Community bank performance update – ‘Are we there, yet?’

Just about everyone who has had the pleasure of taking small children on a long car trip is probably familiar with the question, "Are we there, yet?" In my personal experience, it usually starts about 30 miles into the journey, and is repeated every half hour until the destination is reached. Well, as community bankers, we are all five years into our journey of recovery from the financial crisis, real estate market collapse, and recession, and I can hear my inner 6-year-old asking, "Are we there, yet?" .A look at data from the 1st Quarter of 2013 gives us some insight on where we stand and how close we are. Probably the biggest factor impacting community bank performance right now is the compression of net interest margins. First quarter net interest margins averaged about 3.48 percent, and while there is a lot of variability from bank to bank and state to state, that's about 50 basis points below where most banks would probably like to see it. We've been hit by a combination of falling loan yields (while deposit costs are already at the bottom) and a lack of loan demand resulting in balance sheets filled with low-yielding bonds. On the bright side, there has been some upward movement in rates, and this will be a boon to banks that are properly positioned from an asset liability perspective. It will be critical to keep a lid on deposit rates as long as possible to allow the yield/cost spread to widen back to normal levels..Two other big factors that have been a drag on performance should both be improving – costs related to problem assets and loss provisions. Clearly, loss provisions have dropped substantially as asset quality has improved and reserves are ample (in some cases even over-funded). In the first quarter, the average provision was only 0.05 percent of assets in the region. That really helps profits, but it also means it's about as low as it can get already, and further improvement will have to come from other sources. Some of that will come from continued declining legal and collection expenses, as well as OREO costs as those problem assets are reduced. With an average problem assets ratio of about 2.50 percent (NPAs+90Dpd/Loans+OREO), there is still room for improvement in that area.."Are we there, yet?" Maybe not, but I can see the lights on the horizon. Net interest margins should firm up with rising rates and improving loan/deposit ratios (regional average is only about 68 percent), while problem asset expenses should continue to go down. If these occur, we will be a lot closer to getting back to where we were five years ago, and that part of the journey will be over..Matt Becker is vice president, senior financial analyst, with BankValue Advisory Services, a division of United Bankers Bank, Bloomington, Minn.