By Bryan Corliss
Herald Writer
Unemployment is up, the economy is down and yet Snohomish County’s four publicly traded banks all showed increased profits for the first quarter of 2002.
Around the Northwest, in fact, “You’ve got to look real hard to see a recession” in banking, Ragen McKenzie analyst Jay Tejera said.
Twenty-two of the 28 banks he follows in the region reported increased first-quarter profits, he said, with most of them showing gains well into the double-digits.
The reason?
Low interest rates, which have spurred record levels of mortgage refinancing and supported a strong real estate market, he and other observers said.
“Now is certainly not a bad time to be a financial institution,” said David Carrithers, a lecturer at Seattle University’s Albers School of Business.
Cascade Financial Corp. showed a 54 percent increase in profits for the quarter, compared to the same quarter last year. Frontier Financial Corp. was up 26 percent for the quarter, while CityBank grew 3.6 percent.
EverTrust Financial Group was up 6.7 percent for the quarter, and reported gains of 3.7 percent for its fiscal year, which ended March 31.
Across the region, banks grew their profits by a median of 26 percent during the quarter, which was “extraordinary,” Tejera said. Washington Mutual led the way with increased profits of 56 percent, which was “just incredible for a company that size.”
In any recession, banks have an advantage over other companies, Carrithers said. They’re closer to the pulse of an economy, so they can better manage their costs.
But overall, the increased profits are the result of lower interest rates, he and Tejera said. “That’s why the Fed lowers rates,” said Tejera.
The low rates spur all kinds of financial activity, he said. Mortgage refinancing has been at record levels over the past two years, which translates into increased fee income for lenders.
In addition, the typical homeowner saves $200 to $250 a month by refinancing, Tejera said. That’s about equal to a new car payment, he noted, which has made auto loans affordable.
Low rates also make homeownership more attractive. That’s sparked a rush among first-time buyers, who’ve migrated from high-end apartments to starter homes, Tejera said. That, of course, generates more bank income.
All these factors are particularly true for Snohomish County banks, Tejera said. EverTrust and Cascade are converted thrifts, and Frontier is big into home loans, he noted.
Because mortgages are such a big part of their business, those banks have out-performed their peers during the real estate boom, which is just now slowing, Tejera said.
Low interest rates also mean lower “cost of funds.” Banks are paying lower rates on deposit accounts – about 2 percent for money market accounts right now, compared to rates of 6 or 7 percent 12 months ago.
One of the reasons Frontier is so strong is because it got its margin back in order, Chief Executive Bob Dickson said. Last year, it got caught in a rate squeeze when the Fed lowered interest rates rapidly, while the bank still had to pay high interest on its long-term CDs. During the past quarter, it was able to lower rates on deposits to more-profitable levels.
What’s ahead? Financial institutions are leading indicators, so improved earnings could be a sign of an economic recovery, Carrithers said.
Tejera doesn’t think so.
As time goes buy, laid-off workers will run out of severance, jobless benefits and savings, and will start defaulting on loans, he said. At some point, credit quality will start to become a problem.
“It can be six to nine months before those numbers peak,” he said. “We’re not out of the woods yet. We’re not going to see positive growth until 2003.”
You can call Herald Writer Bryan Corliss at 425-339-3454
or send e-mail to corliss@heraldnet.com.
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