By Ron Sanders
Magnolia Bank is a $180 million-asset, Kentucky-based community bank founded in 1919. We operate four full-service banking offices in LaRue and Hardin counties, three loan production offices in Ohio and western Kentucky, a mortgageprocessing location in Campbellsville, Ky., and a commercial leasing company in Louisville, Ky.
ROAA 2015: 2.74 percent
ROAE 2015: 26.05 percent
Assets: $180 million
Retail locations: Four
Our board recognized in 2008 that with the collapse of the lending demand and protracted low-interest-rate environment, the bank had to generate more fee income to compensate for the loss of interest income. Therefore, we made a conscious effort to grow our secondary mortgage market business. We also saw an opportunity to enter in the commercial leasing business, because many players were exiting that business due to asset-quality issues.
Magnolia Bank chose not to enter the real estate development business and, therefore, experienced no asset-quality issues during this period. In addition, our bank is a Preferred Lender in Small Business Administration program loans for the entire state of Kentucky and has developed a robust Farm Services Agency lending program that is originating 90 percent-guaranteed farm loans and selling them to Kentucky banks with low loan-to-deposit ratios. This product was responsible for approximately 15 percent of our bank’s earnings for 2015, and our earnings projections for the program are even higher for 2016.
These new services come with a lot of risk assessment and compliance risk, which is why our bank has high overhead ratios. We employ four compliance officers to monitor the large volume of 1-4 family mortgages we originate and purchase from third parties. We also have people entirely dedicated to the Home Mortgage Disclosure Act monitoring process due to the large volume of our 1-4 family mortgages. Our bank’s total payroll exceeds 100 employees.
A strategy that we developed in 2008 was to eventually retain the mortgage servicing rights of the 1-4 family mortgages that we originate and purchase. While we currently retain more than $500 million of servicing, that amount will be static or reduced due to the Basel III capital penalties levied on our bank’s mortgage service rights.
Our holding company created a captive insurance company in 2015. This entity gives Magnolia Bank the opportunity to deduct up to $1.2 million in insurance premiums for 2015. This amount has increased for 2016 and beyond. The captive allows us to insure against risks that are outside the norm of a traditional bank blanket bond policy, directors and officers, and property and casualty insurance policies. The captive deduction along with the depreciation deductions created by the commercial leasing company help us become more tax efficient as a whole enterprise.
Our community bank’s board and management believe that there will be fewer community banks in the future and that being innovative is the only way to survive and thrive. This innovation comes with a price as the regulatory environment is constantly questioning the strategic planning and direction of community banks. However, our management is confident that we can navigate those issues and prosper in 2016.
Ron Sanders (firstname.lastname@example.org) is president of Magnolia Bank.