ROBERT B. SEGAL
Sees modest growth
Economic news continues to be positive for the Bay State. According to the Federal Deposit Insurance Corp.’s winter profile, Massachusetts benefited from growth in the national economy during 2004.
The FDIC reported that the number of banking offices is increasing in Massachusetts. As of June 30, there were 2,115 insured banking institutions operating in the commonwealth. According to the FDIC, that represents an increase of 213 offices since 1997, following industry consolidation during the mid-1990s that resulted in a reduced number of banking offices. Thirty-three percent of total deposits in Massachusetts were controlled by out-of-state institutions as of June 30.
In the profile, which ended Sept. 30 of last year, there were only three unprofitable institutions in Massachusetts.
While the FDIC does not comment on specific institutions, Paul Driscoll, regional manager for the Division of Insurance and Research at the FDIC offered a theory. It generally takes a few years for a new institution to become profitable, Driscoll said. He added there are two institutions in Massachusetts that have only conducted business for less than three years.
The FDIC also reported that residential mortgage loans account for 60 percent of total loans in the state’s smaller institutions compared to 32 percent of total loans in the smaller institutions nationwide.
“You’ve got a lot of cooperative banks and savings banks [in Massachusetts], unlike the rest of the country,” said Driscoll.
The profile points out that prepayment speeds on lower-yielding loans will likely slow as interest rates increase and likely will pressure profitability for many small institutions in Massachusetts as funding costs rise, as well.
Strong Growth
Loan growth was strong as insured institutions expanded commercial loan portfolios, the FDIC said.
“The median growth rate for total loans was almost 12 percent as of [Sept. 30], the highest growth rate posted in the past several years,” according to the winter profile.
The state’s large institutions, with assets greater than $1 billion, continued to be active in the mortgage market and posted a median growth rate for mortgage loans of 15 percent as of Sept. 30.
Driscoll said because larger institutions saw commercial and industrial loans take off, they turned to the mortgage market for business.
Jack Phelps, acting associate director of the Division of Insurance and Research at the FDIC, said the third quarter saw positive growth in commercial and industrial loans. However, in the wake of the recession, companies held on to more cash, lessening the loan demand.
“A lot of companies restructured their balance sheets,” Phelps said. “The need for financing is not as great.”
Phelps said there is still a negative financing gap because companies still have money in the coffers.
“Business got quite conservative [during the recession],” Phelps said. “Balance sheets had a lot of cash.”
As the profile indicates, the FDIC is beginning to see a turn around as businesses begin spending money on equipment.
“That is a favorable sign,” Driscoll said.
Driscoll indicated that Massachusetts’ unemployment level was below the national average. He said employment and lending tend to be linked. If jobs are plentiful, Driscoll said there tends to be more lending business.
The profile indicated that due to large capital investment requirements of many key industries in New England, the lag in job growth has been more pronounced in the Bay State. Also, slow labor force growth and relatively high costs of doing business have contributed to a more “muted” employment growth compared to the national average.
But things are looking up, according to the report.
“In Massachusetts, economic improvement is likely to occur as the manufacturing base stabilizes and other areas – principally education, health care and business services – grow more rapidly,” the profile said. “The high-tech sector is expected to be a vibrant contributor of job growth as well.”
Robert B. Segal of J. William Mantz Investment Advisors in Gloucester said smaller institutions are doing better at managing costs.
“The net interest margin for community banks has improved a little bit,” Segal said, adding that community banks have not had to raise deposit costs.
The FDIC profile states that net interest margin compression at Massachusetts’ small institutions prolongs a long-term trend of declining profitability. It also said almost half of the state’s small institutions are classified as mortgage lenders and earnings continue to be affected by low interest rates that are “squeezing” the net interest margin.
Because businesses have been cautious, Segal said commercial loans have picked up slowly, which was predicted.
Banks with niche products, such as construction and home equity loans, fared best in the last quarter, Segal said.
Looking ahead to the upcoming months, Segal said bankers should expect more of the same.
While he does not think there will be a broad increase in loan growth, Segal does expect some activity.
“Loan growth is going to grow modestly,” Segal said. “The economy is picking up. Businesses want to expand.”
While the FDIC said many companies are using cash that was held onto during the recession, Segal said not every business wants to use all its liquidity.
Phelps said rising interest rates continue to be a concern for the future. Driscoll said the impact on borrowers who recently purchased homes with an adjustable-rate mortgage is a “potential concern” if interest rates rise.
Other New England states, like Rhode Island, did not fare so well in the mortgage market. According to Rhode Island’s winter profile, the state’s small institutions reported a decline in profits as net interest margins remain pressured from high mortgage loan concentrations.
New Hampshire had a different outcome last quarter. New Hampshire’s small institutions reported an increase in profits as net interest margins improve.
Like Massachusetts, Connecticut is seeing strong loan growth as the state’s insured institutions expand commercial loan portfolios. Commercial and industrial and commercial real estate loans are driving the loan growth.
Driscoll said the Massachusetts economy likely will follow trends in the national economy.
Jennifer Jope may be reached at jjope@thewarrengroup.com.
