Category Archives: Economy

Did the tortoise catch the hair?

Posted on by
Reply

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.

Risk professionals bullish on housing recovery

Posted on by
Reply

In a quarterly survey of U.S. bank risk professionals, 71 percent of respondents were bullish on the housing recovery saying home prices are “rising at a sustainable pace” from the standpoint of mortgage lending risk, according to Professional Risk Managers’ International Association. In addition, 39 percent of respondents are expecting mortgage delinquencies to decrease over the next six months, while another 45 percent expect delinquencies to remain flat.

These are the most optimistic figures recorded since the survey was launched at the beginning of 2010.

The survey asks U.S. bank risk professionals how they expect delinquency levels to behave over the next six month. For almost all loan types, risk managers expect delinquencies to level off, only student loans had a majority (61.1 percent) of respondents predict an increase in delinquencies.

Respondents also foresee increases in demand for liquidity. Over 57 percent expect customers to increase requests for lines of credit. About 69 percent foresee an increase in requests for credit from small businesses.

 

Midwest has strong local economies

Posted on by
Reply

Bankers can find NorthWestern Financial Review’s 2013 economic outlook feature in our Feb. 1-14, 2013 edition.

Titled “A strong Midwest,” we report economists’ expectation of a stable and growing U.S. economy in the coming year. We also report that the Midwest leads the country for economic strength in its small town economies. Our analysis is based an economic strength ranking created by POLICOM Corporation, an independent economics research firm based in Palm City, Fla.

The economics firm uses data collected by Bureau of Economic Analysis to rank 942 local economies across the country. POLICOM subdivides these local economies into 366 small towns with population between 10,000 and 50,000; and 576 cities with a population of 50,000 or more. POLICOM ranks each city based on what local workers earn, how much they work, and how many jobs are available in the area. The ranking also incorporates data on earnings, wages and jobs provided by small businesses, and the construction and retail industries. It also takes into account negative economic indicators such as welfare and Medicaid payments in a community.

For a ranking of the Midwest’s largest cities and highest-ranked towns, click here.

For a ranking of all Midwestern cities, click here.

For a ranking of Midwestern towns, click here.

POLICOM’s full U.S. ranking can be found here.

To download and manipulate any of the spreadsheets:
1. click the link.
2. click “file” in the document.
3. click “download as” in the file menu.

Fed outlook is a mixed bag for economy in ninth district

Posted on by
Reply

The Federal Reserve Bank of Minneapolis’ year-end economic outlook reflects positive expectations for 2013 from ninth district businesses. Owners polled by the Minneapolis Fed plan to buy new equipment, hire more people and increase sales in the next year; yet they are cautious about their state economy and national economy, according to Fed economists Rob Grunewald and Toby Madden, who teamed to brief reporters on Jan. 3.

Minneapolis Federal Reserve Bank economists Rob Grunewald (left) and Toby Madden (right) brief reporters on the economy in the ninth district.

The encouraging side of the outlook came from an unexpected source: the housing sector. The economists described this sector as a place for renewed optimism due to an uptick in both housing sales and starts. They gave Minnesota as an example; home sales increased 13 percent in Nov. 2012 over a year earlier, according to the Minnesota Realtors Association. In Sioux Falls, S.D., home sales were up 20 percent over the same period, the economists reported.

The improvement in housing sales has reduced inventories and increased prices. Compared to a year earlier, prices in the Twin Cities increased 13 percent in the third quarter. In Sioux Falls, prices increased by 5 percent and in Fargo, N.D., prices increased by 4 percent. Authorizations for builders to construct new homes were up for the entire district but they have not returned to pre-recession levels.

The economists also reported that agriculture in the ninth district remains strong despite the drought of last summer. Residing north of areas most affected, the ninth district received enough precipitation for farmers to grow their crops. Low production elsewhere also applied upward pressure on the prices of corn and soybeans, which increased farm income. The down side to increased prices has been felt by livestock and dairy producers, who have felt the squeeze in their profit margin. The outlook on the price of animal and crop products remains strong for 2013.

Manufactures also have positive outlook for their individual businesses despite a slowdown in manufacturing in 2012. An industry that has been a primary part of the economic recovery in the ninth district, manufacturers in Minnesota, South Dakota and North Dakota watched activity decrease for five straight months before posting a gain in December 2012, according a survey of purchasing managers by Creighton University of Omaha, Neb. The Fed economists reported that manufacturing is slowing due to sluggish export demand; in 2012 manufacturing exports increased just 5 percent compared to the 11 percent increase of 2011.

However, despite a slowing market, employment is up at manufacturers; and they are up-beat on orders and production for 2013, according to the Fed’s manufacturing survey of 542 district businesses.

For Minnesota, the outlook calls for continued growth. Employment is expected to grow by a solid 2.2 percent, while the unemployment rate is predicted to drop to 4.7 percent in the fourth quarter of 2013. Growth in personal income is expected to exceed 5 percent, according to the Minneapolis Fed’s statistical model.

Overall, employment is expected to increase an average 1.6 percent for the district. The outlook calls for average unemployment to drop to 5.1 percent and average income growth of 3 percent, according to the Fed’s statistical models.

The Fed’s outlook for individual states can be found here.

Fed official describes tepid improvement in banking industry conditions across Upper Midwest

Posted on by
Reply

While nearly all states in the Ninth District of the Federal Reserve reported improvement in loan growth, asset quality and profitability in the third quarter; banking conditions do not reflect strong recovery, according to Ron Feldman, senior vice president for supervision, regulation and credit at the Federal Reserve Bank of Minneapolis. Feldman discussed banking conditions at a briefing at the Minneapolis Fed on Nov. 20.

Feldman described Minnesota’s median bank as having “small to middling improvement” in the third quarter. For Minnesota banks, as well as those throughout the district, the problem remains the same. As asset quality has returned to historic norms, banks have set less aside for loan losses. This has led to higher earnings in the short term but now that asset quality has recovered, income growth will depend on loan growth. Unfortunately, while loan growth has improved it still is below historic norms for all states in the district, with the exception of North Dakota.

The Dakotas and Minnesota had the strongest performance in key metrics. In Minnesota, non-performing assets as a percentage of capital at the median bank declined to 11.54 percent, down 1.19 percent from last quarter and down 3.78 from a year ago. ROA for the median state bank has improved to 0.99 percent, up 5 basis points from last quarter, and 20 basis points over third quarter 2011. Over the last four quarters, Minnesota banks’ loan growth was 0.4 percent. This was a considerable year-over-year improvement; it declined 4.14 percent a year ago.

In South Dakota, problem loans at the median bank improved by 27 basis points in the third quarter to a 20-year low of 3.84 percent. Banks in the state had profitability increase slightly to 1.06 percent ROA. Loan growth was lower than last quarter, but has increased 2.83 percent over the past year. It stands at 3.14 percent.

In a different economic universe, North Dakota’s median bank’s problem assets are at a near record low of 5.77 percent in the third quarter, less than half of the national median of 12.1 percent. Loan growth is 12.11 percent for the median bank, more than 10 times the national median of 0.91 percent. Median ROA stands at 1.24 percent; the national median is 0.89 percent.

In Wisconsin, while non-performing loans as percentage of capital remain high; the western part of the state has made significant improvement. Past due loans declined for the third consecutive quarter, sinking to 14.25 percent of capital. Over the past year, that measure has improved by more than 8 percent. Year-over-year loan growth also has improved to 2.07 percent, a 0.6 percent increase over third quarter 2011. ROA for the median bank rose to 0.99 percent, a 0.12 percent improvement over second quarter.

In Michigan’s Upper Peninsula, non-performing assets decreased but remain at 19.32 percent of capital for the median bank. The total value of loans on bank books fell 0.6 percent from a year ago. ROA is 0.9 percent, slightly down from the second quarter but an improvement of 0.10 percent from third quarter last year.

All measurements point to recovery for Minnesota Banks

Posted on by
Reply

Asset quality has returned to the 20-year average in the state of 10,000 lakes. The average Minnesota bank also improved in nearly all other measures since the first quarter of 2012, according Ron Feldman, senior vice president with the Federal Reserve Bank of Minneapolis. Feldman spoke at the Minneapolis Fed’s Banking Conditions briefing on August 23.

Since second quarter 2011, non-current assets as a percentage of capital and allowances at the average Minnesota bank have fallen 5.78 percent to 16.6 percent, just above the 20-year average for banks in Minnesota of 15.8 percent. “Relative to the normal change we see, this is big change,” Feldman said. “It is truly a strong improvement.”

More than 40 percent of all Minnesota banks have had positive loan growth during the last four quarters. The average bank in the state grew its loan portfolio by 0.82 percent; the average bank in the Twin Cities expanded its loan portfolio by 4.06 percent. “It’s better than where we were, not long ago,” Feldman said.

The average Minnesota bank also has reduced inventoried real estate, as a percentage of capital, to 13.8 percent, a 1.78 percent decrease since last year and 0.65 percent better than last quarter.

The average bank in the state is more profitable. Return on assets has grown to 0.9 percent, a 0.23 percent increase over second quarter 2011 and 0.01 percent higher than the first quarter. “It’s not huge improvement,” Feldman said. “But it’s moving in the right direction.”

Since first quarter 2012, loan loss provisioning at the average Minnesota bank decreased by 0.01 percent to 0.21 percent of assets, a sign that banks expect slightly fewer losses.

Minnesota banks also gravitated towards higher ratings. While the number of CAMELS 4-rated banks remained the same, the number of 3-rated banks declined by five. The number of 2-rated banks increased by seven and the number of 1-rated banks declined by one.

“Overall, it was a strong second quarter for banks,” Feldman said. “Some of the financial crisis has passed.”

Minneapolis Fed echoes other economist’s positive outlook for district banking

Posted on by
Reply

Economists have a favorable outlook for Midwest banks in 2012. The Minneapolis Fed predicts conditions will continue improving just as they did in 2011. Ron Feldman, senior vice president of the Ninth Federal Reserve District, spoke to reporters during briefing yesterday morning. This paralleled the message bankers received at the Wisconsin Group One annual meeting in Bloomington, Minn., on Feb. 11.

“Business loan demand has started to rise in the last sixth to 12 months, the numbers of business loans have risen in the order of hundreds of billions of dollars,” said Clare Zempel, at the group One meeting. Zempel is the owner of Zempel Strategic an economic advisory firm. “It is taking place on the consumer side as well, the credit cycle is starting to shift toward greater demand for credit and for loans,” he said. “We are seeing bullish signs that people are willing to borrow and that banks are able to lend,” he added.

“We’re in what economists call a turning point. Conditions are getting better right now,” Feldman said at the fed briefing. Asset quality is starting to look like it did before the crisis. Nonperforming assets will continue declining in agriculture, construction, commercial real estate and industrial sectors.

Profitability will see mediocre improvement; the number of banks reporting negative earnings has dropped for the last three years. Loss provisions also declined in 2011, this drove profitability upward and will continue to do so in 2012.

Year over year loan growth is headed back upward but the volume will not return to prerecession levels in 2012. The Fed forecasts that the number of banks with loan growth will rise to 30 percent in the next year.

Wells Fargo economists see good news in Minnesota housing market

Posted on by
Reply

The bright spot for the Minnesota economy in 2012 is the housing market, home price are beginning to turn around. Other economic indicators for the state show modest growth for 2012, according to Wells Fargo Senior economists Scott Anderson and economist Ed Kashmarek. The economists spoke to reporters during a telephone briefing yesterday afternoon.

Minnesota home prices are 2.3 percent below the national average but in 2011 the majority of the state’s largest cities saw prices trending up again compared to 2010. Minnesota saw the end of a harsh drop in prices in 2011. Prices appear to have bottomed out and are beginning to rise. In the Twin Cities, a smaller inventory for sale has stabilized home prices which have trended up by 3.7 percent. Fewer homes are being built in Duluth and Rochester. Sales activity has been strong in these areas, which has settled home prices. Duluth prices were down only 1 percent compared to 2010. Rochester’s prices recovered by approximately 2.1 percent in 2011. St. Cloud prices have risen but are still 7.6 percent below last year.

Minnesota economic performance mirrors the U.S. economy, Anderson said. The nation finished 2011 on a good note. National GDP was the highest it had been the whole year in the fourth quarter at 2.8 percent. This is a 1.6 percent improvement on the fourth quarter of 2010. Other areas of the economy are relative bright spots. “We have seen improvements in small business and housing starts are looking a little healthier,” he said.

Minnesota’s economic growth will be at 1 percent in 2012, Anderson said. This follows suite with their national prediction. “We are still forecasting a slowdown for the U.S. GDP to 1.5 percent in 2012,” Andersen said. The primary drivers behind this prediction are a weaker consumer spending market, rising gas prices, lower savings rate for consumers, lower income growth due to slow job creation and the global economy. Export markets brought in $5.1 billion in 2011 but this is the same performance as the fall of 2008. “All together the underlying macro trends in the United States and negative global outlook trends cause us to forecast slow growth,” he said.

Minnesota job markets will continue with slow recovery as well. “Modest job growth is occurring, led by services and manufacturing,” Andersen said. State unemployment is also dropping but the downward trend is caused more by people leaving the labor force. The global environment will weigh more heavily on Minnesota manufacturing and exports in 2012. State budget problems are expected to rear their head once again by 2014.