Category Archives: earnings

Did the tortoise catch the hair?

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In our May 1 issue of NorthWestern Financial Review we cover three banks among many in the Midwest that have climbed to the top of the industry in terms of profitability and other metrics.

Looking at just return on assets for banks with under $10 billion in assets, across all 50 states in the union, nearly half (785 of 1,642) of the banks with more than 1.5 percent ROA are based in NorthWestern Financial Review’s 14-state region. (If you selected the hyperlink it will take you to a list of these top banks, the institutions which are based in the Midwest are marked with a “1″.)

A bank which performed among these but did not make it into our feature story is McKenzie County Bank in Watford City, N.D. Earning 1.81 percent return on assets last year; the $113 million bank sits in the top third for ROA among banks with less than $10 billion in assets.

How has the bank done so well? “Well, we started a bank in a Bakken oilfield 30 years ago,” said Dale Patten, president of the bank.

The Bakken formation, a 200,000 square-mile stretch of land covering western North Dakota and eastern Montana and containing an estimated three to four billion barrels of oil, has provided a number of banks in the state unprecedented local economic growth in recent years.

For McKenzie County Bank, agricultural lending has been the mainstay of the bank for decades. Now, loans for farm land are dropping off. But that doesn’t mean the bank isn’t seeing requests for loans on the same land, “The land prices are so high that little of it is sold for ag,” Patten said. Most of the banks growth is due to oil industry service companies, customers also are borrowing against land for housing development or for other purposes connected with the oil industry, he said.

In 2008, the banks had $4.6 million in farmland loans. At the end of 2012, the bank had $4.3 million. On the other hand, construction and land development loans have increased to $4.4 million from $1.9 million over the same period. And, overall, real estate loans have grown to $43 million from $31 million, according to the FDIC.

The risk facing McKenzie County Bank is a decline in the local oil industry and the effect it could have on the oil service businesses and on real estate values. Fortunately, having opened amid the previous oil boom in 1982, the bank’s management has the experience to manage the risk. “When you look at the western side of the state, we have experienced staff because we have been in an energy boom before,” said Patten, who was with McKenzie County Bank since the bank opened.  “We believe we are conservative and we have seen lots of capital from outside the local area.”

And the bank doesn’t see the boom slowing soon, Patten said. Barring some climactic change for the local oil industry, oil will bring income to the area for years to come. “A well that produces 1,000 barrels a day may drop to 250 a day after two years, but it will produce 250 a day for the next 25 years to 50 years,” Patten said. Out of the 180 oil rigs in North Dakota, the average well produces about 2,000 barrels a day. At yesterdays price for a single barrel of oil at $86, you can do the math for the revenue flowing into the region.

2012 proves strong year for bank earnings

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The FDIC reported numbers for the fourth quarter and the full year 2012 yesterday that paint an industry experiencing improving conditions. Earnings are up, deposit funds are flowing into banks at record rates, fewer banks are losing money, and fewer banks remain on the agency’s problem list.

The nation’s 7,083 banks and thrifts reported combined earnings of $141.3 billion for the year. That’s the second-highest ever in a single year behind 2006’s $145.2 billion and 19.3 percent ahead of 2011. The FDIC said the increase was attributable to lower expenses for loan-loss provisions and higher fee income. Most of the income was earned by the nation’s largest banks. The nation’s 2,205 banks with less than $100 million in assets reported combined net income for the year of $920 million.

Asset quality improved across the industry with noncurrent loans falling for the 11th consecutive quarter. Deposits continued to pour into banks, with an increase of $313.1 billion. At 3 percent, that’s the biggest quarterly gain ever. The FDIC’s problem list, which peaked first quarter of 2011 at 888, closed 2012 at 651, marketing the seventh consecutive quarterly decline.

Read the FDIC press release by clicking here.

Banks across the Upper Midwest generally reported earnings in line with the national averages. There is a general decline in the number of institutions, with most of the decline occurring among institutions with less than $100 million in assets.

In Illinois, for example, the number of banks in the state has declined to 560 from 607 in 2010, although the number of banks with less than $100 million in assets has declined by 33 in that time to 226, compared to banks with more than $100 million in assets which have declined by 14 to 334. Nonetheless, earnings at the smaller banks are improving. The smaller banks reported collective earnings of $68 million for 2012 compared to $26 million last year. That’s a 161 percent improvement in earnings despite a 7 percent drop in the number of institutions in that size category. Still, the return on assets and return on equity for smaller banks were below the national average: 0.54 percent for Illinois banks versus 0.72 percent for the country on ROA, and 4.73 percent versus 5.95 percent on ROE.

Banks in Iowa and the Dakota were among the nation’s leaders based on ROA and ROE. Iowa banks (of all sizes) averaged 1.16 percent ROA compared to the all-bank national average of 1.00, and 11.16 percent ROE compared to the national all-bank average of 8.92 percent. Larger banks did better in Iowa than smaller banks: 1.17 percent ROA for large banks versus 1.06 percent for smaller banks; and 11.47 percent ROE for large banks compared to 8.98 percent for smaller banks. All North Dakota banks averaged 15.32 percent ROE (11.72 percent for smaller banks and 15.62 for larger banks), and 1.61 percent ROA (1.16 percent for smaller banks and 1.65 percent for larger banks). South Dakota’s numbers came in at 9.98 percent ROE (10.03 percent for smaller banks and 9.98 percent for larger banks) and 1.11 percent ROA (1.14 percent for smaller banks 1.11 percent for larger banks).

Minnesota’s 379 banks earned $603 million for all of 2012. This total does not include earnings from Wells Fargo or U.S. Bank which have their charters in other states. There are 205 banks with less than $100 million in assets in the state; that’s down from 231 two years ago. The smaller banks collectively earned $87 million last year, compared to $43 million two years ago. All banks combined, returned 0.93 percent on assets (0.83 percent for small banks; 0.95 percent for larger banks), and returned 8.92 percent on equity (7.71 percent for small banks; 9.17 percent for larger banks). The percentage of unprofitable institutions in the state continues to decline. In 2012, 10 percent of the banks lost money, compared to 2010 when 23.27 percent of the banks lost money.

Another look at third quarter earnings

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Third quarter numbers from the FDIC show that Iowa continues to be the state with the strongest bank earnings picture in the Midwest. Return on assets for the 340 banks in Iowa was 1.2 percent through three quarters; return on equity was 11.62 percent.

Michigan reported better overall numbers, with 1.62 percent ROA and 15.85 ROE, but that was skewed toward the largest banks. In Michigan, banks with more than $100 million in assets reported 1.65 percent ROA and 16.56 percent ROE, while banks with less than $100 million in assets reported 0.76 percent ROA and 4.65 percent ROE.

In Iowa, the numbers are far more evenly distributed with banks over $100 million reporting ROA of 1.21 percent and ROE of 11.91 percent, while smaller banks reported 1.16 percent ROA and 9.83 percent ROE.

While the key ratios look strong at Iowa banks, net income figures show larger banks making big gains while smaller banks basically stayed the same. Banks with more than $100 million in assets reported net income of $553 million through three quarters this year, compared to $435 million last year and $315 million two years ago. Smaller banks reported $74 million in earnings this year, compared to $78 million last year and $75 million two years ago.

In Minnesota earnings at both large banks and small banks increased, although they increased more at the larger banks. Minnesota’s 209 banks with fewer than $100 million in assets reported $72 million in net income, compared to $67 million last year and $45 million two years ago. Minnesota 171 banks with more than $100 million in assets reported $322 million in net income this year, compared with $236 last year and $105 million two years ago.

Minnesota banks reported ROA of 0.80 percent (0.89 percent for smaller banks and 0.78 percent for larger banks) and ROE of 7.75 percent (8.22 percent for smaller banks and 7.65 percent for larger banks).

Earnings look good through three quarters

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Banks across the country are reporting much healthier earnings than they were last year and two years ago. The FDIC reported today that the nation’s banks recorded $37.6 billion in income during the third quarter, the 13th quarter in a row when earnings have exceeded those reported a year prior. This press release provides many of the details.

Smaller banks are participating in the industry-wide success, although the number of banks with fewer than $100 million in assets continues to decline. At the end of the third quarter, 2,287 banks with less than $100 million in assets reported $720 million in year-to-date earnings. That compares with $570 million reported by 2,491 banks at the end of the third quarter in 2011, and $454 million earned by 2,682 banks at the end of the third quarter in 2010. Two years ago, those banks had assets of $151 billion ($92 billion were loans) but today they have assets of $132 billion and just $75 billion are loans.

The average return on assets for all banks is 1.02 percent, the first time it’s been over 1.0 percent since the financial crisis of 2008. Smaller banks, however, tend to lag. Banks with fewer than $100 million in assets now have an aggregate return on assets of 0.73 percent, compared to 0.54 percent a year ago, and 0.40 percent two years ago.

Return on equity for all banks is 9.02 percent, compared to 8.18 percent in 2011 and 5.83 percent in 2010. For banks with fewer than $100 million in assets, the aggregate ROE is 6.12 percent, compared to 4.6 percent a year ago and 3.35 percent two years ago.

First quarter earnings releases start coming out

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Wells Fargo released its earnings earlier today, reporting net income of $4.2 billion in the first quarter, 14 percent ahead of fourth quarter 2011. Return on assets for the first quarter was 1.31 percent and return on equity came in at 12.14 percent. Read the entire earnings press release from Wells Fargo here.

Wells Fargo was the first of the publicly held banks to report earnings this season, with JPMorgan Chase also announcing earnings today.

Most of the big banks will announce their first quarter earnings next week. U.S. Bank will announce its earnings on Tuesday, and TCF Financial, Associated Banc-Corp and KeyCorp are scheduled to announce their earnings on Thursday.

Wells Fargo said revenue in the first quarter was its strongest in nine quarters. Hopefully, that’s an indication of how things are going across the industry.

Capital demands mean less lending at smaller banks

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The impact of the recent regulatory focus on capital is evident in the year-end numbers released by the FDIC yesterday: lending is down, particularly among smaller banks.

The lending trend among banks with fewer than $100 million in assets speaks volumes. Here is the situation in six Upper Midwest states:

Illinois – At year-end 2009, the 273 smaller banks (less than $100 million in assets) had total loans of $12.4 billion and a loan-to-deposit ratio of 69.9 percent. At year-end 2011, total loans at the state’s 243 smaller banks were $11.8 billion and the loan-to-deposit ratio was 63.0 percent.

Iowa – At year-end 2009, the 180 smaller banks had total loans of $6.3 billion and a loan-to-deposit ratio of 75.4 percent. At year-end 2011, total loans at the state’s 160 smaller banks were $5.4 billion and the loan-to-deposit ratio was 69.3 percent.

Minnesota – At year-end 2009, the 241 smaller banks had total loans at year-end of $7.8 billion and a loan-to-deposit ratio of 78.6 percent. At year-end 2011, total loans at the state’s 220 smaller banks were $6.8 billion and the loan-to-deposit ratio was 70.7 percent.

Nebraska – At year-end 2009, the 152 smaller banks had total loans of $5.5 billion and a loan-to-deposit ratio of 79.3 percent. At year-end 2011, total loans at the state’s 127 smaller banks were $3.7 billion and the loan-to-deposit ratio was 75.1 percent.

North Dakota – At year-end 2009, the 58 smaller banks had total loans of $1.8 billion and a loan-to-deposit ratio of 71.2 percent. At year-end 2011, total loans at the state’s 48 smaller banks were $1.4 billion and the loan-to-deposit ratio was 62.6 percent.

South Dakota – At year-end 2009, the 50 smaller banks had total loans of $1.5 billion and a loan-to-deposit ratio of 76.1 percent. At year-end 2011, total loans at the state’s 44 smaller banks was $1.2 billion and the loan-to-deposit ratio was 70.1 percent.

It is important to note that the statistics show total lending in Illinois, Nebraska, North Dakota and South Dakota was up over the last three years since larger banks experienced loan growth. In Iowa, the total lending level was virtually unchanged.

It should not come as a surprise that regulatory demands for increased capital should hurt lending at smaller banks more than at larger banks. At larger banks, particularly those that have access to capital markets, raising additional capital is easier than it is at smaller banks. At many smaller banks, the only way to raise the capital level is the shrink the balance sheet, which means less lending.

Furthermore, deposits are way up from 2009, making the current loan-to-deposit ratios look particularly weak.

Critics are quick to say that smaller banks don’t want to lend but I don’t think that is it at all. Banks make their money by lending, so it is hard to argue they don’t want to lend. By demanding more capital, regulators can say they are making smaller banks safer, but at the same time, they are making them less useful. And that’s a shame for everyone.

How is your bank doing on efficiency?

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Bankers should make efficiency the word of 2012 according to Mike Moebs the CEO at Moebs Services, Inc. in Lake Bluff, Ill. In these times when fees are looked down upon and interest rates are low, efficiency can help banks get the most out their assets.

“I had a bank president I met with last week who is celebrating his 25 year anniversary in banking; his case is classic. He managed a community institution and pushed for growth but when he got to the optimal size, he came to realize that he had to control expenses a lot better,” Moebs said. Efficiency becomes the driver when talking about scale, managers have to focus on efficiency as the number one priority and growth as the second priority, he added.

Moebs says the best way to consider efficiency is by comparing expenses to assets. Optimally a bank’s expenses fall within a range of 2.2 percent to 2.6 percent of assets, he said. Generally, community banks between $500 million and $5 billion are at 2.2 percent; those below $500 million are at 3.24 percent. Banks with more than $5 billion in assets typically operate at 2.92 percent.

“Community banks will need to review their checking account structures and understand the cost associated with servicing them.” Moebs places high priority on understanding the cost and profitability of checking accounts. Once a bank understands its cost of doing business it can structure its services for profitability and drive efficiency to increase performance, he said.

“Efficiencies come out in numbers of people,” Moebs says. He suggests banks employ one person per $6 million in deposits; most banks are at $3 million in deposits per employee. A critical element of this is “allowing time to be the equalizer” when it comes to the number of employees, according to Moebs. “I am not for taking the axe to people’s jobs but through the natural course of time people move to a different state or take a different job.” Moebs suggests that managers not refill positions if the banks efficiency ratio is not in line. As managers allow personnel numbers to drop they will need to simultaneously incentivize efficiency for the remaining employees. If managers do not provide these incentives efficiency will not increase, he advised.

Industry contracting disproportionately among smaller banks

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The FDIC’s third quarter figures report 7,436 total insured institutions, compared to 8,099 at the end of the third quarter two years ago. A decline of 663 institutions represents an 8.1 percent contraction in the number of charters. Sadly, however, the decline is disproportionately concentrated among smaller banks. The number of banks with fewer than $100 million at the end of the third quarter was 2,490 compared to 2,915 two years ago. That’s a decline of 425 charters, or 14.5 percent; the number of banks with more than $100 million in assets declined to 4,946 from 5,184, or 4.5 percent.

Also, the FDIC reports that 15.57 percent of all institutions were unprofitable in the third quarter, but among banks with fewer than $100 million in assets, 17.31 percent were unprofitable, and among larger banks only 14.7 percent were unprofitable. In many Upper Midwest states, the profitability delta between the larger and smaller banks was even more pronounced. In Colorado, 25.64 percent of small banks were unprofitable; 20.0 percent of large banks were unprofitable. In Indiana, 18.92 percent of smaller banks were unprofitable, 6.6 percent of larger banks were unprofitable. In Iowa, 7.27 percent of smaller banks were unprofitable, 4.37 percent of larger banks were unprofitable. In Michigan, 18.92 percent of smaller banks were unprofitable, 12.5 percent of larger banks were unprofitable. In Missouri, 23.78 percent of smaller banks were unprofitable, 15.26 percent of larger banks were unprofitable.

In a couple states, however, smaller banks did better than larger banks. In Minnesota, 13.0 percent of smaller banks were unprofitable, while 14.53 percent of larger banks were unprofitable. And in Illinois, 16.13 percent of smaller banks were unprofitable, while 19.35 percent of larger banks were unprofitable.

For additional perspective, here are ROA and ROE numbers by state, for the last three years:

Colorado: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.43 percent, 0.09 and -0.17; ROE — 4.02, 0.86 and -1.51. Banks with over $100 million in assets: ROA — 0.68, -0.10 and 0.01; ROE — 7.25, -1.06 and 0.09.

Illinois: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.37 percent, 0.50 and 0.22; ROE — 3.34, 4.36 and 1.84. Banks with over $100 million in assets: ROA — 0.40, 0.33 and -0.12; ROE — 4.10, 3.45 and -1.39.

Indiana: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.42 percent, 0.38 and -0.07; ROE — 3.32, 3.10 and -0.60. Banks with over $100 million in assets: ROA — 0.83, 0.48 and 0.05; ROE — 7.73, 4.79 and 0.52.

Iowa: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 1.10 percent, 1.04 and 0.78; ROE — 9.69, 8.88 and 6.83. Banks with over $100 million in assets: ROA — 1.02, 0.76 and 0.63; ROE — 10.44, 7.78 and 6.80.

Kansas: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.90 percent, 0.61 and 0.50; ROE — 8.12, 5.51 and 4.49. Banks with over $100 million in assets: ROA — 0.80, 0.36 and 0.21; ROE — 6.79, 3.63 and 2.13.

Michigan: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.63 percent, 0.32 and -0.16; ROE — 4.71, 2.27 and -1.06. Banks with over $100 million in assets: ROA — 0.14, -0.79 and -1.67; ROE — 1.50, -9.01 and -19.90.

Minnesota: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.79 percent, 0.52 and 0.10; ROE — 7.46, 4.85 and 0.90. Banks with over $100 million in assets: ROA — 0.63, 0.33 and 0.35; ROE — 6.40, 3.32 and 3.51.

Missouri: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.52 percent, 0.60 and 0.19; ROE — 4.55, 5.15 and 1.68. Banks with over $100 million in assets: ROA — 0.82, 0.49 and -0.05; ROE — 8.47, 5.26 and -0.57.

Montana: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.63 percent, -0.04 and 0.47; ROE — 5.98, -0.38 and 4.08. Banks with over $100 million in assets: ROA — 0.96, 0.77 and 1.05; ROE — 8.70, 7.06 and 9.73.

Nebraska: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.91 percent, 0.90 and 0.76; ROE — 7.83, 7.58 and 6.27. Banks with over $100 million in assets: ROA — 1.22, 1.18 and 0.02; ROE — 11.72, 11.84 and 0.26.

North Dakota: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 1.11 percent, 0.89 and 0.73; ROE — 11.32, 8.86 and 7.31. Banks with over $100 million in assets: ROA — 1.50, 1.14 and 0.67; ROE — 14.22, 11.09 and 6.64.

South Dakota: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 1.46, percent, 0.90 and 0.87; ROE — 13.13, 8.04 and 7.56. Banks with over $100 million in assets: ROA — 1.00, 0.84 and 1.01; ROE — 8.72, 6.97 and 9.64.

Wyoming: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.79 percent, 0.24 and 0.59; ROE — 8.17, 4.46 and 6.09. Banks with over $100 million in assets: ROA — 0.55, 0.65 and 1.09; ROE — 5.40, 6.14 and 10.74.

Wisconsin: Banks with less than $100 million in assets: year-to-date ROA for 2011, 2010 and 2009, respectively – 0.57 percent, 0.60 and 0.46; ROE — 4.90, 5.02 and 3.73. Banks with over $100 million in assets: ROA — 0.58, -0.22 and -0.42; ROE — 5.28, -2.05 and -4.41.