ROBERT B. SEGAL
An ‘upbeat’ profile
Despite a rising interest rate environment, an upcoming presidential election and unstable world events, the Federal Deposit Insurance Corp. has reported better news regarding the Massachusetts economy.
In its recently released fall 2004 state profile, the FDIC states the Massachusetts’ economy continued to improve in recent months.
“[The profile] is more upbeat,” said Robert B. Segal of J. William Mantz Investment Advisors in Gloucester. “It’s talking about an improving economy and strong loan growth.”
According to the profile, which is updated quarterly, the median growth rate for total loans in Massachusetts was just over 10 percent as of June 30, the largest growth rate posted since 2000.
“Banks have been starving for loans,” said Segal.
The profile also states that after declining in the past two years, commercial loan growth increased slightly in the first half of 2004 to a median growth rate of 9 percent. Despite the slight bump, commercial loan growth was still below growth rates posted in the last half of the 1990s and 2000.
The FDIC also reported that home equity loan growth continues to thrive in Massachusetts.
“Consistent with the strong housing market, home equity loans posted robust growth for the fifth year in a row,” the profile read.
Paul Driscoll, regional manager for the Division of Insurance and Research at the FDIC, said equity loans grew between 20 percent and 25 percent since 2000. Driscoll said the growth in home equity loans was related to the rise in home prices and people opting to refinance.
“Banks have really benefited,” said Segal. “[Home equity loans are] a cost-effective way for consumers to borrow.”
Facing a Challenge
One type of loan has not seen such strong growth. According to the FDIC profile, the overall growth of small-business loans – loans no less than $1 million – has been slow in the Bay State.
Small-business commercial loans between $250,000 and $1 million have shown the largest growth with an average median growth rate of 14 percent for the last seven years.
As it tracks banking and economic data, the FDIC also looks for emerging risks. Driscoll said the FDIC currently is cautioning banks to look out for interest rate risks. He said the yield curve is moving inversely and for institutions with mortgages on the books, that can create a challenge.
“It presents a challenge to manage a balance sheet,” Driscoll said.
Segal said the next few quarters will prove to be interesting because of a few unknowns. Questions on the geopolitical front, especially with oil prices, could become a concern.
“We had a little bit of a slowdown [in the economy] when oil popped up to over $40 [a barrel],” said Segal.
Because many consumers also are uncertain about home heating costs this winter, Segal said many people have set aside money for that, instead of making purchases at retail locations. Businesses also have shown caution in hiring, he said.
In addition, Segal said the upcoming election also has created uncertainty in the public.
However, Driscoll said it is unlikely the election will have a significant impact on the economy. He said entities like the stock market and fixed-income market will see impacts more quickly than the overall economy.
Specifically in Massachusetts, though, Segal said because of the significant merger activity in the state, banks should focus on basic banking and good customer service in order to remain profitable.
The state profile highlights profitability, saying that Massachusetts’ insured institutions remain profitable, but the median return on assets continued a slight decline in the second quarter of this year, slipping to its lowest level since 1992. Earnings have been impacted by historically low interest rates and lower gains on the sale of securities, the profile said.
Out of the 203 institutions in Massachusetts, six were considered unprofitable as of June 30. That number is up from June 2003 when there were three unprofitable institutions in the state.
Segal said he noticed asset yields are coming down and deposit costs are not declining anymore.
“Margins have been declining consistently for a decade,” Segal said.
As of June, the yield on earning assets was about 5 percent, but last June it was 5.47 percent.
Massachusetts had similar profile findings as surrounding New England states. In Rhode Island, the FDIC reported that insured institutions remained profitable. Like the Bay State, earnings for Rhode Island banks were impacted by historically low interest rates and fewer gains on the sale of securities.
Connecticut had similar results, with institutions remaining profitable. Earnings were also affected by low interest rates as well as increases in non-interest expenses.
Loan growth was slightly stronger in Connecticut than in Massachusetts. Connecticut saw a median growth rate for total loans of almost 13 percent, which was the largest growth rate for the state in the past several years. Commercial loan grow slowed to a median growth rate of 9 percent.
The median growth rate for total loans in Rhode Island was 11 percent. According to the FDIC, loan growth has been strong for the past two years because commercial loans have been popular.
New Hampshire and Massachusetts saw similar total loan growth of 10 percent. Small-business commercial loans between $250,000 and $1 million had the largest median growth rate of 12 percent in the last year.
Overall, the economy in Massachusetts, according to the FDIC, continued to improve and the unemployment rate declined sharply this year. In general, Massachusetts had much slower growth in its labor force than the United States as a whole and lower unemployment.
Driscoll said the Bay State is resilient and, as the national economy picks up, Massachusetts will follow.
Segal said he also expects the Massachusetts economy to follow similar trends as the national economy.
Jennifer Jope may be reached at jjope@thewarrengroup.com.
