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April 4, 2005
Doing the numbers | Excerpts from the Bureau of Financial Institutions' annual report to the Legislature
Maine's financial institutions remain in sound financial condition. Capital levels are strong, earnings are sufficient to support continued asset growth and credit quality is at historically high levels.
The [category of] Maine banks include commercial banks, savings banks and savings and loan associations. There are 15 commercial banks, 15 savings banks and eight thrift institutions in Maine. Twenty-nine of the banks are state-chartered and nine are federally-chartered. All but one of the Maine banks operate their banking offices solely in Maine (the one exception also has branches in New Hampshire).
This analysis excludes information about Banknorth, N.A. because its Maine operations represent only a small portion of the bank's consolidated business, and available Maine-specific data is limited to its total loans and deposits. Fleet National Bank (acquired by Bank of America in April 2004) and KeyBank, both of which have a significant presence in Maine but are headquartered in other states, are also excluded from Maine banks due to a lack of Maine-specific data. While Banknorth, Fleet National Bank and KeyBank continue to be the three largest depository institutions operating in Maine, their share of deposits and loans is steadily declining, dropping from 50% and 53%, respectively, in December 1996, to 34% and 35% in June 2004.
Maine banks showed a relatively strong eight percent dollar increase in capital during 2003 that allowed the core capital ratio to increase for the first time since 1997. Risk-based capital ratios, however, have remained on a downward trend since 1996 due to a continued increase in higher risk assets, evidenced by increases in the loan-to-asset ratio and a continued decrease in the ratio of residential first mortgage loans to total loans. The ratios for the Maine banks remain moderately below national ratios.
Nevertheless, the capital ratios remain strong, and all Maine banks have capital in excess of the minimum levels to qualify as "well-capitalized" under federal guidelines. Dollar net income for the Maine banks was up a very strong 22% in 2003, and return on assets improved to its highest level since 1999. Unfortunately, the primary factor in the earnings improvement was a substantial increase in non-core operating income resulting from securities gains.
Modest improvements in three (noninterest income/other income, noninterest expense/overhead and the allowance for loan loss provision) of the four major components of the income statement nearly offset a continued decline (eight of the last nine years) in net interest income, the fourth major component. As a result, core operating income (income before securities gains and taxes) for the year remained nearly flat. Net interest income remains the predominant source of revenue for Maine banks.
However, in the last 10 years noninterest income has increased from 12% of revenues to 20%. This reflects a compound annual growth rate for noninterest income of 14%, nearly double that of net interest income.
Compared to banks nationally, the Maine banks have consistently reported lower core operating income, although the gap has steadily narrowed over the last three years. The primary factor in the weaker performance is a low net interest income, caused by a higher interest expense, in turn caused by a greater reliance on interest-bearing funds. During 2003, nearly two of every three of the Maine banks reported a higher ROA; however, during the first six months of 2004, only one of three Maine banks reported a higher ROA than for 2003.
Loan quality ratios for Maine banks continue to show improvement to loan portfolios. Current loan quality ratios easily surpass 2002's historic lows. Both net loan losses and noncurrent loans remain well below national averages. The improvement in net loan losses is at least partially attributable to the loan mix, which has seen little change and remains predominantly real estate-secured. Notwithstanding the continuing decline in the percentage of residential mortgage loans, Maine banks still hold a significantly larger proportion of mortgage loans than do banks nationally. Historically, such loans have had very low loss experience.
Loans increased at a 10% rate in the 12 months ending June 2004, the fastest rate in the last five years, and climbed to 73% of assets; these ratios compare to nine percent and 63%, respectively, for banks nationally.
The strong loan growth has not been matched by core deposit growth, which increased at a relatively anemic four percent, the lowest growth rate in five years. As a consequence, the loan-to-core deposit ratio rose to a record high of 117%, well above the national average of 90% and up from 110% one year earlier. During the 12 months ending June 2004, 27 Maine banks increased their loan-to-deposit ratio; of those that decreased their loan-to-deposit ratio, nine still had a ratio that exceeded 100%.
Because core deposit growth has not kept pace with loan and asset growth, the Maine banks have had to rely increasingly on borrowings and other types of noncore funding, which supported 27% of assets as of June, 2004; nationally, the average was 16%.
The challenges facing Maine banks as they enter 2005 are similar to those identified last year: loan and deposit growth, credit quality, interest rate risk and risk management processes. In addition to these challenges, Maine banks must grow revenues and control expenses while managing an increasing regulatory burden principally related to compliance issues. These are challenges that the banking industry has met for many years. Maine banks have performed very well and have operated in a safe and sound manner while serving the citizens and businesses of Maine. There is every reason to expect similar results over the next 12 months.
Credit union recap
There are 78 credit unions headquartered in Maine ˆ 14 with Maine charters and 64 with federal charters. The Maine credit unions, individually and collectively, continue to record steady, satisfactory performance. In the key areas of capital and earnings, performance remains moderately below national indicators while loan quality indicators remain mixed. Growth generally slowed in 2003 and through the first six months of 2004, but nevertheless remains fairly strong.
The net worth-to-asset ratio, for both Maine credit unions and credit unions nationally, has been very steady since December 2001. While asset growth at the Maine credit unions has generally lagged growth at the national level, Maine's asset growth has been very steady and sustainable. There are only two Maine credit unions that do not meet the federal definition of well-capitalized as of June 2004, and only one of which is considered undercapitalized. (The National Credit Union Administration categorizes a credit union as well-capitalized if it has a net worth-to-asset ratio of 7.0% or greater. A credit union is categorized as being undercapitalized if its net worth-to-asset ratio is between 4.0% and 5.99%.) Overall, Maine credit unions remain strongly capitalized.
Maine credit unions have recorded a steady and satisfactory return on average assets, or ROA, for several years, albeit at a slightly lower level than credit unions nationally. The primary factor in the lagging ROA has been high overhead which, despite a downward trend, has not declined as much as net interest income. Net interest income decreased significantly in 2003 and through June 2004, barely covering overhead expenses in 2003.
For the first six months of 2004, net interest income was insufficient to offset noninterest expenses. Fortunately, Maine credit unions have historically maintained a high net interest income and consequently have relied more heavily on it as the primary source of net revenue, 80% vs. 75% for credit unions nationally.
Noninterest income continued to increase in 2003; the slight decrease as of June 2004 is attributable to a reduction in mortgage originations. Maine credit unions have also benefited from low net loan losses, enabling them to maintain a low provision for the allowance for loan losses. Through the first half of 2004, Maine Credit Unions have even managed to reduce the allowance for loan losses. During calendar 2003, five Maine credit unions, or 6.4%, experienced a net loss for the year, which was almost one-half the rate nationally. Each of those five credit unions was profitable for the first six months of 2004. Maine credit unions will be challenged to increase revenues ˆ both net interest income and noninterest income ˆ and to further decrease, or hold steady, overhead expenses in order to maintain earnings sufficient to support continued asset growth.
Loan quality indicators remain sound. Net loan losses continue their steady decline and past due loans, after increasing slightly in 2002 and 2003, declined during the first six months of 2004.
The preponderance of real estate loans, nearly all of which are secured by residential property, is a significant factor in the low net loan losses. A second factor is the decrease, both in dollar amount and percentage, of unsecured loans.
Loans held by Maine credit unions increased at a healthy rate of 10% in 2003 and eight percent, annualized, through the first six months of 2004. Loans increased faster than shares for the first time since 2000. As a result, the loan-to-share ratio rose slightly to 84%, well above the national average of 72%. Similarly, the Maine credit unions have consistently maintained a much higher ratio of loans-to-assets. Recognizing the potential liquidity concerns associated with elevated loan-to-share and loan-to-asset ratios, Maine credit unions have strengthened their ratio of investments-assets, up to 18% as of June 2004, but still well below the national average of 27%. In addition to a slight tightening of liquidity ratios, Maine credit unions continue to face increased interest rate risk from the combination of significant holdings of longer term, fixed-rate assets and projected increases in interest rates.
Maine credit unions generally face the same challenges as do the Maine Banks, and all other depository financial institutions. They must grow loans, increase core funding and increase revenues while controlling expenses and managing interest margin pressure.
Maine credit unions must do this while facing an increased regulatory burden, technological changes and intense competition from the financial services industry. For most of the Maine credit unions, these challenges are exacerbated by their relatively small asset size. On average, Maine credit unions have less than $50 million in assets, compared to nearly $375 million for Maine banks. Only nine Maine credit unions have total assets in excess of $100 million, and none of them have assets in excess of $200 million. In contrast, 10 of the Maine banks have total assets in excess of $500 million.
Despite challenges, Maine credit unions possess adequate capital resources and demonstrate an ability to profitably serve their niche markets.
The [category of] Maine banks include commercial banks, savings banks and savings and loan associations. There are 15 commercial banks, 15 savings banks and eight thrift institutions in Maine. Twenty-nine of the banks are state-chartered and nine are federally-chartered. All but one of the Maine banks operate their banking offices solely in Maine (the one exception also has branches in New Hampshire).
This analysis excludes information about Banknorth, N.A. because its Maine operations represent only a small portion of the bank's consolidated business, and available Maine-specific data is limited to its total loans and deposits. Fleet National Bank (acquired by Bank of America in April 2004) and KeyBank, both of which have a significant presence in Maine but are headquartered in other states, are also excluded from Maine banks due to a lack of Maine-specific data. While Banknorth, Fleet National Bank and KeyBank continue to be the three largest depository institutions operating in Maine, their share of deposits and loans is steadily declining, dropping from 50% and 53%, respectively, in December 1996, to 34% and 35% in June 2004.
Maine banks showed a relatively strong eight percent dollar increase in capital during 2003 that allowed the core capital ratio to increase for the first time since 1997. Risk-based capital ratios, however, have remained on a downward trend since 1996 due to a continued increase in higher risk assets, evidenced by increases in the loan-to-asset ratio and a continued decrease in the ratio of residential first mortgage loans to total loans. The ratios for the Maine banks remain moderately below national ratios.
Nevertheless, the capital ratios remain strong, and all Maine banks have capital in excess of the minimum levels to qualify as "well-capitalized" under federal guidelines. Dollar net income for the Maine banks was up a very strong 22% in 2003, and return on assets improved to its highest level since 1999. Unfortunately, the primary factor in the earnings improvement was a substantial increase in non-core operating income resulting from securities gains.
Modest improvements in three (noninterest income/other income, noninterest expense/overhead and the allowance for loan loss provision) of the four major components of the income statement nearly offset a continued decline (eight of the last nine years) in net interest income, the fourth major component. As a result, core operating income (income before securities gains and taxes) for the year remained nearly flat. Net interest income remains the predominant source of revenue for Maine banks.
However, in the last 10 years noninterest income has increased from 12% of revenues to 20%. This reflects a compound annual growth rate for noninterest income of 14%, nearly double that of net interest income.
Compared to banks nationally, the Maine banks have consistently reported lower core operating income, although the gap has steadily narrowed over the last three years. The primary factor in the weaker performance is a low net interest income, caused by a higher interest expense, in turn caused by a greater reliance on interest-bearing funds. During 2003, nearly two of every three of the Maine banks reported a higher ROA; however, during the first six months of 2004, only one of three Maine banks reported a higher ROA than for 2003.
Loan quality ratios for Maine banks continue to show improvement to loan portfolios. Current loan quality ratios easily surpass 2002's historic lows. Both net loan losses and noncurrent loans remain well below national averages. The improvement in net loan losses is at least partially attributable to the loan mix, which has seen little change and remains predominantly real estate-secured. Notwithstanding the continuing decline in the percentage of residential mortgage loans, Maine banks still hold a significantly larger proportion of mortgage loans than do banks nationally. Historically, such loans have had very low loss experience.
Loans increased at a 10% rate in the 12 months ending June 2004, the fastest rate in the last five years, and climbed to 73% of assets; these ratios compare to nine percent and 63%, respectively, for banks nationally.
The strong loan growth has not been matched by core deposit growth, which increased at a relatively anemic four percent, the lowest growth rate in five years. As a consequence, the loan-to-core deposit ratio rose to a record high of 117%, well above the national average of 90% and up from 110% one year earlier. During the 12 months ending June 2004, 27 Maine banks increased their loan-to-deposit ratio; of those that decreased their loan-to-deposit ratio, nine still had a ratio that exceeded 100%.
Because core deposit growth has not kept pace with loan and asset growth, the Maine banks have had to rely increasingly on borrowings and other types of noncore funding, which supported 27% of assets as of June, 2004; nationally, the average was 16%.
The challenges facing Maine banks as they enter 2005 are similar to those identified last year: loan and deposit growth, credit quality, interest rate risk and risk management processes. In addition to these challenges, Maine banks must grow revenues and control expenses while managing an increasing regulatory burden principally related to compliance issues. These are challenges that the banking industry has met for many years. Maine banks have performed very well and have operated in a safe and sound manner while serving the citizens and businesses of Maine. There is every reason to expect similar results over the next 12 months.
Credit union recap
There are 78 credit unions headquartered in Maine ˆ 14 with Maine charters and 64 with federal charters. The Maine credit unions, individually and collectively, continue to record steady, satisfactory performance. In the key areas of capital and earnings, performance remains moderately below national indicators while loan quality indicators remain mixed. Growth generally slowed in 2003 and through the first six months of 2004, but nevertheless remains fairly strong.
The net worth-to-asset ratio, for both Maine credit unions and credit unions nationally, has been very steady since December 2001. While asset growth at the Maine credit unions has generally lagged growth at the national level, Maine's asset growth has been very steady and sustainable. There are only two Maine credit unions that do not meet the federal definition of well-capitalized as of June 2004, and only one of which is considered undercapitalized. (The National Credit Union Administration categorizes a credit union as well-capitalized if it has a net worth-to-asset ratio of 7.0% or greater. A credit union is categorized as being undercapitalized if its net worth-to-asset ratio is between 4.0% and 5.99%.) Overall, Maine credit unions remain strongly capitalized.
Maine credit unions have recorded a steady and satisfactory return on average assets, or ROA, for several years, albeit at a slightly lower level than credit unions nationally. The primary factor in the lagging ROA has been high overhead which, despite a downward trend, has not declined as much as net interest income. Net interest income decreased significantly in 2003 and through June 2004, barely covering overhead expenses in 2003.
For the first six months of 2004, net interest income was insufficient to offset noninterest expenses. Fortunately, Maine credit unions have historically maintained a high net interest income and consequently have relied more heavily on it as the primary source of net revenue, 80% vs. 75% for credit unions nationally.
Noninterest income continued to increase in 2003; the slight decrease as of June 2004 is attributable to a reduction in mortgage originations. Maine credit unions have also benefited from low net loan losses, enabling them to maintain a low provision for the allowance for loan losses. Through the first half of 2004, Maine Credit Unions have even managed to reduce the allowance for loan losses. During calendar 2003, five Maine credit unions, or 6.4%, experienced a net loss for the year, which was almost one-half the rate nationally. Each of those five credit unions was profitable for the first six months of 2004. Maine credit unions will be challenged to increase revenues ˆ both net interest income and noninterest income ˆ and to further decrease, or hold steady, overhead expenses in order to maintain earnings sufficient to support continued asset growth.
Loan quality indicators remain sound. Net loan losses continue their steady decline and past due loans, after increasing slightly in 2002 and 2003, declined during the first six months of 2004.
The preponderance of real estate loans, nearly all of which are secured by residential property, is a significant factor in the low net loan losses. A second factor is the decrease, both in dollar amount and percentage, of unsecured loans.
Loans held by Maine credit unions increased at a healthy rate of 10% in 2003 and eight percent, annualized, through the first six months of 2004. Loans increased faster than shares for the first time since 2000. As a result, the loan-to-share ratio rose slightly to 84%, well above the national average of 72%. Similarly, the Maine credit unions have consistently maintained a much higher ratio of loans-to-assets. Recognizing the potential liquidity concerns associated with elevated loan-to-share and loan-to-asset ratios, Maine credit unions have strengthened their ratio of investments-assets, up to 18% as of June 2004, but still well below the national average of 27%. In addition to a slight tightening of liquidity ratios, Maine credit unions continue to face increased interest rate risk from the combination of significant holdings of longer term, fixed-rate assets and projected increases in interest rates.
Maine credit unions generally face the same challenges as do the Maine Banks, and all other depository financial institutions. They must grow loans, increase core funding and increase revenues while controlling expenses and managing interest margin pressure.
Maine credit unions must do this while facing an increased regulatory burden, technological changes and intense competition from the financial services industry. For most of the Maine credit unions, these challenges are exacerbated by their relatively small asset size. On average, Maine credit unions have less than $50 million in assets, compared to nearly $375 million for Maine banks. Only nine Maine credit unions have total assets in excess of $100 million, and none of them have assets in excess of $200 million. In contrast, 10 of the Maine banks have total assets in excess of $500 million.
Despite challenges, Maine credit unions possess adequate capital resources and demonstrate an ability to profitably serve their niche markets.
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