Real estate can add balance to an investment portfolio
But bankers note that increased activity doesn’t always mean more profits
Banks in southeastern Wisconsin saw a surge in residential refinancing business during the first half of 2003, but several banking executives were quick to point out that does not always translate to positive results on a bank’s bottom line.
However, with the economy starting a slow recovery, home refinancing still running very hot and a good real estate lending market, bank executives are confident the second half of 2003 will be better than the first half and signal the economic turnaround that everyone has been waiting for.
"I am guardedly optimistic that things are going to continue to improve," said David Ballweg, chairman of Community State Bank in Union Grove, a community bank with about $210 million in assets and marking its 100th anniversary this year. "I believe we are on the verge of improvement in many sectors, and that bodes well for both the regional and national economies."
Residential refinancing drove the first half of 2003, with interest rates hitting historic lows, such as a 30-year mortgage for 4.5%. Most banks reported record numbers of refinancing during the first six months of 2003.
"I believe much of the activity would not have happened if the interest rates had been back up in double-digit levels," Ballweg said. "People have taken advantage of those rates to look in loans for the next 20 or 30 years. This also provides them a comfort level to spend a little higher percentage of their money on other things, which is good for the economy."
Thomas Perz, president and chief executive officer of St. Francis Capital Corp., said the lowering interest rates put a lot of pressure on banks earning potential. The Federal Reserve recently lowered the prime interest rate again, which is expected to cause another surge in residential refinancing.
"This is temporary activity that will not be sustainable for a long period of time," he said. "The federal rates have definitely heated up refinancing for us, but it has also put more pressure on our margins."
Perz said the low interest rates have also allowed people to pay down their debt, which means banks are seeing less delinquent loans and are forced to file fewer foreclosure actions.
St. Francis, with $2.29 billion in assets, had a very active first six months as it was announced in mid-May that MAF Bancorp. Inc., Chicago, had agreed to acquire St. Francis in an all-stock transaction that will expand MAF’s market presence in the Milwaukee area. Perz said the acquisition is on target to be completed later this year.
"Our shareholders will benefit from the increased liquidity and broader following by the investment community that the larger combined company should offer," Perz said. "We also believe this transaction will benefit the communities of Milwaukee."
At Anchor Bank, a Madison-based financial institution which has been expanding in the Milwaukee area, residential refinancing and strong commercial loan demand have resulted in a solid first six months, said Michael Carew, vice president, commercial real estate, at Anchor Bank.
"The strongest part of Anchor Bank’s business has been residential loan origination and refinancing followed closely by solid commercial loan origination," Carew said. "Deposit growth has also been strong, which is consistent with the growth of our consumer and commercial customer base."
For the most part, banks’ earning and loan portfolios have been steady through 2002 and the first quarter of 2003, said John Hinkel, director of examiners for the banking division of the Wisconsin Department of Financial Institutions. Financial results will not be available for the second quarter, which ended June 30, until mid-August.
The net income to average assets ratios for all financial institutions in Wisconsin for the first three months of 2003 was 1.34, up slightly from 1.31 at the end of 2002. The equity capital to total assets ratiofor the first three months of 2003 was a 9.2%, up slightly from 9.1% at the end of 2002. And the volume of loans to overall assets ratio during the first three months of 2003 was 70.9%, down slightly from 71% at the end of 2002.
"We’re seeing a lot of stability, which is a sign of how strong the financial institutions in Wisconsin are," Hinkel said. "Even with the fluctuations in interest rates, the banks have done a good job of adjusting and making sure they are staying on strong financial ground."
Several bank executives said the commercial real estate market in southeastern Wisconsin was a strong and profitable one for banks. Anchor Bank’s Carew said real estate lending has been strong in refinancing and acquisitions, with new construction loans being made, but "very selectively based on the strength of the sponsor, tenant and/or product mix."
He pointed to the downtown Milwaukee housing market, new suburban office development in Brookfield, and the retail market near South 27th Street and St. Luke’s Hospital in Milwaukee as the hottest areas.
"Overall, it is a great time to be a commercial real estate developer as there are plenty of lenders competing to lend on commercial real estate projects," Carew said.
As the banking executives look to the second half of 2003, they are optimistic that the economy will continue to improve, meaning good results for area banks. They say the end of the Iraq war had removed some of the doubt that was hindering the economic recovery.
"I think we’ve seen the worse, and thing are going to really start to improve," Ballweg said. "The stock market has shown signs of improvement, and I think people who have been holding back are ready to invest and spend their money."
Added Kelly Foster, president of the Milwaukee division of Johnson Bank, "We expect the second half to be a replay of the first half, with very, very slow recovery signs being exhibited."
Carew said the Milwaukee banking market is healthy, but there is some concern that there are too many banks fighting for a stable pool of customers.
"One of the main concerns in the banking industry is excess capacity – too many banks chasing the same number of customers and depositors with the result being the bank’s traditional sources of revenue fees and interest income are constantly under margin pressure as banks try to maintain their share of the market," he said.
"To survive, competitive service is paramount. Which is why you continue to see a plethora of new banks enter the market at the expense of the larger institutions, who many customers view as less responsive to their local needs, given the perception that management control is out of state and too cumbersome to respond to the unique needs of each customer."
July 11, 2003 Small Business Times, Milwaukee
