aware of compliance officers. Over the last several years, we have seen more and more situations where compliance officers work from home, with some compliance officers going south for the winter and continue to work remotely, etc. In our company, none of our compliance consultants work in our office, even in normal times.

Conclusion

So we encourage you to reimagine the bank to the extent possible. Face-to-face customer contact employees need to be local, but much or the rest of the staff may not really need to be in the building, at least not every day. We encourage you to use this mind set for the future and let it help your bank thrive.

For more information, contact Bill Elliott, Director of Compliance Education, at bille@younginc.com or 330.422.3450, or William Showalter at wshowalter@younginc.com or 330.422.3473.

Mergers & Acquisitions Expected to Rebound in 2021

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By: Bob Viering, Director of Management
April 2021

The Covid-19 pandemic brought M&A activity for community banks and credit unions to a halt in 2020. All expectations for 2021 are that M&A activity is likely to pick up significantly. Much of this activity is due to organizations that had planned to sell or start acquiring in 2020 to make up for lost time, but it will also be due to the changes in the industry as a result of the pandemic.

Electronic and mobile banking adoption accelerated as financial institutions closed branches or provided limited access during the pandemic. Today, not having a digital banking platform (internet and mobile apps) is no longer an option. Financial institutions need to re-assess branch networks in light of how customers/members bank today. Among the reasons that will drive many organizations to sell are:

  • Long-term impact of low interest rates, today’s compressed margin, and the future impact of rising rates
  • Cost/Liability of data security
  • Regulatory compliance costs
  • Lack of management succession

Conversely, those organizations that have made the technology infrastructure investments, have staffing in place that can succeed in this volatile time, and are comfortable thinking outside the traditional banking box have great opportunities.

How We can Assist
Young & Associates, Inc. has been assisting banks and credit unions for over 43 years and have assembled a team of qualified professionals that can assist you in your acquisition or help you prepare to sell your organization and maximize your return.

The industry is fortunate in that we have many excellent investment bankers, law firms, and accounting firms that provide great advice on the pricing, structure, and regulatory requirements. But as anyone who has been through an acquisition or merger can tell you, it is the knowledge you gain during due diligence and post-merger integration that, in the end, will determine if the transaction was successful. Our services will supplement the services acquired from your investment banker, law firm, and accounting firm.

While due diligence and post-merger integration can be done by your staff, our breadth of knowledge, gained from decades of working for hundreds of banks and credit unions, brings a broader perspective. We deal with many of these issues regularly and can often be more efficient. We also understand that time is of the essence for due diligence and will make your engagement a priority to be completed in the time needed.

Due Diligence Assistance

Loan Due Diligence: We can provide a timely assessment of the underwriting, management, and quality of the target’s loan portfolio. We have experts from all disciplines of lending, including ALLL analysis and credit process. We will help you understand the culture of the organization you are acquiring.

Interest Rate Risk and Liquidity Management Due Diligence: We can assist you in determining the target institution’s level of interest rate and liquidity risk. This can then help you as you consider the combined organization’s level of risk. This will help you answer the following question: “Does the combined organization fit within your risk ‘comfort zone?'”

Compliance Due Diligence: Many aspects of compliance, such as Fair Lending and BSA/AML, will become the acquirer’s problem if there was an issue prior to acquisition. Having the target’s compliance program reviewed prior to closing can help you understand the degree of compliance risk you will be assuming.

IT Due Diligence: This is an often overlooked but critical piece of information to understand how well or what IT-related issues a target bank may have that will need to be addressed post-acquisition.

Strategic Planning: We can help you assess how the acquisition will fit into your strategic direction. If your strategic plan involves potential acquisitions, have you put a plan/process in place to prepare for it, or will you put it together on the fly if an acquisition comes along? Analyzing how the target fits with your culture and your strategic direction is one of the most important aspects of a successful acquisition.

Succession Planning: While much of the attention in an acquisition analysis is on the financial aspects of the transaction, the quality and depth of the human resources of the target institution are the drivers of the target’s current success or challenges. We can assist you with reviewing the target’s succession plan or help you craft a new one for the combined organization.

Interagency Bank Merger Application Assistance

We can assist you with the delineation of the relevant geographic markets, evaluation of competitive factors in the proposed transaction, CRA assessment area data and mapping, demographic information, business environment data, information on traffic patterns, and other relevant market information.

We can also help you craft your business plan that is a required part of the application.

Post-Acquisition Integration
Post-acquisition integration is the key to whether your merger/acquisition is successful. You will have just spent many millions of dollars to buy an organization. Buying the organization is not the end result but the beginning of many months and years of hard work to get the return you expect.

There are several ways we can help you achieve the results you expect from the transaction:

  • Employee and Customer Communications
  • Strategic, Capital, and Succession Plan Updates, based on the combined organization
  • Re-assessment of your Branch Network. Does it make sense to consolidate any branches, especially given the changes that the pandemic has brought along to digital banking adoption?
  • Periodic Loan Review and Compliance Review will allow you to assess the quality of results at both the overall organization and the acquired organization.
  • Analysis of Workflow and Staffing of the combined organization
  • Assessment of your Human Resources Management. Retaining key members of the acquired organization’s staff is often the biggest determinant of future success. This is especially true for your frontline commercial/ag/private bankers and key deposit/cash management personnel who are often the day-to-day face of the organization for your largest customers.

These are just some of the ways Young & Associates can work with you to have a long-term successful acquisition, based on your unique needs. Contact us today for more information on how we can assist you with your M&A efforts.

About Young & Associates, Inc.
Young & Associates, Inc. has provided consulting, training, and practical products for community financial institutions for over 43 years. We strive to provide the most up-to-date solutions for our clients’ needs, while remaining true to our founding principles and goals — to ease the management of your organization, reduce the regulatory burden, improve your bottom line, and increase shareholder value.

To learn more about Young & Associates, Inc. and how we can assist your organization, visit our website or contact Dave Reno, Director — Lending and Business Development.

www.younginc.com
Email: dreno@younginc.com
Phone:330.422. 3455

Testing Your Balance Sheet’s Capacity to Weather the Pandemic and Embrace New Opportunities

Written by admin on . Posted in Management & Planning, Uncategorized.

By: Martina Dowidchuk, Senior Consultant and Director of Management Services

As we adjust to the new reality and navigate through the immediate operational challenges, long-term planning comes back into focus. What is the bank’s balance sheet capacity to weather the economic downturn, absorb the potential losses, and leverage the existing resources to support households and businesses affected by the pandemic?

Community banks, with their relationship-based business models, are uniquely positioned to support their markets by using their in-depth knowledge of the local economies and the borrowers’ unique situations to provide timely and individualized assistance for impacted customers. This is an opportunity to facilitate a return to economic stability and be the source of information and communication, but also to enhance customer relationships and trust over the long term.

Unlike during the 2008 financial crisis, most banks have stronger risk infrastructure, larger capital buffers, and higher liquidity reserves. How long the existing safeguards will last depends on the length and severity of the downturn. As we continue to work surrounded by an array of unknowns, there are planning steps that can be taken now to get in front of problems and position the bank to leverage its strengths to support the local communities and shareholders.

Capital Plan Review – How much capital can be deployed into new credits? How much stress can we absorb? 

Considering the abrupt economic changes, the bank’s risk-specific minimum capital level requirements should be revised to reflect the likely changes in the levels and direction of credit risk, interest rate risk, liquidity risk, and others. The recently issued regulatory statement relaxing capital requirements includes modifications related to the amount of retained income available for distribution, allowing banking organizations to dip into their capital buffers and to continue lending without facing abrupt regulatory restrictions. Institution-specific capital adequacy calculations can also provide a basis for the decision whether or not to opt in to using the community bank leverage ratio, which has been temporarily reduced from 9 percent to an 8 percent minimum threshold.

Stress testing the capital against credit losses, adverse interest rate environment, and other earnings challenges can help identify potential vulnerabilities and allow management to proactively prepare and protect the bank from losing its well-capitalized status should the simulated stress scenarios unfold. The sooner the problems are identified, the more flexibility you have in developing a solution. Every bank should have an up-to-date capital contingency plan to be implemented if the capital levels approach the minimums needed for a well-capitalized bank designation.

The review of the minimum capital requirements and the stress tests can provide valuable insights regarding not only the bank’s ability to survive a recession, but also to estimate the amount of “excess” capital that can be used to support additional lending. Many banks can justify lower capital requirements once they customize the capital adequacy calculations to their specific risk profiles. If additional asset growth can be supported from the capital perspective, the plan should be further evaluated from the liquidity standpoint.

Liquidity Plan Review – Are the existing liquidity reserves sufficient to support additional loan growth and the potential funding pressures?

Liquidity plan review needs to go hand in hand with capital planning. While most community banks have strong liquidity positions, the scale and speed of the coronavirus shock have raised concerns that credit drawdowns, sudden declines in revenues, and a higher potential for credit issues will strain bank balance sheets. Funding pressures may be building because of uncertainty about the amount of damage that the coronavirus might cause. Banks may be experiencing deposit drains from customers experiencing financial hardship or seeing withdrawals driven by fear. On the other hand, the volatility of the stock market and the uncertainty may drive the “flight to safety” and increases in bank deposits.

Changes in the business strategies and the results of the capital stress tests should be incorporated in the liquidity plan and the projected cash flows should be stress tested. Banks need to plan for ways to meet their funding needs under stressed conditions. The simulations should cover both short-term and prolonged stress events using a combination of stress constraints that are severe enough to highlight potential vulnerabilities of the bank from the liquidity perspective. The analysis should show the impact on both the on-balance sheet liquidity and the contingent liquidity, while taking into consideration changes in the available collateral, collateral requirements, limitations on access to unsecured funds or brokered deposits, policy limits on the use of wholesale funding, and other relevant stress factors.

Credit Risk Assessments – What is the loan loss potential?

Credit risk has the highest weight among the risk factors affecting capital and it is the biggest unknown in today’s environment. The assessments will need to shift to be more forward looking rather than solely relying on past performance. The stress tests will be most useful when customized to reflect the characteristics particular to the institution and its market area. Banks need to understand which segments of their portfolio will be the most affected and perform targeted assessments of the potential fallout, along with the review of other segments that may have had weaker risk profiles before the pandemic, higher concentrations of credit, or those segments that are significant to the overall business strategy. The estimates might be a moving target in the foreseeable future; however, once the framework is set up, the analyses can be regularly repeated to determine the current impact. The results of these credit risk assessments will provide a valuable input for fine-tuning the capital plan and assessing adequacy of liquidity reserves, as well as for formulating strategies for working with the affected borrowers and extending new credit.

Measuring Impact of Plans

As we face abrupt changes in the strategic focus, taking the time to diagnose strengths and weaknesses, to understand the range of possible outcomes of the new business strategies, and to line up contingency plans ready to be invoked as the picture get clearer is a worthwhile exercise. Young & Associates, Inc. remains committed to assist you in every step of the planning process. Our modeling and stress testing tools will allow you to generate valuable support information for your decision making, ensure regulatory compliance, and be proactive in addressing potential problems and positioning for new opportunities. For more information, contact Martina Dowidchuk at mdowidchuk@younginc.com or 330.422.3449.

HMDA Data for 2018 Released

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By: William J. Showalter, CRCM, CRP, Senior Consultant

The Federal Financial Institutions Examination Council (FFIEC) recently announced the availability of data for the year 2018 regarding mortgage lending transactions at 5,683 financial institutions covered by the Home Mortgage Disclosure Act (HMDA) in metropolitan statistical areas (MSA) throughout the nation.

The newly available HMDA data include disclosure statements for each covered financial institution, aggregate data for each MSA, nationwide summary statistics regarding lending patterns, and the Loan Application Register (LAR) submitted by each institution to its supervisory agency by March 1, 2019, modified for borrower privacy. This release includes loan-level HMDA data covering 2018 lending activity that were submitted on or before August 7, 2019.

The FFIEC prepares and distributes these data products on behalf of its member agencies – the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Consumer Financial Protection Bureau (CFPB) – and the Department of Housing and Urban Development (HUD).

The HMDA loan-level data available to the public will be updated, on an ongoing basis, to reflect late submissions and resubmissions. Accordingly, loan-level data downloaded from https://ffiec.cfpb.gov/ at a later date will include any such updated data. An August 7, 2019 static dataset used to develop the observations in this statement about the 2018 HMDA data is available at https://ffiec.cfpb.gov/data-publication/. In addition, beginning in late March 2019, Loan/Application Registers (LARs) for each HMDA filer of 2018 data, modified to protect borrower privacy, became available at https://ffiec.cfpb.gov/data-publication/.

Data Overview
The 2018 HMDA data use the census tract delineations, population, and housing characteristic data from the 2011-2015 American Community Surveys. In addition, the data reflect metropolitan statistical area (MSA) definitions released by the Office of Management and Budget in 2017 that became effective for HMDA purposes in 2018.

For 2018, the number of reporting institutions declined by about 2.9 percent from the previous year to 5,683, continuing a downward trend since 2006, when HMDA coverage included just over 8,900 lenders. The decline reflects mergers, acquisitions, and the failure of some institutions.

The 2018 data include information on 12.9 million home loan applications. Among them, 10.3 million were closed-end, 2.3 million were open-end, and, for another 378,000 records, pursuant to partial exemptions in the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), financial institutions did not indicate whether the records were closed-end or open-end.

A total of 7.7 million applications resulted in loan originations. Among them, 6.3 million were closed-end mortgage originations, 1.1 million were open-end line of credit originations, and, pursuant to the EGRRCPA’s partial exemptions, 283,000 were originations for which financial institutions did not indicate whether they were closed-end or open-end. The 2018 data include 2.0 million purchased loans, for a total of 15.1 million records. The data also include information on approximately 177,000 requests for preapprovals for home purchase loans.

The total number of originated loans decreased by about 924,000 between 2017 and 2018, or 12.6 percent. Refinance originations decreased by 23.1 percent from 2.5 million, and home purchase lending increased by 0.3 percent from 4.3 million.

A total of 2,251 reporters made use of the EGRRCPA’s partial exemptions for at least one of the 26 data points eligible for the exemptions. In all, they account for about 425,000 records and 298,000 originations.

Demographic Data
From 2017 to 2018, the share of home purchase loans for first lien, one- to four-family, site-built, owner-occupied properties (one- to four-family, owner-occupied properties) made to low- and moderate-income borrowers (those with income of less than 80 percent of area median income) rose slightly from 26.3 percent to 28.1 percent, and the share of refinance loans to low- and moderate-income borrowers for one- to four-family, owner-occupied properties increased from 22.9 percent to 30.0 percent.

In terms of borrower race and ethnicity, the share of home purchase loans for one- to four-family, owner-occupied properties made to Black borrowers rose from 6.4 percent in 2017 to 6.7 percent in 2018, the share made to Hispanic-White borrowers increased slightly from 8.8 percent to 8.9 percent, and those made to Asian borrowers rose from 5.8 percent to 5.9 percent. From 2017 to 2018, the share of refinance loans for one- to four-family, owner-occupied properties made to Black borrowers increased from 5.9 percent to 6.2 percent, the share made to Hispanic-White borrowers remained unchanged at 6.8 percent, and the share made to Asian borrowers fell from 4.0 percent to 3.7 percent.

In 2018, Black and Hispanic-White applicants experienced higher denial rates for one- to four-family, owner-occupied conventional home purchase loans than non-Hispanic-White applicants. The denial rate for Asian applicants is more comparable to the denial rate for non-Hispanic-White applicants. These relationships are similar to those found in earlier years and, due to the limitations of the HMDA data, cannot take into account all legitimate credit risk considerations for loan approval and loan pricing.

Government-backed Lending
The Federal Housing Administration (FHA)-insured share of first-lien home purchase loans for one- to four-family, owner-occupied properties declined from 22.0 percent in 2017 to 19.3 percent in 2018. The Department of Veterans Affairs (VA)-guaranteed share of such loans remained at approximately 10 percent in 2018. The overall government-backed share of such purchase loans, including FHA, VA, Rural Housing Service, and Farm Service Agency loans, was 32.0 percent in 2018, down slightly from 35.4 percent in 2017.

The FHA-insured share of refinance mortgages for one- to four-family, owner-occupied properties decreased slightly to 12.8 percent in 2018 from 13.0 percent in 2017, while the VA-guaranteed share of such refinance loans decreased from 11.3 percent in 2017 to 10.2 percent in 2018.

New Data
The 2018 HMDA data contains a variety of information reported for the first time. For example, the data indicated that approximately 424,000 applications were for commercial purpose loans and approximately 57,000 applications were for reverse mortgages.

In addition, among the 12.9 million applications reported, 1.3 million included at least one disaggregate racial or ethnic category. For approximately 6.3 percent of applications, race and ethnicity of the applicant were collected on the basis of visual observation or surname. The percentage was slightly higher for sex at 6.5 percent.

For the newly-reported age data point, the two most commonly reported age groups for applicants were 35-44 and 45-54, with 22.7 and 22.4 percent of total applications, respectively. Just under 3.0 percent of applicants were under 25 and just under 4.0 percent of applicants were over 74.

Credit score information was reported for 73.1 percent of all applications. Equifax Beacon 5.0, Experian Fair Isaac, and FICO Risk Score Classic 04 were the three most commonly reported credit scoring models at 22.8 percent, 18.8 percent, and 18.2 percent of total applications, respectively. For originated loans, the median primary applicant scores for these three models were between 738 and 746. This compares to medians ranging from 682 to 686 for denied applications.

Debt-to-income ratio (DTI) was reported for 75.3 percent of total applications. Approximately 45.1 percent of applications had DTIs between 36.0 percent and 50 percent, with 7.0 percent of applications with less than 20 percent, and 7.1 percent with greater than 60 percent.

Loan Pricing Data
The 2018 HMDA also contains additional pricing information. For example, the median total loan costs for originated closed-end loans was $3,949. For about 42.5 percent of originated closed-end loans, borrowers paid no discount points and received no lender credits. The median interest rate for these originated loans was 4.8 percent. The median interest rate for originated open-end lines of credit excluding reverse mortgages was 5.0 percent.

The HMDA data also identify loans that are covered by the Home Ownership and Equity Protection Act (HOEPA). Under HOEPA, certain types of mortgage loans that have interest rates or total points and fees above specified levels are subject to certain requirements, such as additional disclosures to consumers, and also are subject to various restrictions on loan terms. For 2018, 6,681 loan originations covered by HOEPA were reported: 3,654 home purchase loans for one- to four-family properties; 448 home improvement loans for one- to four-family properties; and 2,579 refinance loans for one- to four-family properties.

Using the Data
The FFIEC states that HMDA data can facilitate the fair lending examination and enforcement process and promote market transparency. When federal banking agency examiners evaluate an institution’s fair lending risk, they analyze HMDA data in conjunction with other information and risk factors, in accordance with the Interagency Fair Lending Examination Procedures. Risk factors for pricing discrimination include, but are not limited to, the relationship between loan pricing and compensation of loan officers or mortgage brokers, the presence of broad pricing discretion, and consumer complaints.

The HMDA data alone, according to the FFIEC, cannot be used to determine whether a lender is complying with fair lending laws. While they now include many potential determinants of creditworthiness and loan pricing, such as the borrower’s credit history, debt-to-income ratio, and the loan-to-value ratio, the HMDA data may not account for all factors considered in underwriting.

Therefore, when the federal banking agencies conduct fair lending examinations, including ones involving loan pricing, they analyze additional information before reaching a determination regarding institutions’ compliance with fair lending laws.

Obtaining and Disclosing HMDA Data
In the past, HMDA-covered lenders had to make the HMDA disclosure statements available at their home and certain branch offices after receiving the statements. Now, lenders have only to post at their home offices, and other offices in MSAs a written notice that clearly informs those interested that the lender’s HMDA disclosure statement may be obtained on the Consumer Financial Protection Bureau’s website at www.consumerfinance.gov/hmda.

In addition, financial institution disclosure statements, MSA and nationwide aggregate reports for 2018 HMDA data, and tools to search and analyze the HMDA data are available at https://ffiec.cfpb.gov/data-publication/. More information about HMDA data reporting requirements is also available at https://ffiec.cfpb.gov/.

More information about HMDA data reporting requirements is available in the Frequently Asked Questions on the FFIEC website at www.ffiec.gov/hmda/faq.htm. Questions about a HMDA report for a specific lender should be directed to the lender’s supervisory agency.

Capital Market Commentary

Written by admin on . Posted in Uncategorized.

By: Stephen Clinton, President, Capital Market Securities

Mid-November Market Update
The U.S. is undergoing its longest economic expansion on record, breaking the record of 120 months of economic growth recorded from March 1991 to March 2001. Starting in June of 2009, this record-setting run saw GDP recording growth, albeit at a slower growth rate than previous expansions. The unemployment rate is at 3.6% and job growth continues with employers adding an average of 167,000 jobs this year. The current expansion also includes the longest stretch of job creation on record. The current U.S. economic growth is being driven by consumer spending as businesses have slowed business investment due to the uncertainties surrounding tariffs and global growth concerns.

In late October, the Fed lowered short-term interest rates for the third time this year. These moves follow last year’s four interest rate increases designed to guard against concerns about inflation and financial bubbles. The move to a more accommodative stance is designed to cushion the economy against a slowdown in business investment and in recognition of the uncertainties surrounding the U.S.-China trade conflict. U.S. inflation remains low and below the 2% Fed target which has reduced the Fed’s concern about rising prices and higher labor costs.

While the U.S. economy continues to chug along, things are not as optimistic for our trading partners. China’s economy is slowing dramatically; Japan’s economy grew at the slowest pace in a year in October; and Germany barely skirted a recession in the third quarter. These countries represent the world’s second, third, and fourth largest economies in the world. The global economic slowdown may make it difficult for the U.S. to continue to record GNP growth.
The home mortgage market has benefited from lower interest rates. The average 30-year home mortgage rate has fallen to near 4% from a recent high of 5.2% last November. Lenders made $700 billion in home loans in the July-to-September quarter, the most in 14 years. Mortgage origination activity is on pace to hit the highest level since 2006, the peak of the last housing boom. Refinancing activity is in part responsible for this renewed lending activity with refinancings jumping 75% from last year.

The U.S. government spent nearly $1 trillion more in fiscal year 2019 than it took in, which resulted in the highest deficit in seven years. The deficit has now increased for the last four years, the longest stretch of U.S. deficit growth since the early 1980’s, a period that included two recessions and an unemployment rate near 11%. The deficit has increased 68% since 2016 during a time when there is historically low unemployment and a growing economy. The loss of tax revenues from tax cuts, along with a bipartisan budget deal that increased government spending, are responsible for the growing deficits. Long-term costs associated with an aging population, including Social Security and Medicare, are expected to continue to put pressures on balancing the budget in the future.

U.S. corporate earnings remain strong. With most of the third quarter earnings announcements in the books, 75% have posted results above analysts’ expectations. While overall profits are lower than last year by approximately 2.7%, analysts are projecting improved earnings next year. One growing concern about nonfinancial companies being discussed is the high level of debt corporations hold. The level of corporate debt is at the highest level ever. Low interest rates have made the choice of debt preferable to equity for corporations. This has caused a leveraging of balance sheets.

Short-term interest rates have fallen 35% this year as of November 15. The 3-month T-Bill ended at 1.57%, principally due to the three Fed interest rate cuts. The 10-year T-Note was at 1.84% at November 15, down 85 basis points from the end of last year. After spending some time with a partially inverted yield curve, the shape of the yield curve has moved to its more traditional upward slope. The spread between the 3-month T-Bill and the 10-year T-Note was a narrow 27 basis points.

The stock market reached new highs as of November 15. The Dow Jones Industrial Index was up 20.05% for the year. The broader Nasdaq Index closed up 28.72%. The Nasdaq Bank index was up 16.73%, but the KBW Bank Index was up 26.44%. The stronger upward movement of the KBW Bank Index reflects the strong price increases recorded by larger banks this year.
The market has experienced a high level of market volatility this year. The ups and downs of the U.S.-China trade talks has caused wide market swings. Brexit has been a concern for the market. Protests in Hong Kong have captured attention. The U.S. impeachment inquiry presents market risk. We expect the market to continue to be volatile due to these concerns as well as other issues that may surface and capture the market’s attention.

Interesting Tid Bits

Tariffs

      – The U.S. collected a record $7 billion in import tariffs in September. This was up 50% from last year as new duties kicked in on Chinese imports.

Taxation

      – For the first time on record, the 400 wealthiest Americans last year paid a lower total tax rate (federal, state, and local taxes) than any other income group. The overall tax rate on the richest 400 households was 23% last year compared to 70% in 1950 and 47% in 1980.

Manufacturing

      – Manufacturing makes up approximately 11% of the U.S. GNP, which is down from 16% twenty years ago. Factory workers now make up 8.5% of the overall workforce which is down from 13% two decades ago. There are now more local government employees than factory workers.

Merger and Acquisition Activity
Through November 15 this year, there were 229 bank and thrift announced merger transactions. This compares to 231 deals in the same period last year. The median price to tangible book for transactions involving bank sellers was 158%.

Capital Market Services
Capital Market Securities, Inc. has assisted clients in a variety of capital market transactions. For more information on our capital market services, please contact Stephen Clinton at 1.800.376.8662 or sclinton@younginc.com.

Corporate Change to Foster Growth

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By: Jerry Sutherin, President and CEO

I am pleased to announce some changes to the structure of Young & Associates, Inc. that took place in September. The following individuals have received promotions to help our organization continue to grow and guide our organization into 2020 and beyond.

    • 1. Bill Elliott – Director of Compliance Education
    • 2. Karen Clower – Director of Compliance
    • 3. Bob Viering – Director of Lending
    • 4. Aaron Lewis – Director of Lending Education
    • 5. Kyle Curtis – Director of Lending Services
    • 6. Mike Detrow – Director of Information Technology Audit/Information Technology
    • 7. Martina Dowidchuk – Director of Management Services
    • 8. Dave Reno – Director of Lending and Business Development
    • 9. Jeanette McKeever – Director of Internal Audit

Each of these individuals possesses a vast amount of experience, knowledge, and contacts in the financial services industry, and have, time after time, been called upon to utilize this experience and knowledge for the betterment of our clients and, in turn, for the betterment of Young & Associates, Inc. While much of the day-to-day, primary duties and responsibilities of these recognized individuals will remain unchanged, the new role will involve them to a higher degree in the business strategy and implementation needed to grow our business in 2020 and beyond.

The functional areas of Human Resources (Sharon Jeffries), Marketing (Anne Coyne), and Education Coordination (Sally Scudiere) will continue to be valuable advisors/resources to our corporate strategy and senior management team and will be fully utilized through the ongoing process of business growth in conjunction with maximizing employee potential.

Congratulations to all of these individuals on these important promotions. We look forward to working together to serve our current and potential clients in 2020!

A Look to the Future

Written by admin on . Posted in Compliance & Regulations, Information Technology, Lending & Loan Review, Management & Planning, Uncategorized.

By: Jerry Sutherin, President & CEO, Young & Associates, Inc.

On January 31, 2018, I was fortunate to have the opportunity to purchase Young & Associates, Inc. from Mr. Gary Young, the company’s founder and current Chairman. Nearly 40 years ago, Gary created this organization with a vision of providing community banks with consulting services that were typically cost-prohibitive to perform internally. Since its inception in 1978, Young & Associates has evolved from a small start-up organization offering select outsourcing and educational services to one of the premier bank consulting firms with clients nationwide and overseas. We now offer consulting, education, and outsourcing services for nearly every aspect of banking.

From the outset of our acquisition discussions, Gary and I agreed that the greatest asset of the company is its employees. Over the years, not only has Gary developed unique servicing platforms for the industry but more importantly, he has assembled an employee base that is second to none. These employees provide a level of expertise and service to our clients that remains unparalleled in the community banking industry.

To quote Gary, “I founded Young & Associates with the goal of assisting community banks while maintaining a family atmosphere that valued and respected the people that I work with.” Going forward, it is my primary objective to carry on this legacy that Gary has created. I look forward to making this a seamless transition building on the solid foundation that Gary has built over the years. With the work of our employees and support of our clients, there is no doubt that Gary’s legacy will continue for years to come.

Although the ownership of Young & Associates, Inc. has changed, the company’s name, mission, personnel, quality of service, and structure will not change in any way. Gary now serves as Chairman of the Board and will remain actively involved with the business through January 2019, providing the same high-quality service while also assisting me with the transition. In addition to ensuring a smooth internal transition, Gary and I remain focused on making sure that the relationship with our clients remains strong. Existing and new clients are encouraged to contact me, Gary, or any of our consultants to discuss this transition and how we might be able to earn your business.

Young & Associates Employees Donate for Thanksgiving Food Drive

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During the months of October and November, Young & Associates employees have generously donated to a canned food drive to benefit Kent Social Services for the Thanksgiving holiday. These donations will be used to provide food bags for Thanksgiving and throughout the coming year. Thank you to all who participated in this important corporate initiative to give back to our community!

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