Here's another guest post from my friend, former community banker Pat Dalrymple, that, while not technically about bank law, is definitely about banks. Plus, I'm on the road, so Pat is taking a load off.
The demise of community banking has been predicted for the last five years or so. Despite certain significant advantages enjoyed by this group, primarily their market position, and advertising muscle, the prophecy is become more likely, especially for the smallest institutions struggling for profitability.
The challenge to many $200 million asset and under banks is, quite simply, putting on acceptable loan assets: the post meltdown regulatory environment precludes many loans that made up much of the portfolios of small community banks.
Profits are anemic, or non-existent, in a plethora of institutions across the country, compelling management and directors to reassess the very viability of the traditional banking business model.
Many industry practitioners, particularly i small market operations, have lost sight of what banking really is, simply stated: making a profit on the movement of money. It matters not whether it’s Chase or the 2nd National Bank of River City, or how the money moves or, indeed, who moves it. The business of banking is raking in revenue as the commodity circulates.
Unfortunately, a lot of community banks, especially the smaller ones, aren’t doing this well at all. Business customers, turned down for loans, are flocking to so-called “Shadow Lenders”, non-bank
Corporations that are rapidly stepping in where banks fear to tread, often as a result of regulatory mandates. Many commercial customers can qualify for SBA financing, but too few small banks facilitate these programs.
Senior depositors make up a disproportionately larger share of community bank customers, as compared to the big league institutions, but small depositories are doing nothing at all in the area of reverse mortgages.
And then there’s the most egregious failing of all: few banks under, say, $100 million are making residential mortgages available in their markets. On all of these activities, banks aren’t earning a nickel, when nickels are sorely needed, what with loan to deposit ratios at 50 or 60%. But somebody is counting up those nickels, and it comes to lots of nickels.
What should they do? Here are some thoughts:
This is a category that sees the majority of rejections at insured financial institutions. Many would have qualified pre-recession, some would not have. All are bank customers, in one way or another, most are viable borrowers for some capital source, somewhere, and all represent an opportunity for revenue.
Large non-institutional lenders, those specializing in loans for operating capital, lines of credit, and financing for short term emergencies, to name just a few, pay well for referrals. If a bank can’t make a requested loan, the customer is shown the door, and ends up at a shadow bank anyway, often paying an additional fee to a loan broker. Why not guide this borrower, preserve the customer relationship, and get paid for it at the same time?
Too few small banks use this resource. It’s another ignored profit center. If a bank doesn’t want to put any portion of the deal into portfolio, there are plenty of capital sources that will take the loans off its hands. And, if the bank doesn’t want the processing hassle, then there are SBA lenders that pay for a simple referral.
Reverse mortgages are one of those product categories that community banks haven’t even thought about. This is a bit odd, considering that there are a lot of senior customers at small banks. There’s a pervasive lack of knowledge and a body of misconceptions about this lending product, with banks probably being even more ignorant than their customers.
The HECM concept can be an exceptional program for certain senior borrowers, and bankers need to know more about it. Reverse mortgage wholesale lenders have partnership models that can take all of the risk, compliance and otherwise, out of originating these loans, and most of the work. A robust reverse mortgage origination campaign could be mounted by a bank with virtually no additional expense except that for marketing.
RESIDENTIAL MORTGAGE LENDING:
The refusal to ramp up mortgage lending is a glaring abdication of community responsibility by small banks, and an incomprehensible rejection of a profit opportunity.
Every community bank should be the pre-eminent mortgage originator in its market, but virtually none are. Rather, small institution customers get their home loans through mortgage brokers, correspondent mortgage companies, and the mortgage divisions of larger banks.
Banks can profitably originate mortgages with almost no risk if they use the large wholesale lenders that are eager to sign banks up as production partners. The bank needn’t use its own money to fund the loans, and most, if not all of the compliance risk is taken on by the wholesale partner.
There’s a simple way to determine the amount of revenue that a community bank might be leaving on the take: take a given 12 month period, and determine how many bank customers secured a mortgage, either to purchase refinance, through another source. Since small bank customers are among the most loyal consumers on earth, assume that a healthy percentage of those loans would have been initiated and facilitated by the bank, and then multiply the aggregate dollar amount by the “Lender Paid Compensation” offered by the wholesale lender. The amount of foregone revenue is often shocking.
One final suggestion:
Market these services! Someone once looked at the rapidly changing face of banking, especially as it relates to the little guys, and opined, “Bankers are like dinosaurs, standing in the swamp, waiting for the weather to change”.
Don’t wait. Don’t let everybody else make that profit on money movement to your bank customers.