Kevin T. Timmons – ‘Positive surprises’
It appears that banks learned their lesson in the 1990 recession, which saw many of them close due to over-investment in shaky real estate deals. Preliminary fourth-quarter earnings releases show that although banks aren’t unaffected by this recession, they have fared well and are in a good position to ride out the rest of the economic turbulence.
Banks did pretty well … Declining interest rates really helped them out, said Robert B. Segal, a portfolio manager with J. William Mantz Investment Advisors in Gloucester.
Community banks that are in the mortgage business benefited from lower rates and were able to glean some of the refinance business. Additionally, they were able to get their costs down on the deposit side from lower rates, said Segal. As expected in any downturn, delinquencies are up, but not by staggering amounts.
Although many financial institutions have yet to post their fourth-quarter earnings, thus far there have been no great surprises, according to Kevin T. Timmons, senior analyst at CL King & Assoc. in New York.
Obviously, the economy is not what people thought it would be. If you look back a year ago, no one would have thought it would have gotten as soft as it did in the fourth quarter, he said.
But smaller banks, on the whole, fared better than some of the largest, which have taken major hits from the unexpected financial woes of corporate giants like Enron Corp., Kmart and the economic turmoil in Argentina.
We’ve seen a lot of gains in net interest margins and also a lot of favorable changes in the mix of deposits, which have helped to produce some positive surprises in terms of earnings, said Timmons of smaller banks.
Although it has experienced some minor charge-offs related to its recent acquisition of two Massachusetts banks, Portland-based Banknorth Group experienced growth in operating and net income for the year.
I’m happy to be on this call because asset quality, that we hoped wasn’t going to be a problem in a downturn for us, has continued to be very good and very strong for us. We’re very pleased with our asset quality numbers, said William J. Ryan, chairman, president and chief executive officer of the bank, during an earnings conference call.
Ryan said that asset quality continues to be the primary focus of Banknorth. Both acquisitions, Andover Bancorp and MetroWest Bank, have good asset quality and will undergo conversions to Banknorth systems this month.
The one exception is some charge-offs taken at year-end for a commercial leasing portfolio at Andover Bank. We did recognize in buying that company that that portfolio was under a bit of stress, so one of the reasons for our charges being a bit higher was part of the commercial leasing portfolio at Andover, said Ryan.
Banknorth’s percentage of total loans that were non-performing increased 2 basis points to 59 from last year’s numbers, said Ryan.
Similarly, non-performing assets as a percentage of total assets were at 38 basis points this year vs. 37 a year ago. I’m not sure there are many banks that have been able to show that kind of asset quality performance during 2001, he said.
‘Fairly Decent’ Growth
Fee income, while declining, was strong for the bank in some categories – including insurance – as a result of the multiple acquisitions of small insurance agencies. Investment management fees, however, are down, said Ryan.
While he expects loan growth to continue during the coming year, it will remain sluggish. The 0 percent financing offered by auto lenders also affected total growth. Banknorth will continue to further reduce its residential loan portfolio, said Ryan.
That said, we’ve seen the beginning of the year be fairly decent, and we see a strong backlog. But again, where we’d usually look for loan growth at 10 percent, we’re not looking for that this year. Loan growth in the 6- to 8-percent range is probably more a good number for us, considering we still have a quarter or two of recession, he said.
Total loan growth in the fourth quarter, excluding the two acquisitions, is about 2 percent.
While earnings at Somerville-based Central Bancorp showed a modest improvement over last year (net income for 2001 was $949,000; net income for 2000 was $900,000) it improved its performance by decreasing operating expenses while reaping benefits from the increased mortgage lending activity. We are pleased with the recent improvement in our core earnings, as measured by net interest and dividend income, said John D. Doherty, president and chief executive officer. These favorable trends resulted from an increase in lending activity coupled with a reduction in the costs of our deposits because of lower interest rates.
Additionally, the bank has maintained a high quality loan portfolio. Only one non-performing loan existed for the year, totaling $143,000.
Non-performers have generally been up, said Timmons. We’ve been coming off an environment where the non-performing levels were extremely low for five or six years now. You knew there’s only one direction they could really go. So the fact that they’re up is not that frightening to me, he said.
What’s more disturbing are the amounts cited for large banks dealing with hundreds of millions of dollars of loss.
Hingham Institution for Savings experienced a 20 percent rise in its net income earnings over 2000. Net income for the year was $5.1 million. It also experienced a rise in fourth-quarter earnings to $1.3 million over 2000’s $1.2 million.
A 6-percent increase in total loans and 10-percent increase in total deposits also helped the bank’s earnings. Loan originations increased from $92 million in 2000 to $105 million.
Our record earnings and very strong asset quality, in the face of rising unemployment and a struggling national economy, stand as clear testimony to the diligent efforts and good judgment of our board, management and staff, said Robert H. Gaughen Jr., president and chief executive officer.
But while banks are in a much better position to ride out the rest of the recession, bankers aren’t as optimistic about the quick turnaround some have predicted.
I think the regional economy is sliding sidewards, said Ryan in response to an analyst’s question. I don’t think it’s getting a lot better, but it’s not getting worse.
Ryan said the Christmas season wasn’t quite as bad as had been predicted, but he feels more layoffs will be coming down the pike by those companies that didn’t want to give employees a pink slip during the holiday season.
I don’t see the economy growing by a lot in the first two quarters, but it hasn’t been as bad as had been predicted. My sense is, the potential in the third and fourth quarters for things getting better probably rests there, said Ryan.
The consensus from the management teams is that second half of the year looks pretty solid, but there’s a lot of caution in the outlook between now and then, said Timmons. Between now and midyear, I think, the bankers are holding their breath to some extent in hopes that the economy flattens and then begins to turn back up again.
The fourth quarter Regional Outlook recently published by the Federal Deposit Insurance Corp. was cautiously optimistic as well. It compared the percentage of total banks having a weak standing going into the last recession, 30 percent, with the 2001 percentage, 5 percent. That indicates banks entered this downturn from a position of relative strength.
But asset quality indicators are starting to deteriorate, said the report. Banks therefore are in a position to build loan-loss reserves for the first time in years.
Banks in the region have been slowly ratcheting up their loan-loss reserves through the year.
The report also cautioned against interest-rate risk exposure, which could weaken a bank’s earning capacity at exactly the wrong time, resulting in other occurrences such as fraud or further economic downturns severely affecting the bank’s earning capacity.
