Promissory Notes - Banking & Finance Insights: V 3, Issue 4, April 2023

Lee Denton, Bryce Hunter, Joshua Jarrell, Brian Richardson
Spilman Thomas & Battle, PLLC
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Volume 3, Issue 4, 2023

Welcome!

Welcome to our fourth issue of Promissory Notes of 2023. Promissory Notes is our Banking & Finance Insights e-newsletter where we highlight important news articles from the industry and explain why they are important.

Firstly, we wish all of our administrative staff a happy Administrative Professionals Day! Our employees are some of the best in the business and we thank them every day for their professionalism, dedication and knowledge that they bring to work every single day.

 Thank you for reading.

Bryce J. Hunter - Member; Chair, Tax Credits Practice Group; Chair, Community Banking Group; Co-Chair, Banking and Finance Practice Group; and Editor of Promissory Notes

Joshua L. Jarrell - Member; Chair, Public & Project Finance Practice Group; Co-Chair, Banking and Finance Practice Group

Banks are Borrowing Less from the Federal Reserve

“’So the fact that they are now borrowing less means that they’re trying to get back to normal.’”

Why this is important: Investors and commentators look to several measures of banks’ health, including earnings reports and amounts that banks borrow from the Federal Reserve. For the first time in a few months, banks are borrowing less, which investors and commentators view as tentative good news. Following recent bank failures (e.g., Silicon Valley Bank) in recent months, the Federal Reserve, typically the lender of last resort, went out of its way to ensure that banks had plenty of money, offering loans from its traditional backstop, the discount window, and creating new lending programs.

Over the past few weeks, banks have been borrowing less from the Federal Reserve which is a sign that banks are attempting to get back to normalcy. Despite the central bank data showing banks borrowed about $9 billion less from the Federal Reserve in the week ending April 12, banks still borrowed about $139 billion, which is still much more than in usual cycles. Some commentators believe the financial system may be headed for a chronic condition where Federal Reserve lending to banks does not increase, but banks are still under stress and will be reluctant to lend out any extra cash on hand. --- Bryce J. Hunter

Credit Unions Expected to Remain an Auto Lending Force

“Credit unions continued to beat out rivals for auto financing market share during the fourth quarter of 2022.”

Why this is important: In recent years, and as a result of many varied market forces, the auto industry has been particularly volatile, both for new and used purchases. Through it all, potential lenders have faced numerous challenges in structuring and closing their auto financing transactions. Credit unions have been on the rise, and are rapidly becoming the go-to financing option for consumers looking for auto financing options. Comparing data sets from Q4 reporting over the past five years shows that credit unions have emerged through the COVID-19 pandemic cycle as the top source for consumer auto finance in the used vehicle loan and lease markets. Credit unions are unique in reflecting consistent market share growth for both Q4 2021 and 2022, with the largest growth coming through Q4 2022. Largely on the success of the used vehicle market, credit unions also represent the overall market share leader for all auto financing in the loan and lease markets, although this is likely a reflection of the strength of the used vehicle market across the past two years. As the new vehicle market ramps back up in production, those overall numbers may shift again in coming years. One thing is certain, however, and that is that credit unions are quickly becoming a go-to choice for consumers seeking auto financing. Time will tell if those same market forces will shift to other lending markets. --- Brian H. Richardson

Mortgage Forbearance Improves as Pandemic Emergency Draws to a Close

“MBA forecasts a recession in 2023, but credit quality is generally good, and borrowers can access enhanced loss mitigation options.”

Why this is important: As the COVID-19 national emergency draws to a close, the forbearance rate has decreased month-over-month, according to a recent report from the Mortgage Bankers Association (“MBA”).

The total number of loans in forbearance in March decreased five basis points from February, dropping to 0.55 percent from 0.60 percent of servicers’ portfolio volume. About 275,000 homeowners were in forbearance plans as of March 31. The largest improvement was with Ginnie Mae loans in forbearance, which declined 10 basis points to 1.18 percent in March while the share of Fannie Mae and Freddie Mac loans in forbearance decreased 2 basis points to 0.26 percent. Overall, the total for loans serviced that were current last month (i.e., not delinquent or in foreclosure) reached 96.35 percent of the portfolio, an increase of 59 basis points compared to February. 

The report cited MBA’s forecast for a recession in 2023, which may change the current performance levels, but stressed that credit quality is generally good and many borrowers facing financial hardship can now access enhanced loss mitigation options that resulted from successes of pandemic-related policies.

After the government-sponsored enterprises completed more than one million COVID-19 payment deferrals, the Federal Housing Finance Agency said it was making mortgage payment deferrals a key part of its standard loss mitigation toolkit for borrowers with eligible hardships, including a recent announcement that Fannie Mae and Freddie Mac will enhance their payment deferral policies to allow borrowers facing financial hardship to defer up to six months of mortgage payments. --- Bryce J. Hunter

Data’s Crucial Role in Advancing Risk Functions for Financial Services

“Celent estimates that global spending on risk management technology in financial services will reach $148.0 billion in 2026, up from $109.8 billion in 2023, a 10.5 percent compound annual growth rate.”

Why this is important: Some of the largest advances in leveraging data analytics for financial services have taken place during the past five years. As data continues to drive market initiatives, it will be absolutely essential for financial institutions to develop and implement more robust data management tools, particularly with cross-database analytics. Management teams should focus on implementing and developing protocols for regulatory compliance, operational resilience, financial cybercrime compliance, and emerging risk analysis. Many of these functions require and benefit from artificial intelligence-driven analysis. This is particularly helpful in compliance functions because AI protocols can accelerate an organization's efforts to de-silo operations and databases following a corporate restructuring, or more frequently a merger. --- Brian H. Richardson

Small Banks should be Exempt from FDIC Special Assessment: ICBA

“A community bank trade group is urging the Federal Deposit Insurance Corp. to exempt small banks from a special assessment to recover roughly $22.5 billion in losses to the Deposit Insurance Fund in the wake of several bank failures.”

Why this is important: In a recent letter to the FDIC Chairman, Independent Community Bankers of America (“ICBA”) CEO Rebeca Romero Rainey said large banks should be on the hook for the special assessment, since they would be the main beneficiaries of the FDIC’s decision to backstop uninsured deposits at Silicon Valley Bank (“SVB”) and Signature Bank, two regional financial institutions that collapsed last month.

In an effort to limit a cascading effect in bank failures, regulators stepped in to waive the FDIC insurance cap of $250,000 per depositor and make all of SVB and Signature’s depositors whole. As a result, the FDIC estimates the emergency measures will cost the Deposit Insurance Fund (“DIF”), which is made up of fees paid by banks, roughly $22.5 billion. Romero Rainey urged the FDIC not to include community banks in any special assessment aimed at making up that deficit stating that “Community banks and their customers shouldn’t have to pay for the miscalculations and speculative practices of large financial institutions like SVB and Signature. If any assessment increase is warranted, it should be imposed on the institutions that pose the most risk to the DIF — not community banks.” She stressed that community banks operate under an entirely different business model, one that is focused on relationships with consumers and small businesses in the cities and towns in their hometowns.

The timing of the ICBA chief’s remarks was not coincidence. It came ahead of an FDIC board meeting where members are set to discuss a single agenda item: The Deposit Insurance Fund’s restoration plan. Lawmakers as well as the White House appear sensitive to the impact on community banks and are urging regulators to ensure that the costs of replenishing the DIF does not fall on community banks. --- Bryce J. Hunter

Tech to Boost Community Bank Growth, Research Shows

“Digitization and online banking will help the community banking sector grow substantially over the next five years.”

Why this is important: Over the next five years, analysts are forecasting 5 percent growth in the community bank market share of overall banking services. If 5 percent seems comparatively small, consider the dollar comparison represented by that share: $207 billion. Community banks have many factors on their side as they continue this growth curve. First, their size allows them to be more nimble in implementing technologies, or changing course. In many instances, this is accomplished by strategic partnerships, such as the partnership recently announced by First Fidelity Bank and its prospective fintech partner Unifimoney, which is driving growth of its digital and online offerings, as one example. Fintech partnerships and other technological developments can help community banks continue on growth trajectories. Alternatively, for those that may be struggling with consumers departing for more non-conventional banking options and fintech startups, it can help stem that tide as they become better equipped to meet customer demand. Strong online offerings appear to be a major driving force in the growth of community banks, and will continue to drive that progress over the coming five-year cycle. ---  Brian H. Richardson

SAY WHAT??—Defamation in an Era when Content is King

By Lee D. Denton

On April 18, 2023, Fox News agreed to pay Dominion Voting Systems a staggering $787.5 million to settle a defamation lawsuit. Particularly startling about the settlement is that Dominion was valued at around $51 million as recently as 2018, meaning that the settlement resulted in a payout up to fifteen times Dominion’s value. Dominion filed the lawsuit in response to publicly broadcast statements by Fox News and its guests after the 2020 election. Dominion alleged that the statements were not only false, but that Fox News knew that the statements were false and repeatedly broadcast them anyway.

Imagine one of your customers perceives that he suffered some slight (real or imagined) during an interaction with your company. Unbeknownst to you, he is one of the 4.5 billion people with a social media account. Fueled by outrage, the impression of anonymity, and the desire for revenge, the customer quickly tweets out a fake story about their interaction with you and your company in a matter of seconds, and goes on with his life. One of that customer’s followers retweets the story to his 10,000 followers, who share that story with their followers, and so on. Before it is over, your company’s business is devastated.

Click here to read the entire article.

 

 

 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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