Though 96 percent of the 275 state-chartered banks in Iowa have a CAMELS rating of 1 or 2, there’s been a slight increase in the number of 3-rated banks in Iowa in the past two years. “You may think this increase is expected because of the current ag environment,” said Ron Hansen, Superintendent of Banking for Iowa. “I would tell you it’s as much caused by a decrease in the management component of the CAMELS rating as it has been by the asset quality component.”
Driving Hansen’s concern about management is succession planning. In banking, 28 percent of senior managers are older than 62 while the median age for middle managers is 52. Additionally, succession planning was listed as a top concern among Iowa bankers in a survey conducted by the Iowa Division of Banking. The Division itself is facing a generational shift as 19 percent, or 10 out of 54 field examiners and bank analysts, become eligible for retirement this year. In anticipation, the DoB hired nine examiners in January and will bring two additional examiners on next month.
Succession planning was the subtext of the Iowa DoB’s annual Day with the Superintendent, held April 12 in Des Moines. “It continues to be difficult for banks in Iowa to find people who want to work and live in rural areas,” Hansen said. Calling succession planning an industry issue, he urged bankers to be proactive in recruiting, to visit high schools and college career fairs and talk to young people about careers in banking. The DoB visited a career fair sponsored by a finance club at Iowa State University, one of many the Division attends each year, Hansen said. Employers in attendance were primarily brokerage firms and insurance companies. No one representing the banking industry was in attendance except for regulators.
“We as an industry need to do a better job raising awareness about jobs in banking,” Hansen said. “This is an industry problem and we need your help fixing it.”
With newer examiners being a larger portion of its field staff, Hansen said the DoB created a new chief examiner position charged with accelerating the training for new examiners, a process that currently takes three to five years. “Because it is expensive and time consuming to train new examiners, employee retention is critical to us,” he said.
Calling community banks one of the main economic drivers of Iowa communities, Hansen offered this snapshot of how the industry fared in 2017:
- 98.3 percent of Iowa institutions were profitable, a slight decrease from the previous year but better than the profitability rate of 94.6 percent nationally.
- Return on assets was 1.15 percent compared to 0.97 percent nationally. Iowa consistently outperforms the national average, Hansen said.
- Yield on earning assets was 4.01 percent. “Iowa banks have fared better than the national average since 2007,” Hansen said. “I assume that’s because we can get a little better rates on our loans in rural areas.” The national yield went up 23 basis points year-over-year while the Iowa yield rose 9 basis points.
- Iowa banks had an average cost of funding earning assets at 0.59 percent, up from 0.51 percent in the two previous years. “Iowa has been above the national average since 2007,” Hansen said. “I assume this is because larger banks generally have a higher level of non-interest bearing deposits on their balance sheets.”
- Net interest margin was at 3.42 percent, up 2 basis points from the previous two years. Hansen said net interest margin could compress as interest rates climb and competition for loans does not allow loan rates to increase correspondingly. “It’s extremely important for banks to have a reliable interest rate risk model that accurately portrays their position,” Hansen said. Stressing the importance of having a strong interest rate risk program, Hansen said, “we occasionally run into an assumption that’s not supported by bank specific data.”
- Net charge-offs to total loans was at 0.15 percent, a slight upward trend but “manageable,” Hansen said. Iowa banks peaked at 1.02 percent in 2010 while nationally, banks peaked at 2.55 percent.
- Non-current loans and leases to total loans and leases decreased to 0.62 percent from 0.70 percent. Iowa banks also compare favorably to national numbers in non-performing assets to total assets, 0.54 percent down from 0.58 percent a year earlier.
- The most recent adversely classified assets to Tier One capital and ALLL ratio was 15.6 percent. The rolling average for the past 12 months, as of March 31, 2018, was 15.9 percent. The ratio peaked at 52.3 percent in 2010.
- The FDIC reports 95 problem banks in the nation, “problem” defined as having a CAMELS rating of 4 or 5. One of the 95 is located in Iowa. Total assets held by problem banks nationally was $14 billion, a drop from $28 billion a year earlier.
Preceding his summary of state bank performance, Greg Clausen and Darrell Lingle of Eide Bailly LLP, advised bankers to actively prepare for the 2021 CECL implementation. “Have the CECL team in place now and identify your risk pools now,” Lingle advised. “That will help you know what your losses are and that will drive what information you need to pull out of your core system.”
The pair also said it was key for banks to ensure their board members were up-to-date on the CECL process. “They don’t need to be experts in CECL but they do need to understand the methodology,” Lingle said, adding “they need to understand that it’s being applied appropriately.” Clausen advised bankers to loop their internal audit function into the CECL team.
In response to Clausen and Lingle’s presentation, Hansen acknowledged there would be a learning curve for CECL amongst his examiners. “Our people at the Division of Banking will be learning alongside you. So it will not be a ‘gotcha’ moment when we come into the bank the first time after the implementation of CECL,” Hansen said. “We will, however, expect a good faith effort at the implementation of the standard.”