Indiana and Michigan Banks in total reported solid earnings through June 30, 2012. In addition, early earnings releases for the third quarter continue to exhibit a positive trend. Horizon Bancorp is following suit and recently reported record year-to-date earnings through the third quarter 2012. The chart below exhibits the positive earnings trends for Indiana and Michigan Banks.
Source: UBPR for States of IN & MI, represents aggregate earnings for all banks in each state
Year-to-date earnings for Indiana and Michigan Banks are driven by two key factors, lower credit costs as reflected in a lower expense to fund the allowance for loan and lease loss reserve and an increase in non-interest income associated with higher residential mortgage loan volume.
Lower credit costs are a good economic signal and are directionally aligned with the regions lower unemployment rates and increase in manufacturing output. Lower credit costs are positive however the region’s banks still have a high level of non-performing loans when compared to historical norms. This elevated level of non-performing loans would place at risk future earnings if say the United States heads into another recession, fails to effectively deal with the looming fiscal cliff or there is a world event that up-sets the markets.
Residential mortgage loan volume continues at a brisk pace and is being driven by the Federal Reserve Bank’s quantitative easing policy to monthly repurchase approximately $40 billion of long term bonds. This is known as QE III, which has produced historic low interest rates for 1 to 4 family residential mortgage loans. Given the high probability and need for future tax increases to lower the United States debt level, low interest rates on residential mortgage loans may be the only U.S. governmental subsidy available to consumers long-term. I would encourage all consumers to discuss with a mortgage loan expert how they can take advantage of these historic low mortgage rates. In addition, if you are looking for a new home, the low interest rates and high number of homes available in the market make it a great time to purchase.
Another bright spot year-to-date is that Indiana banks in total are reporting growth in total assets, which means that the Indiana banks have increased their lending activities. Michigan banks on the other hand are reporting flat to no growth in total assets, which is a positive sign since the Michigan Banks have stopped loan roll-off and are now positioned well to handle future growth. See the chart below that reflects historical total assets for banks in the states of Indiana and Michigan as of the dates listed.
In Billions Source: UBPR for States of IN & MI, represents aggregate earnings for all banks in each state