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THE BANK REGISTER TO ATTEND S UMMJT Visit www.thebanksummit.com today!
Established 1872 WEEK OF MONDAY, SEPTEMBER 15, 2014 www. bankerandtradesman. com
ER&TRADES THE FINANCIAL SERVICES AND REAL ESTATE WEEKLY FOR MASSACHUSETTS
UNDER PRESSURE
Not For Lack Of Interest
Non-Interest Income Declines Ramp Up Margin Pressure
BY LAURA ALIX BANKER & TRADESM~N STAFF
WEe asset quality is improvg and the number of problem
anks has continued to decline, the recent increase in banking industry earnings is less because of robust loan demand and more the result of cutting costs.
Though net interest income increased $2 billion, or 1.9 percent, in the second quarter this year, non-interest income fell $3.6 billion, or 5.3 percent, across the industry in the second quarter, according to the Federal Deposit Insurance Corp.'s most recent quarterly banking profile.
A similar dynamic was at work beyond the very biggest money centers. Community banks increased their net income $166 million, or 3.5 percent, to $4.9 billion, but saw non-interest income fall $475 million, or 9 percent, from the yearago period.
Some of that is down to a decline in mortgage banking income. The FDIC recorded a $3.7 billion decline in sales, se-
Continued on Page 10
COMMERCIAL INTERESTS
MassHousing Scores Second
Best Year Despite Demand, Agency Is
Down $434M Over 2013 BY SCOTT VAN VOORHIS
BANKER & TRADESMAN COLUMNIST
No doubt about it, when you rack up your second-best year in business, it is certainly a cause for celebration.
But when it comes right after your best year ever, it can be also be a cause for concern,
as MassHousing is findiiig out.
The state's affordable housing banker, the Massachusetts Housing Finance Agency backed $766 million in affordable mortgages for work
SCOTT VAN VOORHIS ing- and middle-class
families across the state. It was the secondbest year in the quasi-public housing agency's nearly 50-year history.
"It was a terrific year for us," said Thomas Gleason, chief executive of MassHousing, said of the numbers piled up dur
Continued on Page 3
A Publication of The Warren Group
Subcontractors Win Payment Battle "It doesn't really have any flexibility and
it eliminates the ability of owners to negotiate this on a project-by-project basis," Small said. "As a result, owners and developers are going to use well-established contractors and not going to take a risk with the ones they don't have a relationship, because they don't want to take the risk of them not finishing the job."
BY STEVE ADAMS I BANKER & TRADESMAN STAFF
T:e final stages of a construction projct are often the most contentious,
and can lead to a disproportionate share of financial disputes.
For years, the industry's solution has been a concept called retainage fees. Essentially, the fees act like a security deposit that owners withhold from contractors, and general contractors hold back from subcontractors, giving them an incentive to tie up the loose ends ofthejob.
Beginning in November, the ground rules will change in Massachusetts for private construction projects $3 million and up. A new law sets a maximum retainage fee of 5 percent, down from the 'Widelyaccepted industry standard of 10 percent. And it spells out a series of deadlines for when the money is due.
Legal experts say the new law could reshape every step of the construction cycle, as funds flow from lenders to developers, and in turn to general contractors and subcontractors. Some predict it could drive up the cost of projects.
"There are many traps in here for the uninformed," said Peter McGlynn, a managing
I
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Residential .............................................................. 7
director at Boston-based Bernkopf GoodmaniJJ>.
Passage of the law, signed by Gov. Deval Patrick last month, was a victory for unionized building trades and subcontractors, who had lobbied for the more aggressive requirements on payments for three years.
Backers say the new law was needed because late payments are a chronic problem in the industry, with subcontractors
Legal experts say a new law could reshape every step of the construction cycle as funds flow from lenders to developers, and in turn to general contractors and subcontractors.
Opponents say the law will lead to more disputes and lawsuits that shut down projects.
NAlOP Massachusetts, which represents commercial developers and owners, was not invited to provide input on the bill, and the result is flawed legislation, said Tamara Small, NAlOP's senior vice president of government affairs.
In Person ......... ......................................................... 8
Commercial & Industrial .. ........................................ 9
Banking & Lending ................................................ 10
sometimes forced to wait years to get paid in full.
Passage of the "prompt payment bill" in 2010 addressed some of those complaints, said Richard Fisher, president of Associated Subcontractors of Massachusetts. That law gave subcontractors the ability to suspend work if they were behind in receiving payments, without running the risk
Continut!rl O}t I'agt'!)
Classified Sections ...................... ........................... 13
Credit Union Heroes ................................................ Bl
Records Section ...................................................... Cl
10 BANKER & TRADESMAN SE.
BANKING & LENDING
As Non-Interest Income Declines, Banks Cut Costs, Get Aggressive On Loans Continued from Page 1
curitization and servicing of one- to fourfamily homes and also noted that trading income declined for a fourth consecutive quarter, falling $721 million, or 10.1 percent, industry-wide.
But for many conununity banks, the Dodd Frank Act also took a bite out of overdraft fee income, and while some have reacted by eliminating fee-free checking accounts, Ron Shevlin, a senior analyst at Aite Group, said the income generated by those monthly fees has apparently not been enough to counterbalance the decline in overdraft income.
Don't forget the Durbin Amendment, either, which capped how much banks could charge on interchange fees, thereby putting a dent in non-interest income for many banks.
"If those numbers are still coming down, what it's saying is that the increase in card volume is simply not making up for the decline in non-interest income generated through interchange," Shevlin said.
A Balancing Act With non-interest revenues declining,
mortgage demand still soft and commercial lending ultra-competitive, that means banks are caught in a kind of balancing act of trying to increase revenue while also managing expense creep, said Matt Pieniazek, president of Darling Consulting Group in Newburyport.
"A lot of banks are looking at the additional compliance costs 3$SOciated with Dodd-Frank and just deciding at this juncture that they're going to pull back and cover their reduction in revenue by reducing other costs," he said. For instance, some banks are cutting staff, re-
visiting branch strategy or getting out of the mortgage business altogether.
On the other hand, Pieniazek said he's observed a smaller number of banks that have reacted by ramping up their mortgage lending efforts, recruiting thirdparty originators or agents in the hopes of casting a wider net beyond their preexisting market area
Still others have gotten more aggressive on loan pricing, in particular for jumbo mortgages and conunercialloans, with risk-adjusted pricing on conunercial loans now nearly as aggressive as it was pre-crisis, he said.
Some banks can rely on non-interest income from other sources, like wealth management services for wealthier clients. For instance, Independent Bank Corp., the parent of Rockland Trust, saw a nearly 18 percent year-over-year increase in its investment management income in the second quarter, even as its total noninterest income barely budged from the year-ago period.
However, services like wealth management and trust departments are very much volume-driven business lines, Pieniazek said. More conunonly, increasing margin pressures are driving banks to take a
A NEW TENANT
harder look at their expenses, and that can mean reducing personnel, rank-ordering branches from most to least profitable, and more generally, trying to do more with less.
'The $64 Billion Question' That's reflected in the FDIC data, which
indicate that the increase in earnings during the second quarter was more the result of cutting costs than of any boom in loan demand.
So how might an industry struggling with increasing regulatory demands and razor-thin margins generate non-interest income, without alienating its customer base?
"That's not just the $64,000 question. That's the $64 billion question," Shevlin said.
While qualifying that he doesn't like to use buzzwords like "fundamental," Shevlin nonetheless thinks the banking industry may be due for a shakeup or a fundamental rethinking of the traditional business model - especially when considered in light of competition from lighter, more agile neo-banks, like Moven or GoBank.
"The real challenge is what new products and services can they develop, dream up and implement that consumers would value and pay for," Shevlin said.
"I don't know if you've looked at your cell phone bill lately, but we pay for stuff that's outrageous, and we don't complain about that as much as if we get hit with a $5 monthly fee on our checking account," he said. "The challenge won't be solved within the next two or three quarters. It really takes a rethinking of the business model, how revenue is generated, and what consumers will pay." •
Email: [email protected]
Cambridge Mortgage Group Moves Into Fed Building
BY LAURA ALIX BANKER & TRADESMAN STAFF
Early in his career, John Habeeb took a boat on his conunute to an office on High Street, but his busi
ness has long since moved out of town to Hingham. Now, though, he's taking that same boat again and reminiscing about his early days in the mortgage business.
Cambridge Mortgage Group, of which Habeeb is regional sales manager, recently opened a new location in the Federal Reserve building at 600 Atlantic Ave. The mortgage company, which is a subsidiary of South Shore Bank, partnered with 600 Atlantic Federal Credit Union, which is headquartered in the fourth floor of the Federal Reserve building, to offer a wider line of mortgage products to the credit union's members.
"The credit union's charter limits the size and duration of loans they can write," Habeeb said. "So there's a big gap in their product mix, which we are wellsuited to fill."
Jumbo loans are one example, and non-QM loans are another. Because Cambridge Mortgage Group is a subsidiary of South Shore Bank, the company can hold loans on its own portfolio, which has made it easier for the group
Mortgage Co. To Partner With Credit Union
to lend to high net-worth borrowers who might not fit into a QM loan.
The credit union has just over 1,600 members, many of them Federal Reserve employees, according to President and CEO Ralph Moore.
Besides credit union members and Federal Reserve employees, the new location also gives Cambridge Mortgage Group access to the 800 or so other people who work in other companies in the Federal Reserve building, and it certainly doesn't hurt that the new office is down the hall from a cafeteria
"From what I've seen, the caliber of borrower is premium: good credit, good employment, good income. It's a nice profile, and it seems like the loan amount requests are higher than conforming," Habeeb said.
Habeeb won't be taking that boat every day, though. Two other loan officers will divide up the week to staff the Federal Reserve office, and Habeeb will fill in where needed.
The company moved into its new office on Aug. 1 and just closed its first loan to a credit union member last week
"Over the years, I think mortgage companies have looked toward strategic alliances with colleges and hospitals and some corporations, to provide mortgage
services in a more convenient way," Habeeb said. "I think it'll be a good match of capabilities, I think it'll be good for us and good for them. They'll
get good service and we're right here, so it can't be more convenient." •
Email: [email protected]
