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Bank Portfolio Management - Solve the Problems

Posted by Wendell Brock on Wed, Mar 10, 2010

It's a tangled mess in the financial jungle. In order to navigate the issues of portfolio management and compliance while still staying profitable and able to weather the market's unpredictable trends, financial institutions must arm themselves with the best information and resources. Yet many don't have either the knowledge or analytical resources to not only stay abreast of changing trends but also act on them in a timely and profitable manner. We have solutions.

New Rules, Economic Trends

A financial planner I know is now telling his older clients that the stock market is so volatile that it cannot be relied on as a stable platform for long term investing. Thus, the age-old saying that "assets are soft and debts are hard," has never been truer. In these difficult economic times, financial institutions need reliable information about their asset portfolio, including how the loans are matching up with the current value of the assets supporting the loans, along with the borrower's strength, all at a simple click of a mouse. 

By the time the CFO, CCO, CLO, CEO or any other member of the management team assembles enough information about the portfolio in a spreadsheet to make decisions, it seems the market may have changed enough to make the choice more difficult.  The analytics we can provide at a simple click of the mouse gives you 100 percent loan penetration and enough analytical information about your assets that your institution will have an objective defendable system to help manage the portfolio.  

Regulatory Requirements

The frequency and breadth of audits are increasing; requiring financial institutions to stay in a mode of continuous compliance, in one year's time they could be subject to internal and external loan review, IT audit, financial audit, CRA exam, and regulatory exams. Compliance is mandatory and with RiskKey, staying in continuous compliance is much easier.   

Industry Standards

There is a paradigm shift coming to financial institutions. Because lending is often formula driven, bankers need aggressively take on the roll of being asset managers. In addition to managing the loans in the portfolio, they need to manage the assets that support the loans. The tools and knowledge to help actively manage your portfolio are available with a simple, cost effective, mouse click!


With forward-thinking analytics, you can determine your portfolio's risk. These analytics provide a defensible probability of default within the portfolio, you can also stress test the portfolio along several different data inputs, including, percent of asset recovery, interest rate, fico score, and others. This basis can provide a direction as to the quality of the overall portfolio, all the while allowing the banker to zero in on the individual problem loans and assess their grade based on the institution's custom grading scale.


Armed with a new, comprehensive understanding of your portfolio's risk, the analytics will subsequently locate the most pressing issues and provide options.


Finally, with your portfolio's risk evaluated and acted upon, you will have the tools and resources needed to clearly and concisely report your findings, to loan committees, the board of directors, and regulators.

Easy, Secure & Forthright

Working with us is simple. We take care of merging your data into a single platform. Your data will be protected and your analyses kept completely confidential. Our pricing is straightforward and simple.

People, Time & Action

Your employees should be generating revenue and managing accounts, not gathering statistics.  De Novo Strategy will allow your people to get back to profitable work. Our innovative practices are well beyond spreadsheets and simplistic reports. There's no laborious compiling of figures or making difficult assessments across a range of formats. Integrated reports and analyses mean less lag time between making a decision and executing it.

To learn more about Silverback Portfolio Analytics click and let us know. This will help you Build a Smarter Bank!

Topics: Bank, Bank Risks, regulators, Bank Regulators, Bank Asset, Regulations, Bank Policies, Compliance, Growth, real estate, Commercial Bank

The FDIC's Bank Insurance Fund

Posted by Wendell Brock on Thu, Sep 04, 2008

The FDIC's mission to maintain stability in the U.S. banking system is partially fulfilled by the deposit insurance program. The FDIC collects premiums from banking institutions to fund the deposit insurance; these premiums are calculated as a percentage of each bank's total deposits. Most banks today are paying out insurance premiums of about 5 to 7 cents for every $100 of domestic deposits.   

The premiums, less operating costs, go into the Deposit Insurance Fund (DIF) which is used to cover the deposit losses of failed banks. Since the existence of a viable deposit insurance program is of critical importance in maintaining the public's faith in the banking system, the FDIC is continually assessing the risks of bank failures and projecting potential expenses that may be charged to the DIF.

Rising losses could signal rising fees

This year, the FDIC has been appointed the receiver for ten banks with total assets just over $40 billion. Not all of these assets translate to losses in the DIF however. Part of the FDIC's function as receiver is to sell off the assets of the failed banks, thus recouping losses to the DIF. It is estimated that the losses to the DIF associated with those ten bank failures will amount to $7.5 billion, meaning that more than 80 percent of the total assets should be recovered.

Even so, the FDIC's list of problem banks is growing. As of the end of the second quarter, there were 117 banks on the "problem" list, up from 90 at the end of the first quarter and 61 at the end of the second quarter of 2007. To address the rising number of at-risk banks, the FDIC increased its provisions for insurance losses by $10.2 billion during the second quarter; this was the largest factor behind the $7.6 billion decrease in the fund, which ended the quarter at $45.2 billion (unaudited). Since insured deposits only rose 0.5 percent in the same time period, the reserve ratio fell to 1.01 percent as of June 30, 2008. The reserve ratio has not been this low since 1995, when the combined Bank Insurance Fund (BIF) and Savings Account Insurance Fund (SAIF) was 0.98. The BIF and SAIF were merged in 2006.

When the reserve ratio dips below 1.15 percent, the FDIC is required by the Federal Deposit Insurance Reform Act of 2005 to create a fund restoration plan that will bring the ratio back up to 1.15 percent within five years. FDIC Chairman, Sheila C. Bair, has already stated publicly that the FDIC's restoration plan is likely to incorporate an increase in the premiums the banks pay into the fund. Bair has also indicated that the FDIC will propose changes in the rate structure to shift a greater share of the responsibility onto financial institutions that participate in higher-risk activities. The current credit crisis will likely result in premium increases across the board for all banks.

An increase in FDIC insurance premiums will put more strain on banks that are already grappling with rising credit losses. While this is bad news for existing banks, it is a necessary step in maintaining the public's confidence in the banking system. Should the FDIC develop an assessment system that provides rewards to banks that engage in safer activities, at least these institutions will have the option and incentive to take some of the risk out of their operations. De novo banks may end up with an advantage in this regard, because they can open the doors with a business strategy that complies with FDIC guidelines to keep premiums low and minimize risk going forward. De Novo Banks also open without a legacy portfolio that may have some high-risk loans. Very few de novo banks fail, which is a credit to the bankers and regulators working together in an effort to build a solid foundation for the new financial institution.

For banks with problem loans in its portfolio, the best solution is to get in and meet with the borrowers early (perhaps when the borrower misses the first payment, not the third). The sooner the problems are addressed the greater opportunity for success in recovery or improvement of the loan. This might mean meeting with all borrowers as a ‘check up' on their status. It is far better for the bank to find the problem loans than the examiners.

The bank insurance fund is a critical part of our country's economic engine and is a model for the world. The fund will be stressed during this credit crisis, but we have to maintain the faith in the system that has kept our banking system safe and in good health for the past 75 years.

By Wendell Brock, MBA, ChFC

Topics: FDIC, Community Bank, Bank Regulators, Quarterly Banking Report, Commercial Bank

Second Quarter 2008 FDIC Banking Profile Highlights

Posted by Wendell Brock on Wed, Aug 27, 2008

By Wendell Brock, MBA, ChFC

Years ago when I was backpacking in the High Sierras, my Boy Scout leader taught me that the air temperature was coldest just before dawn. Hopefully, we are experiencing that time now and things will get better as dawn approaches, because this quarter's report is pretty ice cold! Total net income from insured banks is off 87 percent from second quarter last year to $5 billion. "Loss provisions totaled $50.2 billion, more than four times the $11.4 billion quarterly total of a year ago." Provisions drained almost one-third (31.9 percent) of the industry's operating revenue-the highest level since the third quarter of 1989. 

The average return on assets (ROA) was only 0.15 percent; in the same quarter last year, it was 1.21 percent. Larger institutions (over $1 billion in assets) suffered a bit more; their ROA was 0.10 percent. The average ROA for the smaller institutions (less than $1 billion in assets) was 0.57 percent. In the same quarter last year, the ROAs were 1.23 percent and 1.10 percent, respectively. Nearly two of three institutions (62.1 percent) reported a lower ROA this quarter. Almost 18 percent of banks, approximately 1,530 in number, were unprofitable this quarter; in the second quarter of 2007, this percentage was 9.8 percent.

Noninterest income was 10.9 percent lower than in second quarter of 2007, dipping to $60.8 billion. This decline was due in large part to lower trading income, which totaled only $5.5 billion and was down 88.6 percent from last year. A revenue bright spot showed up in net interest income, which increased by $8.2 billion (9.3 percent) over last year, with servicing fee income rising 35.9 percent or $1.9 billion. Bank customers paid more in service charges this quarter by $853 million or 8.6 percent over year-earlier levels.

Net interest margin ticked up slightly to 3.37 percent compared to the first quarter's margin of 3.33 percent. "Improvements and declines were fairly evenly divided among insured institutions, with 46.9 percent reporting lower margins than in the first quarter, and 51.5 percent reporting improved NIMs." The average yields on interest-bearing assets fell 51 basis points, from 6.27 percent to 5.76 percent. During the same quarter, the interest expense dropped 57 basis points from 2.95 percent to 2.38 percent. The industry average has remained steady within a 5-basis-point range over the last six quarters. The margins for community banks have fallen by 21 basis points, and larger institutions have gained only 10 basis points.

Net charge-offs increased sharply to a total of $26.4 billion during the quarter, which is almost three-times the $8.9 billion in the second quarter of 2007. This is the largest quarterly charge-off rate since the fourth quarter of 1991. At large institutions, the charge-off rate was 1.46 percent; at small institutions, the rate was only 0.44 percent. The annualized industry average for the quarter was 1.32 percent, considerably higher than last year's quarterly average of 0.49 percent.

The amount of noncurrent loans and leases has risen for nine consecutive quarters, increasing by $26.7 billion or 19.6 percent. In the second quarter, all major loan categories experienced increases in noncurrent loans. By quarter-end, the industry's total noncurrent loans and leases reached 2.04 percent, the highest level since the third quarter of 1993. Provisions increased for the third straight quarter, nearly doubling the amount of charge-offs. Institutions set aside $23.8 billion in provisions during the quarter and industry reserves rose by 19.1 percent. The total ratio increased from 1.52 percent to 1.80 percent, which is the highest level since mid-1996. At the same time, the coverage ratio slipped slightly from 88.9 cents for every $1.00 of noncurrent loans to 88.5 cents, which is a 15-year low.

Sixty percent of the institutions reported a decline in their total risk-based capital ratios during the quarter. The industry added only $10.6 billion to its regulatory capital during the quarter. Dividend payments were significantly lower during the quarter, totaling $17.7 billion, less than half the $40.9 billion paid a year earlier. Only 45.5 percent of the institutions reported higher retained earnings compared to a year ago. "Despite the slowdown in capital growth and the erosion in capital ratios at many institutions, 98.4 percent of all institutions (accounting for 99.4 percent of total industry assets) met or exceeded the highest regulatory capital requirements at the end of June."

Total assets declined for the first time since the first quarter of 2002 and experienced the largest quarterly decline since the first quarter of 1991. The decline totaled $118.9 billion or 11.8 percent, with nearly 40 percent of banks reported lower assets at the end of June. OREO properties (acquired by foreclosure) increased by $3.5 billion (29.1 percent) during the quarter to $15.6 billion.

Small business and farm loans increased only 3.4 percent or $25.3 billion during the 12 months ending June 30. These loans currently account for 32.7 percent of all business and farm loans to domestic borrowers. Larger business and farm loans increased by $249.4 billion or 18.4 percent during the same period. Total deposits increased only $6.9 billion or 0.1 percent during the second quarter. This was mostly from deposits in foreign offices, which rose by $46.8 billion, while domestic office deposits decreased by $39.6 billion.

Reporting institutions dropped to 8,451, equating to a loss of 43 institutions. Two banks failed during the quarter, ANB Financial in Arkansas and First Integrity in Minnesota. Three mutual banks converted to stock ownership (combined assets of $1.1 billion). The FDIC's problem bank list increased by 27 banks this quarter, from 90 banks in the first quarter to 117. This is an increase of 40 new problem banks for the year. Assets of problem banks increased from $26.3 billion to $78.3 billion. During the quarter there were 24 new charters, which brings the total of de novo banks for the year to 62.

We can only hope this is as cold as it gets before the dawn!

Note: quotes are from the FDIC second quarter 2008 report.

Topics: FDIC, Community Bank, Bank Regulators, Quarterly Banking Report, Commercial Bank


Posted by Wendell Brock on Fri, Jun 06, 2008

  BarCamp Bank - Chicago

July 16, 2008 @ 9am - 4pm

A BarCamp is an ad-hoc gathering born from the desire for people to share and learn in an open environment.  It is an intense event with discussions, demos, and interaction from attendees. This BarCamp will focus on banking in the 21st century - and how to do it better.  How can banks relate more effectively with their clients?  How are banks growing and improving their clients' business or lives? How are new and community banks creatively competing and getting results? These and many other topics will be discussed at the BarCamp Bank - Chicago.

Because a BarCamp is not intended to "make a profit" we are using CREED a registered 501(c)3 non-profit to accept the money and pay the bills.  CREED, which focuses on Economic Education and Development has an interest in improving financial education among the general population as well as bankers.

The BarCamp Bank - Chicago location will be at the Drake Hotel, a Hilton Property, and within one block of the Interagency Minority Depository Institutions National Conference (MDI Conference), being held July 16 - 18, 2008.  The MDI Conference will start with an evening cocktail party at 5:00 p.m.; there would be enough time for attendees to walk over to the MDI Conference.

BarCamp Bank - Chicago:

Site:                            The Drake Hotel

140 East Walton Place, Chicago, IL 60611, 312.787.2200

Spot:                                     $69.00 per person, (limited to 30 people)

Sponsor:                              $500.00 (limited to 3 sponsors)

Other Stuff:                        A light lunch will be served.

Current Sponsors:    De Novo Strategy, Inc.; CREED;

Topics: BarCamp Bank - Chicago will cover six topics total. 12pm - 1:00 p.m. is for sponsors to facilitate short discussions.  Sponsors may discuss recent trends in their markets, ask questions, or drive ideas by the group. Sponsors may also provide topics for the general session and assist in those discussions.  This is an open forum requiring participation from all attendees. You should expect to enjoy the engagement with your peers.

Contact: Wendell Brock, Principal
De Novo Strategy, Inc.


Topics: Chicago, Community Bank, Minority Banking, BarCampBank, Commercial Bank

Major Opportunity for De Novo Banks

Posted by Wendell Brock on Sat, May 03, 2008

According to a recent article by Douglas McIntyre on 247wallstreet a number of large banks are going to be closing branches, which makes good-sense, as the overhead can be a heavy burden. Closing branches for these mega banks is a good idea easing their cash flow and saving them money.

This can be a phenomenal opportunity for de novo bank projects in the industry.

One critical challenge in starting a bank is finding the real estate - some groups spend months, up to a year, to secure the right space. Many of these ‘closed' branches offer an opportunity to obtain ideal locations at lower price points. Depending upon the location you may be able to save quite a bit on your build out as well. Either way, organizers in the de novo market need to move smartly and capitalize on this opportunity

Aside from great locations during this industry adjustment there are going to be great bank employees and many customers searching for greener pastures.

By Wendell Brock 

April 28, 2008
Large Banks Beginning To Close Branch Locations (C)(WB)(WFC)(BAC)

Consumers and businesses are faced with two difficult problems as a result of major banks taking huge write-offs. The first is that, even though the Fed is chopping rates, lower interest loans are not making it to consumer or business lending departments. The banks have elected to use the money they get inexpensively from the Fed to improve their own balance sheets. They want to take as little lending risk as possible while the economy is still in trouble.

The other by-product of troubles at large money center banks like Citigroup (C), Wachovia (WB), Wells Fargo (WFC), and Bank of America (BAC) is that closing local branches is a fast way to bring down costs. Doing this without losing customers is somewhat easier because of online banking and ATMs.

Banks in the deepest have already begun the process. Washington Mutual (WM) plans to take out over 3,000 jobs in the short-term and Citigroup has said it will lay-off 9,000. Some of those jobs will be administrative, but these financial firms have huge numbers of people in location through-out the regions which they serve.

Bank of America operates 6,200 branches. Operating a local office can cost $1 million a year when employees, overhead, and rent are factored in. If the bank shuts 10% of its locations it can save over $600 million a year.

Mid-sized regional banks may be under even more pressure to cut costs. National City Corp (NCC) recently reported a huge loss and had to raise over $7 billion. It has eliminated its dividend and must now look for new places to take out costs. Regional bank Peoples recently closed 20 branches in one small section of Connecticut. Banks usually look for locations outside where their core customer "foot prints" are and shutter locations there.

To a large extent banks are willing to let some consumer and smaller business customers go. These groups tend to have high default rates in a recession. Individuals and companies with relatively small revenue often are in no position to weather a downturn in the economy and lending to these groups has already slowed to a crawl.

Businesses which have been under-served by banking institutions are about to see that situation get worse as banks which invested in risky assets try to save themselves from insolvency. Borrowing money has gotten tough, and it is about to get worse.

By Douglas A. McIntyre

Topics: Bank Opportunities, Community Bank, Bank Executives, Commercial Bank

Bank Executive Survey

Posted by Wendell Brock on Sat, Apr 26, 2008

Survey by Grant Thornton

The results are in and the outlook is bleak. Grant Thornton's 15th annual survey of bank executives indicates that bankers are gloomier than ever about the economy. Only 1 in 10 bankers surveyed claimed to be optimistic about the economy, while 54 percent were pessimistic. In the survey's 15-year history, the numbers have never been this extreme. Just three years ago, for example, only 3 percent of bankers said they were pessimistic.
Many bankers are waiting for the real estate market to hit bottom and for the credit crisis to pass. At the same time, they're hoping they will be able to weather the storm. Sixty-four percent of bankers believe that the bottom will come after May, 2008. Another 17 percent are looking to 2009, indicating that the bottom won't come until after the close of this year. The housing bubble has been damaging to the banks. Homeowners have borrowed all their equity out through home equity loans; when the home values dropped, the equity was erased and banks were left under-collateralized. For March, the ABA reported a housing price decline of 3.6 percent from February, the fifth consecutive monthly decline.
George Mark and John Ziegelbauer of Grant Thornton predict that bankers will "tighten down the ship-tightening the underwriting and build liquidity." Many are getting back to the basics, citing the need to get to know their customers better as part of the solution. It's a smart move, one that will help the banks comply with the regulations, while enhancing cross-selling efforts.
Bankers are concerned about obtaining new customers while taking care of the ones they have. Credit unions pose a competitive threat, particularly with respect to business customers, which have traditionally been a core customer segment for banks. Maybe a renewed bank focus on customer service will result in depositors and borrowers feeling truly valued by their bank once more!
Bank capital is also in short supply and it is harder to raise capital in this difficult environment. Investors are looking for full disclosure of all the risks, including the loan portfolio and liquidity risks. When capital dries up, it's more expensive to acquire. Many banks are trading at or below book value, which, to the banker, makes it very hard to sell stock and let people in for such a discount.
All of these factors and many more are putting pressure on bank boards to understand what is going on in their own banks. Directors need to be proactive about uncovering any problems, rather than waiting for the regulators to find them. If the regulators find problems, it says two things: 1) the board does not understand what is happening at the bank, and 2) the bank does not have proper controls in place.
To download a full copy of the survey, simply click on the link.

Summary by Wendell Brock, MBA, ChFC 

Topics: Bank Executives, Commercial Bank, Grant Thornton

FDIC Quarterly Banking Profile Highlights

Posted by Wendell Brock on Thu, Mar 20, 2008

By Wendell Brock, MBA, ChFC

Today the FDIC issued the Fourth Quarter 2007 banking profile, which contained very mixed results on a slippery slope. The industry as a whole is struggling through the latest national economic tidal wave of debt problems from the sub-prime termoil to an over leveraged derivative market. So the banks are squeezed between tougher regulation enforcement, higher deposit rates, lower net interest margins, larger loan loss reserves, higher charge off and noncurrent accounts, growth in deposits, etc. The following are some key highlights.

Widespread earnings weakness occurred in more than half the institutions - "51.2% reported lower net income than in the 4th quarter of 2006. One out of four institutions with assets greater than $10 billion reported a net loss for the fourth quarter." During the 4th quarter interest rates fell, which increased downward pressure on Net Interest Margins (NIM), making it the lowest quarterly NIM since 1989.

Total earnings for banks were off by 27.4% for all of 2007, which was a decline of $39.8 billion to $105.5 billion. This is the first time since 1999-2000 that annual net income declined. Only 49.2% of insured institutions reported improved earnings in 2007 - the lowest level in 23 years. Unprofitable institutions reached a 26 year high of 11.6% at the same time the ROA was the lowest in 26 years at 0.86%. This is the first time since the mid 1970's that noninterest income has declined - it fell by 2.9% to $233.4 billion.

2007 fourth quarter net charge offs spiked nearly 100% to $16.2 billion over the same quarter in 2006 which had $8.5 billion. This increase has regulators very worried. In mid 2006 the amount of noncurrent loans (loans which are 90 days past due) began an upward movement, this loan pool continued to swell by $26.9 billion, a increase of 32.5% during the 4th quarter of 2007. "The percentage of loans that were noncurrent at year-end was 1.39%, the highest level since the third quarter of 2002." This has prompted banks to put more away in their Allowance for Loan and Lease Losses (ALLL). The ALLL reserve ratio rose from 1.13% to 1.29% during the quarter; however it was not enough to cover the increase in noncurrent loans. "At year end, one in three institutions had noncurrent loans that exceeded reserves, compared to fewer than one in four institutions a year earlier."

Equity capital increased by $25.1 billion or 1.9%; at the same time the leverage ratio fell to 7.98% down from 8.14%. "In contrast, the industry's total risk-based capital ratio, which includes loss reserves, increased from 12.74% to 12.79%." In the end 99% of all insured institutions, which represents more than 99% of industry assets, met or exceeded the highest regulatory capital requirements. During this same time, banks were lending money - asset growth continued strong - assets increased by $331.8 billion or 2.6% during the quarter. Because of the high increase in noncurrent loans, examiners have been watching closely the concentrations of bank portfolios in commercial real estate. In spite of the construction slow down, the number of banks that have a high concentration of construction lending increased from 2,348 to 2,368. A high concentration of commercial real estate loans in a bank's loan portfolio is defined when that part of the loan portfolio exceeds the bank's total capital.

Deposits grew to record levels during the 4th quarter. Institutions saw an increase of $170.6 billion or 2.5%, the largest quarterly increase ever reported. "The industry's ratio of deposits to total assets, which hit an all time low of 64.4% at the end of the 3rd quarter, rose slightly to 64.5% at year end."

For the year, Trust Assets increased an amazing $2.6 trillion or 13.4% for managed accounts and $68.6 billion or 1.6% for non-managed accounts. "Five institutions accounted for 53% of the industry's net trust income in 2007."

In 2007, there were only three bank failures, this is the most since 2004 - this ended the unprecedented run of no bank failures (there was only one failure in the 4th quarter). The two-year term was the longest in the FDIC's history. During the quarter, there were 50 de novo banks, which brought the total for the year up to 181 new institutions. Mergers in the 4th quarter slowed down to 74 for an annual total of 321 banks merged out of existence. The regulator's problem bank list grew to 76 banks, up from 65 at the close of the 3rd quarter. The total assets of these problem banks are $22.3 billion, up from $18.5 billion at the end of the 3rd quarter. The total FDIC insured institutions ended the year at 8,533 down, slightly from 8,559.  For a complete copy of the report see request for a white paper.

Wendell Brock, MBA, ChFC
De Novo Strategy

Topics: FDIC, Bank Mergers, Quarterly Banking Report, Deposit Growth, De Novo Banks, Noncurrent loans, Commercial Bank

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BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at