March 29, 2004
The (fiscal) year in review | Excerpts from Superintendent Howard Gray's annual report to the Legislature on the Bureau of Financial Institutions
Maine's financial institutions remain in sound financial condition, generating record profits in calendar year 2002. However, despite the record earnings, asset growth outpaced retained earnings, resulting in a nominal decline in capital ratios. Loan quality indicators continue to improve and generally compare favorably to national averages.
"Maine banks" consists of the 38 banks and thrifts headquartered in Maine, having consolidated assets of less than $1.5 billion. This category does not include Banknorth, Fleet National Bank and KeyBank, each a multi-billion dollar-asset bank operating banking offices in several states in addition to numerous banking offices throughout Maine. The Maine operations of each of these banks represent only a small portion of their consolidated business and Maine-specific data for each is very limited.
In terms of loans and deposits, Banknorth, Fleet and KeyBank are the top three institutions in Maine. These three institutions hold 41% of Maine banking deposits. While this may seem excessive, the 10 largest banks in the United States (0.1% of the number of FDIC-insured institutions, one of which is Fleet) hold 30% of all deposits held by FDIC-insured institutions and the 100 largest banks (1.1% of FDIC-insured institutions) hold approximately 60% of deposits. Fleet and KeyBank, both of which are headquartered outside of Maine, hold 22% of the state's banking deposits. The share of Maine deposits held by out-of-state banks has been declining for several years and compares favorably to the national average of 30% and the New England average of 29%.
Performance in calendar year 2002 and in the first six months of 2003 is best described as steady and solid. Earnings ratios, while still well below their peak levels of the mid-1990s, are at their highest level in at least four years. Loan quality ratios are at their lowest (best) level in recent history and the core capital ratio increased at [June 2003], reversing, even if only temporarily, a five-year trend of declining levels.
Profitability for Maine banks, while historically moving in the same direction as that for banks nationwide, has consistently lagged the national performance. This sub-performance is caused by a lower net interest margin, due mostly to the higher interest expense for the Maine banks, which in turn is attributable to a greater reliance on interest-bearing funds. The gap between Maine banks and all banks has steadily narrowed, dropping from 47 basis points at December 2000 to 19 basis points at June 2003....
Maine banks experienced very strong asset growth in 2002, fueled by the 12% deposit growth. However, this growth slowed considerably in the first half of 2003 to the slowest rate since mid-1996....
Nearly one-half of the Maine banks' loan portfolio consists of residential real estate mortgages (which includes first mortgages and home equity loans). A comparison of [net loan loss] ratios by loan type (e.g., commercial real estate, commercial and industrial, and individual) shows that the Maine banks have consistently had a higher loss experience than the national average. Given the economics of Maine ˆ relatively low per capita income and a very high number of small businesses ˆ the higher loss ratios are not at all surprising.
During the 12 months ending June 30, 2003, total loans held by the Maine banks increased nearly 10%, the highest rate in three years, and climbed to 73% of total assets, up from 71% a year earlier. While all major categories of loans increased, commercial real estate loans was the only category that grew faster than total loans, increasing at a double-digit rate for the eighth consecutive year. Except for the changes in residential real estate and [commercial real estate], there has been minimal change in the loan mix....
The weak stock market of the past few years resulted in deposit inflows for Maine banks. However, the recent resurgence in the stock market appears to, once again, be diverting funds away from banks, slowing the growth in deposits and increasing the reliance on borrowed funds. Core deposits increased at an annualized rate of only two percent during the first half of 2003, after increasing at a 12% rate in calendar 2002. This is the slowest growth rate since 1993....
Looking ahead to 2004, the key challenges for Maine banks include loan and deposit growth, credit quality and interest rate risk. These challenges contribute to an outlook for marginal earnings growth. Earnings in 2004 are not expected to benefit to the same degree that they did in 2003 from the mortgage refinancing boom, securities gains and a reduced loan loss provision, each of which was a strong contributor to 2003 earnings. Also, the risk of rising interest rates will keep the net interest margin under pressure, as will the increased competition for deposits and loans. If the economy continues to rebound, however, and commercial activity rises, then commercial loan demand should rise, generating increased revenues to at least partially offset reductions in mortgage banking and securities gains.
In addition to these challenges, all of which the banking industry has confronted for several years, bankers will continue to be tested by an industry that is becoming increasingly competitive, complex and technology dependent, all of which require more sophisticated risk management techniques.
The credit union picture
"Maine credit unions" consists of the 78 credit unions headquartered in Maine: 15 Maine-chartered and 63 federally chartered. The recent performance of Maine's credit unions continues to be mixed, but the overall condition remains satisfactory. Net income ratios have generally trended downwards, but in calendar year 2002 they were their highest in six years before falling significantly through June 2003. Net worth ratios have steadily declined over the last 30 months as asset growth has been strong during this period, averaging more than 11% per year....
All but three of the Maine credit unions meet the federal definition of well capitalized, and only one is considered undercapitalized. Each of these three was profitable for the calendar year ending December 2002 and the six month period ending June 2003. Notwithstanding the downward trend in the net worth ratio, Maine credit unions remain strongly capitalized....
Maine credit unions have a higher percentage of real estate loans and a lower percentage of unsecured loans and automobile loans [than the national average]. Real estate loans typically have the lowest loan loss experience, while unsecured and automobile loans generally carry a much higher loss experience....
At both the Maine and national level, unsecured loans and new automobile loans have been declining since at least June 2001. This can be attributed to the concentration of credit card lending at a few national companies, attractive new car financing provided by automobile manufacturers, the tax benefits of home equity loans and the mortgage refinancing boom. These trends in the loan mix are expected to continue, notwithstanding the end of the refinancing boom....
Despite some fluctuation or negative movement in key ratios, Maine credit unions remain in an overall sound financial condition. Their immediate challenges are similar to those faced by Maine banks (and all depository institutions nationwide): finding loan growth, addressing the continued pressure on the net interest margin, and controlling noninterest expense. Increased competition from both within and outside the deposit-taking industry, increased demands for products and services from customers, and increased demands from regulatory agencies for enhanced risk management processes will continue to challenge Maine credit unions as well.
"Maine banks" consists of the 38 banks and thrifts headquartered in Maine, having consolidated assets of less than $1.5 billion. This category does not include Banknorth, Fleet National Bank and KeyBank, each a multi-billion dollar-asset bank operating banking offices in several states in addition to numerous banking offices throughout Maine. The Maine operations of each of these banks represent only a small portion of their consolidated business and Maine-specific data for each is very limited.
In terms of loans and deposits, Banknorth, Fleet and KeyBank are the top three institutions in Maine. These three institutions hold 41% of Maine banking deposits. While this may seem excessive, the 10 largest banks in the United States (0.1% of the number of FDIC-insured institutions, one of which is Fleet) hold 30% of all deposits held by FDIC-insured institutions and the 100 largest banks (1.1% of FDIC-insured institutions) hold approximately 60% of deposits. Fleet and KeyBank, both of which are headquartered outside of Maine, hold 22% of the state's banking deposits. The share of Maine deposits held by out-of-state banks has been declining for several years and compares favorably to the national average of 30% and the New England average of 29%.
Performance in calendar year 2002 and in the first six months of 2003 is best described as steady and solid. Earnings ratios, while still well below their peak levels of the mid-1990s, are at their highest level in at least four years. Loan quality ratios are at their lowest (best) level in recent history and the core capital ratio increased at [June 2003], reversing, even if only temporarily, a five-year trend of declining levels.
Profitability for Maine banks, while historically moving in the same direction as that for banks nationwide, has consistently lagged the national performance. This sub-performance is caused by a lower net interest margin, due mostly to the higher interest expense for the Maine banks, which in turn is attributable to a greater reliance on interest-bearing funds. The gap between Maine banks and all banks has steadily narrowed, dropping from 47 basis points at December 2000 to 19 basis points at June 2003....
Maine banks experienced very strong asset growth in 2002, fueled by the 12% deposit growth. However, this growth slowed considerably in the first half of 2003 to the slowest rate since mid-1996....
Nearly one-half of the Maine banks' loan portfolio consists of residential real estate mortgages (which includes first mortgages and home equity loans). A comparison of [net loan loss] ratios by loan type (e.g., commercial real estate, commercial and industrial, and individual) shows that the Maine banks have consistently had a higher loss experience than the national average. Given the economics of Maine ˆ relatively low per capita income and a very high number of small businesses ˆ the higher loss ratios are not at all surprising.
During the 12 months ending June 30, 2003, total loans held by the Maine banks increased nearly 10%, the highest rate in three years, and climbed to 73% of total assets, up from 71% a year earlier. While all major categories of loans increased, commercial real estate loans was the only category that grew faster than total loans, increasing at a double-digit rate for the eighth consecutive year. Except for the changes in residential real estate and [commercial real estate], there has been minimal change in the loan mix....
The weak stock market of the past few years resulted in deposit inflows for Maine banks. However, the recent resurgence in the stock market appears to, once again, be diverting funds away from banks, slowing the growth in deposits and increasing the reliance on borrowed funds. Core deposits increased at an annualized rate of only two percent during the first half of 2003, after increasing at a 12% rate in calendar 2002. This is the slowest growth rate since 1993....
Looking ahead to 2004, the key challenges for Maine banks include loan and deposit growth, credit quality and interest rate risk. These challenges contribute to an outlook for marginal earnings growth. Earnings in 2004 are not expected to benefit to the same degree that they did in 2003 from the mortgage refinancing boom, securities gains and a reduced loan loss provision, each of which was a strong contributor to 2003 earnings. Also, the risk of rising interest rates will keep the net interest margin under pressure, as will the increased competition for deposits and loans. If the economy continues to rebound, however, and commercial activity rises, then commercial loan demand should rise, generating increased revenues to at least partially offset reductions in mortgage banking and securities gains.
In addition to these challenges, all of which the banking industry has confronted for several years, bankers will continue to be tested by an industry that is becoming increasingly competitive, complex and technology dependent, all of which require more sophisticated risk management techniques.
The credit union picture
"Maine credit unions" consists of the 78 credit unions headquartered in Maine: 15 Maine-chartered and 63 federally chartered. The recent performance of Maine's credit unions continues to be mixed, but the overall condition remains satisfactory. Net income ratios have generally trended downwards, but in calendar year 2002 they were their highest in six years before falling significantly through June 2003. Net worth ratios have steadily declined over the last 30 months as asset growth has been strong during this period, averaging more than 11% per year....
All but three of the Maine credit unions meet the federal definition of well capitalized, and only one is considered undercapitalized. Each of these three was profitable for the calendar year ending December 2002 and the six month period ending June 2003. Notwithstanding the downward trend in the net worth ratio, Maine credit unions remain strongly capitalized....
Maine credit unions have a higher percentage of real estate loans and a lower percentage of unsecured loans and automobile loans [than the national average]. Real estate loans typically have the lowest loan loss experience, while unsecured and automobile loans generally carry a much higher loss experience....
At both the Maine and national level, unsecured loans and new automobile loans have been declining since at least June 2001. This can be attributed to the concentration of credit card lending at a few national companies, attractive new car financing provided by automobile manufacturers, the tax benefits of home equity loans and the mortgage refinancing boom. These trends in the loan mix are expected to continue, notwithstanding the end of the refinancing boom....
Despite some fluctuation or negative movement in key ratios, Maine credit unions remain in an overall sound financial condition. Their immediate challenges are similar to those faced by Maine banks (and all depository institutions nationwide): finding loan growth, addressing the continued pressure on the net interest margin, and controlling noninterest expense. Increased competition from both within and outside the deposit-taking industry, increased demands for products and services from customers, and increased demands from regulatory agencies for enhanced risk management processes will continue to challenge Maine credit unions as well.
Most Recent
Most Recent
Comments