On the rebound: An overview of the Maine Bureau of Financial Institutions' report to the Legislature
After a tumultuous 2009, last year was an improvement for Maine-based financial institutions. Having escaped the hardships that befell their larger counterparts, many institutions rebounded in 2010. Though full-year data for 2010 isn’t yet available, the first three quarters show some improvement for Maine’s financial institutions, which continue to perform better than their national peers in many respects, according to the Maine Bureau of Financial Institutions’ annual report to the Legislature.
MAINE BANKS
Net income
After a mixed 2009, when banks saw only slight earnings increases and deteriorating loan quality, the first three quarters of 2010 showed moderate growth in core operating earnings, thanks to revenue growth and a decrease in noninterest expenses. As a result, net income for the 28 Maine-based banks more than doubled from $45 million in September 2009 to $101 million in September 2010, a 124% difference. However, the report called the total net income “less than desirable,” but said it was enough to boost capital ratios above those of their national peers for the first time in several years.
The 28 state-chartered banks continued to outpace their national peers, and their performance has improved compared to other banks in the country since 2007. Nationally, 19% of all FDIC-insured institutions were unprofitable in 2010, while only one Maine bank, or 4%, was unprofitable.
Assets and loans
Total assets at Maine banks rose 3% to more than $18 billion, while total deposits increased 6.5% to more than $13 billion.
For the first time in more than a decade, loans declined from September 2009 to September 2010, mostly attributable to the runoff of indirect loans, such as auto loans, at a few banks that ended their dealer relationships in 2008 and 2009. Loans fell 0.7% to $13.2 billion. Individual loans, which accounted for 3% of the total portfolio, dropped 27%, while construction loans fell 16%. Other loan types increased, with home equity loans rising the most at nearly 8%. Banks originated more than $900 million in new residential first mortgages in the three quarters of 2010, of which nearly 50% were sold. Business loans between September 2009 and September 2010 increased 2.2%, or $100 million, with nearly all of the growth coming from commercial real estate loans. From June 2009 to June 2010, however, the percentage of business loans for small businesses fell from 59% of the total to 52%.
The mortgages in the process of foreclosure dropped in the third quarter of 2010, but the number of completed foreclosures continued to rise through September. Foreclosure data is based on a bureau survey of the 32 state-chartered banks and credit unions.
Though loan quality continued to deteriorate, nominal improvement in the third quarter of 2010 indicates that the peak has already been reached or will be reached soon, meaning improvement will follow.
CREDIT UNIONS
Net income
In 2009, credit unions were hampered by deterioration in loan portfolios and a shakeup in the corporate credit union market, which cost the National Credit Union Administration between $14 billion and $16 billion. A modest increase in net income was seen in 2009, but the amount was still the second lowest annual net income in at least 15 years. But, net income has continued to grow modestly in the first three quarters of 2010, thanks to both higher net interest income and operating income and a lower provision for loan losses. From September 2009 to September 2010, net income increased 4.4% to $20 million.
However, in 2008 and 2009, net income did not grow enough to keep up with asset growth, leading both Maine and national credit unions to see declining net-worth-to-asset ratios. Those ratios increased nominally by September 2010, as asset growth slowed and net income grew.
Assets and loans
Assets and share growth exceeded loan growth in 2009 and year-to-date 2010, which led to declines in loan-to-asset and loan-to-share ratios by 66% and 77%, respectively. But those ratios are above the national average. Loan growth slowed in 2009 to 3.3%, the lowest in 15 years, and slowed in 2010 to 2.6%, though those rates compare well with national averages. In 2009, loan growth at Maine credit unions was driven by increases in first mortgages and used auto loans, which grew 7% and 5%, respectively.
In 2009, credit unions granted $419 million of first mortgages and $210 of other mortgages, compared with $358 million and $294 million, respectively, for 2008. For the first nine months of September 2010, they granted $309 million for first mortgages and $139 million for other mortgages, slightly less than they garnered for the same time period the year before.
Compared with 2000, the loan mix at the state’s 66 credit unions in September 2010 shifted to fewer auto loans and unsecured loans, to more first and other mortgages. In 2000, 32% of credit union loans were auto loans, while in 2010 it was 24%; in 2000, 32% were first mortgages, while that increased to 43% in 2010. Unsecured loans dropped from 12% in 2000 to 6% in 2010. Maine credit union shares increased 11.2% in 2009, the highest rate since 2001, but year-to-date September 2010 share growth slowed to 6.6%. This rate, however, was still more than three times faster than loan growth.
OUTLOOK
According to the bureau, the outlook for Maine’s financial institutions is satisfactory. Earnings remain below what is needed to sustain long-term growth, but have sufficed to ride out the recession and sluggish recovery. Capital ratios have also increased, and nose-diving loan portfolios have begun to right themselves in 2010. Without more significant economic and employment growth, however, credit availability will remain tight, and the performance of Maine institutions will likely remain weakened as the economy lingers in the doldrums. Sweeping financial reform, enacted last July, will also add a level of uncertainty, and new regulations will reduce revenue sources and increase costs, negatively affecting profitability for many institutions.
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