As many of you know I have been serving as the Executive Director of CREED – the Center of Resources for Economic Education and Development these past several years. This year we have done some exciting things with the help of our board and many of you.
We have shipped over 1000 humanitarian school kits to children in need so they can continue their education in Haiti and Belize, and we are preparing a shipment to Uganda. We helped start a micro business in Uganda at an orphanage – we provided the funds to start a pultry business, we helped build a chicken coop stocked with baby chicks and feed. This chicken coop, which will hold 500 chickens, will help provide enough money in the future to send the 27 children to school as well as help them have more food to eat. We are starting a micro-business lending project in Belize which will provide small dollar loans to several micro business owners, after approval of the borrower’s business plan and education training.
We now have a very unique opportunity: Just Give, a non-profit company, which offers non-profits such as CREED and thousands of other non-profits an easy way to donate on line, is offering a matching gift to celebrate their 10 year anniversary. For each donation of at least $10.00 they will send us an additional $10.00. This offer is only for donation made up to October 20th.
A school kit cost $10.00. So for every ten dollars donated we can send two children to school instead of one! The micro business loans will be about $400-$500 each; we are working towards four loans per month in the next 12 months.
Please make your donation by following the following link and then filling in the boxes with the following information as shown below:
The web page should look something like this below:
Charity Name or Keyword
Tax ID / EIN
On behalf of CREED and the growing number of people we serve, we thank you very much your support, it is GREATLY APPRECIATED. And we wish you the best as we press forward during these difficult times to strengthen families and homes, through self-reliance.
Wendell BrockExecutive Director, CREED
Please join me in sending more children to school and also help finance a micro-business with a small donation.
CREED is a registered 501(c)3 nonprofit and all donations are tax deductible.
Creation of Safe, Affordable and Feasible Template for Small-Dollar Loans
Small-dollar loan pilot
The Small-dollar Loan Pilot Project was a study to find if it is profitable for banks to offer small-dollar loans to their customers. Small-dollar loans were created as an option to expensive payday loans, or heavy fee-based overdraft programs. This study opened up opportunities for small-dollar loans to be more affordable.
Small-dollar loans have created a way to maintain associations with current costumers and opportunities to attract unbanked new customers.
Goals: The main goal the FDIC had in mind for small-dollar loans was for banks to create long-lasting relationships with their customers using the product of small-dollar loans. Many banks had another goal in mind in addition to the FDIC’s goal. Some banks wanted to become more profitable by producing the product while other banks produced the product to create more goodwill in their community.
Where and how the study started: The FDIC found 28 volunteer banks with total assets from $28 million to nearly $10 billion to use the new product, offering of small-dollar loans. All were found in 450 offices in 27 states. Now, in the pilot study there have been over 34,400 small-dollar loans that represent a balance of $40.2 million.
Template for small-dollar loans: Loans are given with an amount of $2,500 or less, with a term of 90 days or more. The Annual Percentage Rate is 36 percent or less depending on the circumstances of the borrower. There are little to no fees and, underwriting follows with proof of identity, address, income, and credit report to decide the loan amount and the ability to pay. The loan decision will usually take less than 24 hours. There are also additional optional features of mandatory savings and financial education.
Long loan term success: Studies found that having a longer loan term increased the amount of success in small-dollar loans. This allowed the customer to recover from any financial emergency by going through a few pay check cycles before it was time to start paying the loan back. Liberty Bank in New Orleans, Louisiana offered loan terms to 6 months in order to avoid continuously renewed “treadmill” loans. The pilot decided that a minimum loan term of 90 days would prove to be feasible.
Often the bank will require the customer to place a minimum of ten percent of the loan in a savings account that becomes available when the loan is paid off.
Delinquencies: In 2009 the delinquency rates by quarter for small dollar loans were 6.2 in the fourth, 5.7 in the third, 5.2 in the second, and 4.3 in the first.
How to be most successful when producing small-dollar loans: The FDIC is reporting that the participating banks have found much success through small-dollar loans. But the most success came from long term support from the bank’s board, and the senior management. It is critically important to have strong support coming from senior management.
The small-dollar loan pilot has proven to be a great addition to bank’s loan portfolio, the FDIC hopes that it will spread to banks outside the pilot.
Profitability may depend on location: The FDIC has found the most successful programs are in banks located in communities with a high population of low- and moderate-income, military, or immigrant households. Banks in rural areas that did not have many other financial service providers also saw feasibility because of the low amount of competition.
Improving performance: Automatic repayments are a way to improve performance for all products not just the small-dollar loans.
This week, Standard & Poor's posted new figures that show the domestic housing market's rebound is anything but certain, causing bankers to have cautious optimism.
Utilizing 10- and 20-city composites, the S&P/Case-Shiller Home Prices Indices data compared one-month price changes from January to February 2010, and also twelve-month prices from February to February.
January to February
In the 20-city composite, only one location-San Diego-saw a rise in prices from January 2010. The 0.6% rise, though, was slight. All other cities saw decreases that ranged from New York's -0.4% to Portland's -2.4%. The 20-city composite fell -0.9%.
What a Difference a Year Makes
A brighter picture emerges, though, in the sampled metro areas' twelve-month comparisons. San Francisco's 11.6% rise was the largest among the surveyed cities. San Diego came in second with a 7.6% increase. The 20-city composite improved 0.6%.
Las Vegas, which has endured one of the country's largest drops in home value, continues its decline with a -14.6% drop from February to February.
Writing in USAToday.com, Stephanie Armour states that prices in Charlotte, New York, Las Vegas, Portland, Seattle, and Tampa have fallen to new lows.
Home prices peaked nearly four years ago in June and July of 2006. February's average prices dropped close to their numbers from 2003's summer and early fall.
But David M. Blitzer, chairman of the Index Committee at Standard and Poor's, is cautious. "It is too early to say that the housing market is recovering," he says. "The homebuyer tax credit...is the likely cause for these encouraging numbers and this may also flow through to some of our home price data in the next few months. Amidst all the news, however, we should also pay heed to foreclosure activity, which have reached their highest level in at least the last five years."
April's Index number was 57.9, which is an improvement over March's 52.3. Providing evidence that the rebound may not be fleeting, this is the highest the Index has been since September 2008. The Index pulls its data from a survey of 5,000 American households.
Americans are also feeling good about the job market. 18% of those surveyed thought the future would bring more jobs, which is an improvement from March's 14.1%. Similarly, those who believed the number of jobs would decrease dropped from 21.1% to 20%.
In March, 45.8% of survey respondents said that jobs were "hard to get." This is a decline from February's number of 47.3. Combined with the optimistic responses to April's survey, these data could indicate a rising trend.
Yesterday the FDIC announced that the formula for how they assess deposit insurance would be changed for large banks (those with $10 billion of assets or more). Below is the notice with the links to the summary and the full document. While this rule makes changes for "large banks" eventually this methodology will trickle down and become practice for smaller banks too.
Each bank, no matter the size, will need an objective, defensible methodology for analyzing, grading and stratifying their loan portfolio. They will also need the ability to stress test the portfolio beyond the typical raising or lowering of interest rates. Probable loss modeling will become the norm as bankers and examiners look deeper for risks in the portfolio. It will be important for bankers to have this information updated regularly based on current estimates of value of the assets backing the loans.
It is no longer simply how much the bank has on deposit that determines the banks deposit premium, it is centered on the risk the bank is to the bank insurance fund - how likely will the FDIC have to pay out to cover deposits. The loan portfolio that the bank is creating and servicing is where the risks are, which must be fully analyzed, using an objective, defensible method.
As you read this notice of what the regulators are going to start requiring from banks, you will realize that the questions will get tougher and the answers more complex. We are happy to help provide strategies and solutions to some of the tough questions banks will face.
Assessments Notice of Proposed Rulemaking On April 13, 2010, the FDIC Board of Directors (Board) adopted a notice of proposed rulemaking (NPR or proposal) and request for comment that would revise the assessment system applicable to all large insured depository institutions. The NPR would: (1) eliminate risk categories and the use of long-term debt issuer ratings in calculating risk-based assessments for large institutions; (2) use two scorecards -one for most large institutions and another for large institutions that are structurally and operationally complex or that pose unique challenges and risks in the event of failure (highly complex institutions)-to calculate the assessment rates for all large institutions; (3) allow the FDIC to take additional information into account to make limited adjustments to the scores; and (4) use the scorecard to determine the assessment rate for each institution.
The NPR would also alter assessment rates applicable to all insured depository institutions to ensure that the revenue collected under the new assessment system would approximately equal that collected under the existing assessment system and ensure that the lowest rate applicable to small and large institutions would be the same.
On September 29, 2009, the Board adopted a uniform increase in assessment rates effective January 1, 2011. As a result of the Board's earlier action, assessment rates in effect on January 1, 2011, will uniformly increase by 3 basis points.
FOR MORE INFORMATION:
In less time than you take for a lunch break Silverback Portfolio Analytics can show you how to, analyze your loan portfolio with real-time asset valuations, use objective loan grading, provide stratification analysis, probable loss modeling and stress test simulations.
If art imitates life, then the burgeoning market of art-as-loan-collateral is a mirror of today's financial sector, of asset-based lending.
Last year, venerable portrait photographer Annie Leibovitz called on Art Capital Group (ACG) for a $15.5M loan. Leibovitz's collateral? The rights to her entire photograph collection.
ACG only makes loans against an artist's or art patron's collection. Their website explains: "Unlike traditional sources of capital, we are comfortable utilizing fine and decorative art as the sole asset securing a loan or as a component of a collateral package."
And you thought the medical profession was specialized.
A preeminent photographer borrowing against her artistic catalog makes headlines (and blogs!), but asset-based lending and lending tailored to a business industry aren't new nor confined to the fine arts.
What is new is how popular this lending practice has become.
As Kyle Stock writes in the Wall Street Journal, "Asset-based lending, excluding mortgages, swelled by 8.3% to almost $600 billion in 2008, according to the Commercial Finance Association, an industry trade group. The association is still gathering data on 2009, but preliminary surveys show double-digit percent increases in lending. In comparison, syndicated lending in 2009 sagged by 39%, according to Dealogic Inc."
Interest rates for asset-based lending are typically higher than traditional loans, but still less than a credit card's terms. And if you can't persuade a bank to lend money through the usual channels-whether because of poor credit or the contracted credit market-then it's your best option.
Loans are made based on a business's accounts receivable, invoices, inventory, patents, and equipment. Most lenders require a detailed (and optimistic) business plan. But depending on the lender, businesses can use the cash for, among other things, acquisition, management buyout, recapitalization, growth financing, and turnaround.
Along with higher interest rates than traditional loans, asset-based loans also typically carry stiffer penalties for default, including a quick seizure of the collateral rather than a penalty. And if a bank has to liquidate assets, knowledge of the industry is very important.
Asset-based lending that matches a specialized lender with a customer-as with Leibovitz's loan-benefits both parties. The lender knows that what they're-literally-buying into, and the business gets payment terms that are tailored to their billing cycle.
Several banks around the country--both large and small--offer asset-based lending including, Bank of America, which offers several specialties, and is the asset-based lending industry leader.
According to the Wall Street Journal, the industry's biggest companies funded 23% more asset-based deals in 2009 as compared to the previous year.
Whether this trend will continue remains to be seen. Much of it will depend on the default rate of these types of loans. Late last year, ACG accused Leibovitz of defaulting on her loan. Although ACG threatened a lawsuit, the issue was resolved last September without court proceedings.
Andy Warhol once said, "Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art."
FDIC member institutions' earnings improved this quarter to a modest $2.8 billion, which is significant over last quarter's net loss of $4.3 billion and third quarter of 2008 of $879 million. Loan loss provision continued to affect the profitability of the industry as banks continued to cover their bad assets. Growth in securities and operating income helped the industry realize the profit, with 43 percent of the institutions reporting higher profits this quarter over the same quarter last year. Just over one in four banks reported losses this quarter of 26.4 percent, which is slightly up from 24.6 percent a year ago.
Net Interest Margin, ALLL
Net interest was higher this quarter, rising to a four-year high of 4.6 billion. The average net interest margin (NIM) was 3.51 percent, slightly higher than last quarter. Most banks, 62.1 percent, reported higher NIM than last quarter; however only 42.2 percent had an NIM increase year over year. Provisions for loan and lease losses increased and total set aside, remained over $60 billion for the fourth straight quarter, rising to $62.5 billion. While the quarterly amount banks set aside was only 11.3 billion, $4.2 billion less than the second quarter, it was 22.2 percent higher than last year. Almost two out of three institutions, 62.6 percent, increased their loan loss provisions.
Net Charge Offs Remain High
Loan losses continued to mount, as banks suffered year over year increases for 11 straight quarters. Insured institutions charged off a net of $50.2 billion this quarter, a $22.6 billion increase or an 80.5 percent increase compared to third quarter of 2008. This is the highest annual charge off rate since banks began reporting this information in 1984. All major categories of loans saw significant increases in charge offs this quarter, but losses were largest amongst commercial and industrial (C&I) borrowers. While noncurrent loans continued to increase, the rate of increase slowed; noncurrent loans and leases increased $34.7 billion or 10.5 percent to $366.6 billion, which is 4.94 percent of all loans and leases. This is the highest level of noncurrent loans and leases in 26 years. The increase of noncurrent loans was the smallest in the past four quarters.
The reserve ratio increased as noncurrent loans increased, however the spread continued to widen. While the industry set aside 9.2 billion, 4.4 percent in reserves, which increased the reserve level from 2.77 percent to 2.97 percent. This increase was not enough to slow the slide - it was the smallest quarterly increase in the past four quarters and the growth in reserves lagged the growth of noncurrent loans, which caused the 14th consecutive quarterly decline in this ratio from 63.6 percent to 60.1 percent.
Loan Balances Decline Deposits Are Up
Loan and lease balances saw the largest quarterly decline since the industry started keeping track of these numbers in 1984; they fell by $210.4 billion or 2.8 percent. Total assets fell for the third straight quarter; assets at insured institutions fell by $54.3 billion, which follows a decline of $237.9 billion in the second quarter and a $303.2 billion decline in the first quarter. Deposits increased $79.8 billion or 0.4 percent during the third quarter, allowing banks to fund more loans with deposits rather than other liabilities. At the end of the quarter deposits funded bank assets was 68.7 percent, the highest level since second quarter 1997.
Troubled Banks Increase
The number of reporting insured institutions at the end of the quarter was down to 8,099 from 8,195; there were fifty bank failures and forty-seven bank mergers. This is the largest number of banks to fail since fourth quarter of 1992, when 55 banks failed. The number of banks on the FDIC's problem list increased from 416 to 552 at the end of the second quarter.
During the quarter, the number of new banks chartered was three. This is the lowest level since World War II. This begs the question on what is the best way to get new capital into the banking industry. Should we recapitalize the existing banks including those in trouble? Or, should we start fresh with a new bank that can build a new, clean loan portfolio?
CREED - a 501(c)3 nonprofit has started a Crowdfunding project/contest to help a small business - Look at the opportunity to be a part of something truly great! We will follow this closely as we are strong supporters of CREED.
In the beginning of 2009, the media was pushing the idea that this would be the year for the community bank. Many smaller banks had not weighted down their balance sheets with subprime loans, asset-backed securities and complex derivatives. In theory, they had the stability to pick up loan customers that had been turned away by larger institutions. Columbus Business First published an article entitled, "Larger competitors' retrenchment may give smaller banks opening." And Business Week said, "As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business customers."
Getting in to the banking industry during a power shift from big banks to small ones would appear to be an attractive opportunity for bank executives and community leaders who wish to be bank investors. But the predictions of a few publications don't sufficiently address the risk involved in buying a bank. Bank investors need to have some framework for separating the good targets from the bad ones.
Characteristics of at-risk community banks
In a speech made last July, San Francisco Fed President Janet Yellen summarized the characteristics of at-risk community banks. She cited:
High concentrations of construction loans for speculative housing projects
Concentrations of land acquisition and development loans
Poor appraisal systems
Weak risk-monitoring systems
Looking ahead, Yellen also identified "income-producing office, warehouse, and retail commercial property" as an area of potential risk. She cited rising vacancies and poor rent dynamics, which are putting negative pressures on property values. These value declines can be particularly problematic for maturing loans that need to be refinanced. Community banks that maintain large portfolios of commercial property loans should be proactively managing these risks. Bank acquisition groups should verify that target banks are updating property appraisals, recognizing impairments early, and negotiating work-outs with borrowers when appropriate.
Tim Coffey, Research Analyst for FIG Partners, LLC, agrees that commercial real estate is the next area of risk for banks. In an interview, Coffey said,
I think the residential portion of this correction has been dealt with and recognized by bankers and market participants alike. The next shoe to drop is going to be commercial real estate. I don't think there is really any kind of argument about that. How messy it's going to be compared to the residential part remains to be seen.
Coffey's comment was included in a report by The Wall Street Transcript that also quoted commentary from other banking analysts. The consensus among them was that some community banks are still facing potentially disastrous problems ahead.
Separating the good acquisition targets from the bad ones, then, requires careful analysis of the balance sheet, loan portfolio and the bank's current risk management practices. If the bank isn't managing risk proactively, there could be unknown problems brewing within the loan portfolio. Buying a bank with known problem assets is a manageable challenge-but buying a bank with unknown problem assets is something else entirely.
The Congressional Oversight Panel (COP), tasked with monitoring the Treasury's progress combating the financial crisis, has released an update on the continued risk of troubled assets in the banking industry. While the report doesn't address bank organizing groups specifically, its content does emphasize the challenges of evaluating target banks during this financial crisis.
Those challenges include valuing the target bank's troubled assets and identifying the reasons why those assets became troubled in the first place. In the general sense of the term, troubled assets are loans or securities that no longer meet (or perhaps never did meet) acceptable underwriting standards. The credit risk on these assets exceeds acceptable levels, repayment is questionable, and the aggregate asset value is far lower than originally assumed. Troubled assets commonly include:
Whole mortgages in the bank's portfolio
Securities backed by credit card receivables
Securities backed by commercial mortgages
Community banks generally have more exposure to troubled whole mortgages.
The bank organizing group does have a certain level of negotiating power when the target bank's balance sheet is weighted down with too many troubled assets. That's where the advantages end, however. Even before the negotiating begins, organizers must identify the underlying causes of the bad assets:
Were these assets bad from the start, due to lax underwriting or borrower fraud? Did the bank willingly overlook missing documentation or red flags on credit histories? Was it simply an over-reliance on the assumption that collateral values would continue to rise over time?
Or did these assets become troubled over time due to extreme weakening of collateral values or borrowers' credit qualifications?
Procedural changes and capital requirements
The organizing group is then tasked with devising the underwriting, workout and procedural standards that will:
maximize the return on existing troubled assets
add new, high quality loans to the portfolio
minimize the addition of new troubled assets
Obviously, these are relatively complex objectives in this economic environment. Unemployment is still rising and the outlook for property values, particularly commercial property values, remains uncertain. Excessively timid underwriting can minimize the creation of new problems, but it's counter-productive; banks have to make loans to survive. The new management team simply has to find a way to originate loans that make sense.
Setting appropriate capital requirements is also a key step in evaluating the target bank. Ample capital can be a buffer for future loan losses, but organizers have to balance the capital needs with the availability of investor funds. Under current conditions, it is possible for organizers to meet their capital raise targets-but it isn't easy. The process takes planning, knowledge and expertise.
Reports Continued Deterioration in Earnings Performance, Asset Quality
FDIC’s third quarter, 2008 Quarterly Banking Profile was released on November
25, 2008. The industry snapshot shows a continuation of negative trends, including
depressed earnings and deteriorating asset quality. The report also provides
detail on the proposed changes to the FDIC’s assessment system.
than 58 percent of member institutions reported year-over-year declines in
quarterly net income, while 64 percent generated a reduced quarterly return on
assets (ROA). Profitability issues appear to be magnified at the larger banks;
institutions with assets greater than $1 billion experienced a 47-basis point,
year-over-year ROA decline. Community banks fared somewhat better with a
25-basis point decline. Nearly one-quarter of member banks failed to earn a
profit in the quarter; this is the highest level for this metric since the
fourth quarter of 1990.
Income a mixed bag
banks reported declines in several categories of noninterest income, including
securitization income and gains on sales of assets other than loans. Losses on
sales of bank-owned real estate increased almost six-fold to $518 million. Loan
sales, however, showed a marked improvement with net gains of $166 million.
This compares to net losses of $1.2 billion in the third quarter of last year.
interest income also improved by 4.9 percent versus a year ago. The average net
interest margin (NIM) remained flat with last quarter, but rose 2 basis points
relative to the year-ago quarter. This trend was more pronounced among larger
Credit losses still
expected, expenses related to credit losses drove much of the earnings decline.
Industry-wide, credit loss-related expenses topped $50 billion, eating up about
one-third of the industry’s net operating revenue. Aggregate loan-loss
provisions tripled from the year-ago level, reaching $50.5 billion in the
quarter. Net charge-offs increased by 156.4 percent to $27.9 billion, with
two-thirds of the increase related to loans secured by real estate. Charge-offs
related to closed-end first and second lien mortgages, real estate construction
and development loans, and loans to commercial and industrial borrowers all
showed increases well in excess of 100 percent. The quarterly net charge-off
rate jumped 10 basis points sequentially to 1.42 percent; this is the highest quarterly
net charge-off rate since 1991.
loans and leases, defined as being 90 days or more past due or in nonaccrual
status, increased by $21.4 billion sequentially to $184.3 billion. Nearly half
of this growth came from closed-end first and second lien mortgages. The percentage
of loans and leases that are noncurrent rose to 2.31 percent, which is the
highest percentage recorded since 1993.
reserves ticked up by 8.1 percent, bringing the ratio of reserves to total
loans and leases to 1.95 percent. Reserves to noncurrent loans fell to $0.85, which
is the lowest level recorded since the first quarter of 1993.
Watch list grows 46
percent, number of new charters shrinks
banks collapsed during the third quarter, and another seventy-three were merged
into other institutions. While the number of failures marks a high point since the third quarter of 1993,
the growth of the FDIC’s list of problem banks indicates that there are still
rough times ahead; an additional fifty-four banks were added to the watch list,
bringing the total number of problem banks to 171.
new institutions were chartered during the quarter. This marks a decline from
the twenty-four new charters that were added last quarter.
deposits rise, DIF reserve ratio declines
total assets of all FDIC-insured member institutions rose 2.1 percent to $273.2
billion during the quarter. Most of the increase, some 57 percent, came from
noninterest-bearing deposits. Interest-bearing deposits on the other hand
showed a slight decrease of 0.3 percent.
deposits continued an upward trend, rising 1.8 percent on top of a second
quarter increase of 0.6 percent. Fifty-eight percent of member institutions
reported an increase in insured deposits, 42 percent reported a decrease and
the remainder reported no change.
Deposit Insurance Fund decreased by $10.6 billion, primarily due to an $11.9
billion increase in loss provisions for bank failures. As of September 30,
2008, the reserve ratio was 0.76 percent, down 25 basis points from three months
prior. Nine insured institutions failed during the quarter, bringing
year-to-date failures to thirteen; those thirteen failed institutions had
combined assets of $348 billion and are estimated to have cost the DIF $11
involves increases, changes to risk-based assessments
FDIC adopted a restoration plan on October 7 to increase the DIF’s reserve loss
ratio to 1.15 percent within five years, as required by Federal Deposit
Insurance Reform Act of 2005. In accordance with the plan, the FDIC Board
approved the publication of a notice of proposed rule making to increase the
assessment and shift a larger proportion of that increase to riskier
institutions. For the first quarter of 2009, the FDIC seeks to increase
assessment rates by 7 basis points across the board.
proposed assessment system, to be effective April 1, 2009, establishes base
assessment rates ranging from 10 to 45 basis points for Risk Categories I
through IV. Those base rates would then be adjusted for unsecured debt, secured
liabilities and brokered deposits. The adjusted assessment rates would range
from 8 to 77.5 basis points.