2020 Journal of Community Bank Studies

2020 COMMUNITY BANK CASE STUDY COMPETITION

portfolio. It shows the shift of the emphasis, but it does not show how the focus has shifted or whether the change is in tune with the bank’s strategic plan, which is to grow commercial loans and sell more of the mortgages to the secondary market. Figure 3 displays the dollar value of loans in each category, which provides a better look into the portfolio. The dollar amount of residential mortgage increase had a significant bump in 2019; commercial loans experienced a similar event. This displays that the bank has grown its commercial loan organically. Also, the recent acquisition explains the sudden increase in both residential mortgage and commercial

their homes. The shift to a greater percentage of commercial lending will provide the bank stability in the future. As shown to the Figures 4 and 5, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets remain stable and well above the well-capitalized level. This reflects the bank’s policy to keep the capital level high so the bank can absorb losses. It also allows the bank to acquire other banks when the

Figure 4: Tier 1 Capital to Risk-Weighted Assets

Tier 1 Capital to Risk-Weighted Assets Minimum Well Capitalized

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loans. While the bank’s desire for the growing commercial loan in the organic approach is vividly displayed in Figure 4, the composition of the bank played a dominant role in the change in the loan portfolio. This change in the portfolio will likely result in improved performance of the bank, considering that the yield on commercial loans is typically higher than the residential mortgages. Additionally, this shift reduces the interest rate risk. The reduction of such risk is particularly crucial in the time of economic contraction induced by the COVID-19 pandemic. The US Federal Reserve greatly reduced its interest rates in March 2020, and many customers began to refinance

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Figure 5: Total Capital to Risk-Weighted Assets (by percentage)

Total Capital to Risk-Weighted Assets Minimum Well Capitalized

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