Officials at Hingham Institution for Savings say mergers at larger institutions are still driving new customers in their direction.
The industry may not have set any profitability records, but most bankers and analysts agree 2000 was a pretty good year for financial institutions. And in Massachusetts, largely because it is more heavily populated with smaller banks, the banking industry performed better than the nation as a whole.
“[Profitability was] probably not quite as good as the previous year, but certainly by historical comparison they [banks] were quite profitable, extremely well capitalized,” said financial economist Steven Davidson of America’s Community Bankers. “The challenge was, last year, with rising interest rates through most of the year, it made generating strong spreads between lending and their cost of funds a bit of a challenge. Going forward, with the Federal Reserve reducing rates 100 basis points in January, from a spread point of view, it should be a better year; one would suspect a more profitable year.”
Veribanc President Michael Heller agrees that from a profitability standpoint the commonwealth didn’t do as well as the previous year, but said Massachusetts fared better than the nation and will probably continue to do so.
“Net income, year to date [for the state], is $1.195 billion for the quarter ending Sept. 30. That’s down from the previous year’s third quarter, which was $1.689 billion,” said Heller. Industry-wide, Heller expects a decrease in profitability for the fourth quarter because of increases in problem loans.
“Problem loans for Massachusetts have actually gone down. So Massachusetts, from a problem-loan standpoint, is doing better. I don’t expect to see Massachusetts following the trend. I would see them counter the nationwide trend for the fourth quarter,” he said.
Another reason for the state faring well is that it has only one truly large, regional bank, FleetBoston Financial. On the whole, the larger banks experienced problems in the past year.
“Most of the problems has been in syndicated loans, and Fleet is really the only one that’s done that kind of thing,” said Arnold G. Danielson of Danielson Assoc. in Rockville, Md.
Many commonwealth banks releasing fourth-quarter earnings have noted an increase in profitability over last year, including FleetBoston, which helped its bottom line by selling off nearly $1 billion in troubled loans.
The continuing spate of mergers in the state is still listed by many community banks as a source of new customers and profitability, as consumers tire of problems associated with acquisitions and switch banks.
“We had about a 30 percent increase [in profits] for the year and about 32 percent for the fourth quarter. There’s a real opportunity in terms of the consolidation,” said Robert H. Gaughen Jr. president of the $338 million-asset Hingham Institution for Savings.
Deposits increased by 17 percent in 2000 as compared to an 8 percent increase in 1999. In addition, Hingham’s loan portfolio grew.
“Net loans increased from about $230 million up to $267 million. That’s good production, good quality loans,” said William M. Donovan Jr. vice president of administration at Hingham.
Although an economic slowdown may be at hand, Donovan said the bank’s projections for next year are include continued profits. He expects core deposits to continue to be a growth area for the bank with customers still defecting from larger merged institutions.
“You know, with the mergers that we see in the community, the Fleet, the Bank of Boston, the Citizens … our deposits were up over $30 million. So, I would [expect to] continue to see growth in the deposits and in the loans, as well, which will generate more income,” said Donovan.
“I don’t think the full implications of consolidation have really settled in. Consumers take a long time to move. We saw a lot of shift in terms of transaction accounts, checking accounts moving over last spring … and they’re still coming in,” said Gaughen.
However, he doesn’t expect core deposits to continue to rise without some action by banks to become more competitive.
“I think, in the long term, no one can expect to retain deposits at less than market rates,” he said. Gaughen predicts that within the next two years interest on commercial checking products will become an industry standard. There’s an up side and a down side to interest on commercial checking accounts, he said.
“Operationally, it’s going to make things a little simpler for the smaller banks in terms of eliminating the need to have sweep accounts that you’re moving the money out of the commercial checking accounts every night in order to earn them some market rates. On the other hand, it’s going to cost a little bit on the existing base of deposits. The long and the short is consumers are too sophisticated to give anyone, whether it’s a bank or mutual fund, money without a reasonable return,” said Gaughen.
Problem Loans
Loan portfolios across the state have seen healthy increases as well. For Hingham, loan volume increased 16 percent as opposed to 12 percent in 1999. Loan originations for 2000 were $92 million.
“They [banks in Massachusetts] are extremely well reserved,” said Davidson, citing another reason Massachusetts did well in 2000. “They’re loss reserves on average is about 20 times their level of non-performing loans, which is quite impressive.”
“[Massachusetts’] number of problem loans, both by historic terms and compared to the rest of the industry, was quite low … Because 0.2 percent of loans were non-performing, the number can’t go much lower,” said Davidson But considering the slowdown, keeping the number of problem loans low may become an industry-wide challenge in 2001. But, again, for the Bay State, non-performing loans may not be as much of a problem as it could be nationally because the concerns fall mostly on the business lending side, not the residential side that makes up the bulk of loans in the state.
According to Heller, the top-performing banks in the state owe their performance to their residential loan portfolios, which are made up mostly of one- to four-family mortgages.
“That’s where they’re the most profitable,” he said.
One major bank, BankNorth Group, the Portland, Maine-based parent of First Massachusetts Bank, said it posted its seventh consecutive year of record earnings in 2000, in part due to the profitability of the $5 billion First Massachusetts in Worcester.
“We’re up about 9 percent on an operating basis,” said Brian Arsenault, senior vice president of corporate communications for BankNorth.
“First Massachusetts bank has been particularly strong. It’s been probably the key to our growth.” Both Maine and Vermont, where BankNorth operates, are slow growth markets, explained Arsenault. Noting the disruption caused by the merger of Fleet and the arrival of Sovereign, he said growth in Southern New Hampshire and Massachusetts has helped his company.
“Those are all good banks but whenever you have that kind of disruption, it creates opportunities to pick up some business,” he said.
However, like other Massachusetts-based banks, Mutual Federal Savings of Whitman owed its 5 percent growth in 2000 to lending.
“Primarily home equity lending. We embarked on a promotional campaign during the year to originate home equity loans and it was very successful,” said David W. Cogan, president and chief executive officer of Mutual Federal Savings.
Cogan said that while profits may slow a bit in 2001, he hopes to increase the lending side of the $88 million-asset bank through local deposits or by leveraging capital through the Federal Home Loan Bank.
Of ACB’s list of the ten top-performing Massachusetts banks, all but one were community-sized banks, those with assets of less than $1 billion. Davidson said he expects banks to be able to post profits again next year if they are able to maintain the current balance.
“On the one hand, the economic environment is good for banks because the cost of borrowing is coming down … On the other hand, with the economic data showing a slowing economy, that brings challenges on keeping the [loan payment] delinquencies low.”
