A double dose! Dealing with falling NIMs, and dealing with bad loans (July 2009)

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A double dose! Dealing with falling NIMs, and dealing with bad loans (July 2009)

Headache 1:

How is your bank dealing with shrinking net interest margins?

Remedy 1
Burt Blacksher, executive vice-president, Bank of the West, $758.3 million-assets, El Paso, Texas

We have been successful in maintaining our net interest margin with floors on floating-rate loans, which we began implementing about 18 months ago. We saw the likelihood of a significant drop in interest rates and didn’t want to repeat the same mistake that we made during 2001-2002, when the prime rate plummeted to a 40-plus-year low. We have also been able to gradually lower our interest expense, thereby maintaining a 4.44% (average) net interest margin over the past six months. In contrast, our net interest margin averaged 4.20% during the previous six months.

Remedy 2
Amy J. Rohdenburg, senior vice-president/retail market executive, Carolina First Bank, $13.3 billion-assets, Greenville, S.C., part of The South Financial Group.

Here’s how The South Financial Group is dealing with shrinking margins:
1. We let high-interest, single-service, CD-only households walk.

2. We place a high focus on relationship HH customers. [HH = Households by customer] Cross-selling is key.

3. We stress consistent focus and coaching with retail employees in the sales process. We find out the needs of our customers first, before we try to sell them something.

4. We scheduled training for commercial lenders (fall 2009) in selling skills training (including “needs-based sales” training).

5. We place an intense focus on income statements, such that retail employees focus on P&L, specifically “interest income” and funds transfer pricing credit on branch deposits. This helps build more low-cost deposits, more NSF income, and higher FTP credit on deposits.

Remedy 3
Albert H. Garrett, president and CEO, Robertson Banking Co., $240.5 million-assets, Demopolis, Al.

We meet regularly with our loan officers to emphasize to them the importance of keeping the loan rates in line with risk. Loans are reviewed after they are booked to monitor variances from the rate sheet we issue as guidance. Also we are encouraging officers to keep maturities short. One measure of their incentive plan is interest income growth.

Additionally we watch CD rates and conduct a rate survey of competitors in our market. Whenever possible we make sure we are at market rate or below. We watch closely so that we can react quickly to the changing market. Our customer service representatives are charged with maintaining relationships with our customers and they do a good job in a difficult situation. I make a point to tell them that we know they are faced with disappointed customers many times a day. It is much easier to raise a customer’s CD rate, but it is a different matter when they are required to deliver bad news in the form of much lower rates to our customers.

Remedy 4
Mike Murphy, exe cutive vice-president and CFO, First American Bank, $295 million-assets, Norman, Okla.

Our net interest margin is not as healthy as it once was, but we are still fortunate that it is well-above peer average. To combat the loss of NIM that came about due to the drastic reduction in interest rates, we have focused on moderating our expenses. We have and still are undertaking a review of all large contracts, looking for leverage with our vendors and for better ways to get the service we need. That has been a very productive way to offset the effect of the NIM shrinkage. We have also been more in tune to our staffing levels through attrition. We have lowered full-time equivalents by about 3%. By using these simple measures, we have shaved about 4% off our total overhead expenses and look to double that by the end of the year.

Headache 2: Credit Issues
What measures has your institution introduced in the last six months to deal with worsening credit trends?

Remedy 1
Blair Hillyer, chairman, president, and CEO, First National Bank, $163.2 million-assets, Dennison, Ohio.

We have tried to tighten our underwriting for all types of loans, but especially those made to marginal borrowers.

We are also attempting to contact delinquent borrowers early in the past-due cycle to understand the circumstances for the delinquency. We want to support borrowers who are experiencing temporary difficulties due to the economy. However, we need to separate those borrowers who can’t pay from those who won’t pay!

The bank has also reviewed some appraisals from some of our larger commercial credits, to make sure no significant adjustments are necessary. We are also aggressively funding our loan loss reserve, in case the conditions get worse than we believe they are currently.

Remedy 2
Jeremy Harrell, division president, Marion State Bank, $130 million-assets, Sterlington, La.

While our regional economy has taken its share of lumps (and then some), we are still faring very well compared with other parts of the South. In an effort to deal with the sliding credit trends everyone is seeing, we have reduced all of our loan-to-value limits to well below the regulatory threshold; have begun pulling credit reports from two providers, and using the lower of the two scores for underwriting; and have discontinued our home equity line of credit product.

We are also watching credit and collateral exceptions very closely and are only making those exceptions rarely.

And even when we are making exceptions, we are discussing them in our weekly loan committee meeting. We have put an intense focus on past dues and are working them more at the 10-day level, when we used to start acting at 30 days.

We are always looking at our loan policy. Specifically, we are identifying areas that could potentially cause us problems in the future and addressing them beforehand in the policy.

Perhaps the single move that has most helped us curtail credit and collateral exceptions was the move to centralized loan processing. This action has allowed us to catch potential problems and exceptions on the front end, thus allowing our lenders to focus more heavily on working past dues and bringing in quality banking relationships. We are fortunate to still have a good number of quality credits on our books and coming through the door.

Remedy 3
Stefanie Kimball, executive vice-president, lending, Independent Bank, $2.9 billion-assets, Ionia, Mich.

Continuously we adjust our credit processes to keep pace with the deteriorating economy. Several years ago Independent Bank implemented a comprehensive set of credit best practices which serve as a foundation to navigate this credit storm.

During the past six months we have been carefully monitoring execution. For example, we observed that our lenders could benefit from some additional coaching on how to deliver difficult messages more effectively. We conducted a workshop to improve preparation and delivery for those difficult conversations.

Another recent change was adding a third-party appraisal review process for the larger or more difficult properties. With the real estate market as fragile as it is, we felt it was important to get second opinions. In addition, we used the feedback to restrict our list of appraisers to those who really are expert for both the type and location of the collateral.

Remedy 4
Bob Herr, ex ecutive vice-president and loan administrator, Plumas Bank, $478 million-assets, Quincy, Calif.

The economic downturn has negatively impacted the quality of loan portfolios of all financial institutions, including Plumas Bank. In an effort to be proactive, Plumas Bank has implemented a Management Asset Resolution Committee (MARC) to develop an action plan to significantly reduce criticized assets. The committee consists of members of executive and credit administration management, and the activities are governed by a formal written charter. The MARC meets semi-monthly and reports to the Board’s Loan Committee.

More specifically, a formal plan to effect repayment and/or disposition of every significant criticized loan relationship is developed and documented for review and on-going oversight by the MARC. Some of the strategies used include: obtaining additional collateral; obtaining additional investor cash infusion; sale of note to outside party. Each step includes a benchmark timeline to track progress.

The MARC Committee helps to mitigate commercial real estate concentrations by conducting “stress tests” of the CRE loan portfolio to identify loan relationships that do not reflect the type and risk profile of CRE loans desired by the bank.

MARC also provides guidance for the maintenance and timely disposition of other real estate owned (OREO) properties; including developing financing and marketing programs to incent individuals to purchase OREO.

The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0709/index.php?startid=16