April 7, 2008
Bank statement | Highlights from the Bureau of Financial Institutions' annual report to the Legislature
MAINE BANKS
As the numbers suggest, 2006 was clearly a down year for Maine banks, but it was far from a disastrous year; in fact, several banks continued to turn in very strong performances. The decrease in growth was a reflection of the economy and increased competition from a wide range of financial providers, both within and outside the State of Maine, seeking to maintain or increase their volume of business.
In the face of the prolonged flat yield curve, slower loan growth, intense competition for loans and deposits further squeezing the net interest margin, rising overhead, and deteriorating loan quality necessitating increased provisions for loan losses, the earnings decrease was not unexpected. Also not unexpected was the increase in delinquent loans and net loan losses; these have been predicted for several years, due primarily to the pristine quality of loans for several years. Lastly, the 2006 performance must be put into perspective with that of prior years which has generally been very strong. Overall, the condition of the Maine banks at year-end 2006 was satisfactory and not widely divergent from that of banks nationally.
Performance for the first six months of 2007 was generally more of the same: asset and loan growth slowed further, profitability measures continued to decline and net loan losses increased. On the positive side, core deposit growth accelerated and past due and noncurrent loans both declined, in dollars and as a percentage of loans.
Net income
Calendar year 2006 was a period of slow growth: Asset growth, at 7.0%, was the slowest since 1996; loan growth, at 7.9%, was the slowest since 2001; and core deposit growth, at 2.9%, was the slowest since 1996. Net income declined for only the second time since 1992.
Assets and loans
The strong growth in core deposits during the first half of 2007 positively impacted liquidity for Maine banks. Noncore funding supported 31% of assets, the loan-to-core deposit ratio was 123% and long-term assets (maturity or repricing greater than five years) represented 42% of assets; for federally-insured banks, these ratios were 21%, 102% and 13%, respectively.
Outlook
The widespread problems in the residential real estate market, from declining market values to predatory loans to individuals with suspect ability to pay, have, to date and based on available data, not had a significant impact on the Maine banks. The increase in delinquencies has been very modest, and net loan losses have been minimal. Going forward, the impact may increase, and some banks will be affected more greatly than others, but conditions would have to worsen substantially before the overall stability of the Maine banks is threatened. Without downplaying the real estate concerns, the Maine banks continue to face a plethora of issues that are just as significant, including but not limited to declining profitability, weak to stagnant economy, intense competition, technology changes and regulatory burdens. The recent increase in mergers and acquisitions among the Maine banks is a testimony to the wide range of challenges, and the difficulty banks of all sizes are having in the current environment.
MAINE CREDIT UNIONS
Performance over the last several years has generally been steady with no dramatic fluctuations. However, between June 2006 and June 2007, performance in key areas tended to compare unfavorably with prior periods and with that of credit unions nationally. The gap, though, was not significant and overall performance remains acceptable. The industry continues in sound condition with sufficient capital and earnings. Asset quality, based on most recent data, continues to be acceptable, although loan delinquencies are rising.
Net income
Maine credit unions reported record net income of $33.5 million in 2006, up 6% from 2005 but, for the first six months of 2007, net income fell 13% from the comparable period of 2006, to $15.2 million. The drop in interim 2007 net income is due to nominal growth in net interest income and a continuing increase in non-interest expense. Net interest income remains the primary source of revenue, but it has steadily decreased, due to a narrowing spread between interest income and interest expense. To compensate for the narrowing net interest income, there has been an increased emphasis on non-interest income.
Assets and loans
The net worth-to-total asset ratio continued to climb during 2006, and the gap between Maine credit unions and credit unions nationally narrowed to the smallest margin in more than 12 years. In the first six months of 2007, both trends reversed as the net worth-to-total asset ratio for Maine credit unions declined and the gap widened. However, the changes were not significant in either year. In recent years, asset growth at the Maine credit unions has moderately lagged that of credit unions nationally, but for the first six months of 2007 asset growth was strong, the highest since 2001, and outpaced growth for credit unions nationally.
Loan growth during 2006 continued to slow, dropping to $106 million, 3.6%, compared to 5.3% in 2005 and a 7.4% annual compound growth rate for the five-year period [from] 2000 to 2005. Loan growth during the first six months of 2007 was steady, at 3.5% annualized. Automobile loans and first residential mortgage loans both increased, but unsecured loans and other real estate loans, primarily home equity loans, decreased.
Outlook
Maine credit unions face the same myriad of issues confronting the Maine banks (and credit unions nationally), but the issues are compounded by the credit unions' relatively small asset size. The smaller asset size generally reduces dollar earnings potential, which constricts their resources to combat their challenges.
As the numbers suggest, 2006 was clearly a down year for Maine banks, but it was far from a disastrous year; in fact, several banks continued to turn in very strong performances. The decrease in growth was a reflection of the economy and increased competition from a wide range of financial providers, both within and outside the State of Maine, seeking to maintain or increase their volume of business.
In the face of the prolonged flat yield curve, slower loan growth, intense competition for loans and deposits further squeezing the net interest margin, rising overhead, and deteriorating loan quality necessitating increased provisions for loan losses, the earnings decrease was not unexpected. Also not unexpected was the increase in delinquent loans and net loan losses; these have been predicted for several years, due primarily to the pristine quality of loans for several years. Lastly, the 2006 performance must be put into perspective with that of prior years which has generally been very strong. Overall, the condition of the Maine banks at year-end 2006 was satisfactory and not widely divergent from that of banks nationally.
Performance for the first six months of 2007 was generally more of the same: asset and loan growth slowed further, profitability measures continued to decline and net loan losses increased. On the positive side, core deposit growth accelerated and past due and noncurrent loans both declined, in dollars and as a percentage of loans.
Net income
Calendar year 2006 was a period of slow growth: Asset growth, at 7.0%, was the slowest since 1996; loan growth, at 7.9%, was the slowest since 2001; and core deposit growth, at 2.9%, was the slowest since 1996. Net income declined for only the second time since 1992.
Assets and loans
The strong growth in core deposits during the first half of 2007 positively impacted liquidity for Maine banks. Noncore funding supported 31% of assets, the loan-to-core deposit ratio was 123% and long-term assets (maturity or repricing greater than five years) represented 42% of assets; for federally-insured banks, these ratios were 21%, 102% and 13%, respectively.
Outlook
The widespread problems in the residential real estate market, from declining market values to predatory loans to individuals with suspect ability to pay, have, to date and based on available data, not had a significant impact on the Maine banks. The increase in delinquencies has been very modest, and net loan losses have been minimal. Going forward, the impact may increase, and some banks will be affected more greatly than others, but conditions would have to worsen substantially before the overall stability of the Maine banks is threatened. Without downplaying the real estate concerns, the Maine banks continue to face a plethora of issues that are just as significant, including but not limited to declining profitability, weak to stagnant economy, intense competition, technology changes and regulatory burdens. The recent increase in mergers and acquisitions among the Maine banks is a testimony to the wide range of challenges, and the difficulty banks of all sizes are having in the current environment.
MAINE CREDIT UNIONS
Performance over the last several years has generally been steady with no dramatic fluctuations. However, between June 2006 and June 2007, performance in key areas tended to compare unfavorably with prior periods and with that of credit unions nationally. The gap, though, was not significant and overall performance remains acceptable. The industry continues in sound condition with sufficient capital and earnings. Asset quality, based on most recent data, continues to be acceptable, although loan delinquencies are rising.
Net income
Maine credit unions reported record net income of $33.5 million in 2006, up 6% from 2005 but, for the first six months of 2007, net income fell 13% from the comparable period of 2006, to $15.2 million. The drop in interim 2007 net income is due to nominal growth in net interest income and a continuing increase in non-interest expense. Net interest income remains the primary source of revenue, but it has steadily decreased, due to a narrowing spread between interest income and interest expense. To compensate for the narrowing net interest income, there has been an increased emphasis on non-interest income.
Assets and loans
The net worth-to-total asset ratio continued to climb during 2006, and the gap between Maine credit unions and credit unions nationally narrowed to the smallest margin in more than 12 years. In the first six months of 2007, both trends reversed as the net worth-to-total asset ratio for Maine credit unions declined and the gap widened. However, the changes were not significant in either year. In recent years, asset growth at the Maine credit unions has moderately lagged that of credit unions nationally, but for the first six months of 2007 asset growth was strong, the highest since 2001, and outpaced growth for credit unions nationally.
Loan growth during 2006 continued to slow, dropping to $106 million, 3.6%, compared to 5.3% in 2005 and a 7.4% annual compound growth rate for the five-year period [from] 2000 to 2005. Loan growth during the first six months of 2007 was steady, at 3.5% annualized. Automobile loans and first residential mortgage loans both increased, but unsecured loans and other real estate loans, primarily home equity loans, decreased.
Outlook
Maine credit unions face the same myriad of issues confronting the Maine banks (and credit unions nationally), but the issues are compounded by the credit unions' relatively small asset size. The smaller asset size generally reduces dollar earnings potential, which constricts their resources to combat their challenges.
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