Pub. 5 2015 Issue 1

The State of the State By JOHN FAHRENDORF W H ILE IT IS STILL DEBATABLE WHEN THE “GREAT RECESSION” REALLY STARTED, IT IS CLEAR THAT WHILE IT MIGHT BE TECHNICALLY OVER, THINGS ARE STILL VERY CHALLENGING FOR BANKS AND bankers on a national basis in many parts of the country. In this article, I’ve compared September 30, 2006 data and September 30, 2014 data for banks in Arizona. My data sources are SNL Financial, BankTrends, and the Federal Financial Institutions Examination Council (FFIEC). I’ll cover some general state averages and then go over some specific highs and lows, along with a brief comparison of Arizona to national averages. In 2006, some banks were actually paying dividends. H IGHS AND LOWS FOR 2014 Now for some “highs and lows” in our state: Cost of Funds: The top performer in Cost of Funds stands at a rather astonishing .07% and the poorest performer is at .88%. Net Interest Margin: Our #1 bank is at 5.95% and the low- est is at 2.49%. Efficiency Ratio: Efficiency ratio is quite interesting, with our most efficient bank reporting in at 39.05% for the quar- ter. Insofar as it appears as if a non-recurring event, I’ll also report the second highest performer at 47.73% for the quarter. Sadly, four of our banks are still operating unprofitably, with Efficiency Ratios in excess of 100%. Texas Ratio: While improving, this ranged from a high of 173% to an excellent 0%. ROE and ROA: For these ratios, our top performer is the same bank for both, with an ROA of 2.2% and an ROE of 20.3 %. Unfortunately our bottom performers stood at a -2.43%, for ROA, and -41.35 for ROE. Just to dig a little deeper, for our top-performing ROA and ROE bank, five years ago they were losing money, had an efficiency ratio of 98.7%, and NIM of 4.02%. Their ALLL stood at 3.75. Since then, they have improved their Efficiency ratio to 73%, and actually improved their NIM to 4.27. Their ALLL now stands at 1.55%. * Includes 1 credit card bank and 1 Sub S bank. For these purposes, I have excluded the credit card bank in order to compare “apples to apples.” C OMPARISON TO KEY NATIONAL AVERAGES I’ll conclude with a brief comparison of how Arizona compares on a few key national averages. Arizona compares favorably on Texas Ratio, Non-Current Loans, Non-Current Loans and Non-Performing Assets to ALLL, NIM, Return on Equity, and Net Charge-Offs to Earning Assets. We still have room to improve on our Efficiency Ratio and, interest- ingly, our legal costs run higher than national averages. I understand that numbers and statistics are just that, and we’re still seeing “strange” things in call reports, with deferred tax assets, restated call reports, accrual to nonaccrual and vice versa, but the data is what it is. So the question is, “what’s the state of the state?” Clearly, it’s still a mixed bag, with some improvement, some stabilization and, unfortunately, still pain. Stay focused on Cost of Funds and Efficiency Ratio, and re- member that “gain on sale” fee income is great but does little to improve franchise value relative to core earnings. My New Year’s wish for you is for continued improvement and that Non-Performing Assets become nothing more than a distant memory. w 9/30/2006 9/30/2014 Number of Banks 49 22* Cost of Funds 2.23% 0.41% Average Net Interest Margin 4.94% 3.81% Net Losses to Average Loans 0.01% 0.68% Earnings Coverage to Net Losses 218% ALLL Averaged 1.09% 1.63% Past Dues Including Non-Accruals 0.14% 1.46% Tier-1 Leverage Capital 15.09% 11.39% Unemployment 3.9% 6.6% For more information, contact John Fahrendorf, Executive VP, Western Divi- sion, Young & Associates, Inc. at 602.383.3603 or jfahrendorf@younginc.com. Young & Associates, Inc. has provided consulting, outsourcing, and educational services to community financial institutions nationwide and overseas for over 35 years. We look forward to working with you to ensure that your bank can make informed and strategically sound decisions now and in the future. 7 WINTER 2015