5 posts from November 2013

Bank on it: Ninth District banks continue to improve

Rome wasn’t built in a day, and neither is bank health after a financial crisis. But Ninth District banks are continuing their slow ascent to better bottom-line health, according to the third quarter report on banking conditions by the Federal Reserve Bank of Minneapolis.

Overall, some performance metrics continue to be poorer than historical norms, but most are improving. Problem loans, for example, continue to be elevated, but declined again in the third quarter. Profits were flat this quarter, but strong gains were seen in loan growth. Bank performance among district states generally mirrored district results.

Minnesota: Overall improvement “remains steady but slow,” according to the report. Minnesota banks had slightly better performance this quarter than last. Banks continued to reduce problem loans and saw higher loan growth, and general banking conditions in the state “compare well to the nation as a whole.”

Montana: For the second consecutive quarter, Montana banks “demonstrated improvement through reduced problem loans, increased loan growth and improved earnings,” which put the state near or above national performance for these key measures. Loan growth was particularly notable, seeing year-over-year growth of 3.2 percent after seeing slightly negative growth both in the previous quarter and one year ago.

North Dakota: The state’s banks turned in strong third quarter results, with improvements in loan growth, profitability and problem loans—all three of which are considerably better than national levels. For example, the percentage of noncurrent loans decreased by 39 basis points to 5.01 percent, less than half the national level of 10.22 percent. Median return on average assets increased slightly to 1.22 percent, well above the national median of 0.86 percent. At the same time, activity is moderating somewhat, the report said. “Relative to last year, performance in the third quarter is less stellar on some dimensions for the median North Dakota bank, but remains far superior to the U.S. as a whole.”

South Dakota: The state’s 70 banks “are already strong,” but turned in significant gains in performance compared with the rest of the country. Loan growth, for example, was almost 10 percent on a year-over-year basis, nearly 4 percentage points higher than the previous quarter. Problem loans, at just 4.29 percent, is tops in the Ninth District, and about 60 percent better than the national figure.

Upper Peninsula of Michigan: It was a mixed bag for the 21 U.P. banks, with reduction in (median) problem loans and positive loan growth in the third quarter. However, profits fell, and all three measures are significantly worse than the median U.S. bank. Problem loans, for example, saw a substantial reduction, falling 3.74 percentage points to 19.39 percent in the third quarter. But that’s almost twice the national level. Loan growth fell slightly over the past year (-0.39), but that rate was an improvement over the previous quarter by 90 basis points.

Wisconsin: The 55 banks in the western part of Wisconsin that fall within the Federal Reserve’s Ninth District had mixed results in the third quarter. Problem loans fell and earnings were steady, but loan growth was weak and fell further in the third quarter. Problem loans and loan growth in this region were poorer than in other district states (save for the U.P.) and the nation. Year-over-year loan growth declined by almost 1 percentage point to 0.13 percent, compared to the national median of 3.28 percent.

Unemployment insurance: Slowly mending in most district states

While unemployment rates continue to fall, if slowly, employers in many states are still grappling with higher tax rates for unemployment insurance (UI), which fund unemployment benefits in each state. Recent data from the U.S. Department of Labor suggest a mixed bag of improvements this year among Ninth District states.

Employers pay UI taxes for every covered worker on payroll, but every state does things a little differently. For example, the amount of income subject to UI taxes varies widely among states. In Michigan, employers pay UI taxes only on the first $9,500 of wages paid. In Wisconsin, it’s $14,000, and in North Dakota, almost $32,000 (see Chart 1). As a result, UI tax rates tend to be inversely related to how much income is subject to UI taxes, with Michigan’s rate the highest and North Dakota’s the lowest (see Chart 2). Higher UI rates tend to reflect benefit generosity as well.

But the direction of UI rates are heavily influenced by each state’s economy, and the Great Recession gave UI systems in most states a one-two punch: It put many out of work, thus greatly increasing unemployment benefit spending; it also lowered overall employment, which lowered the amount of UI taxes coming into UI trust funds (which pay unemployment benefits). As a result, UI tax rates on covered employees had to go up for most UI systems to maintain adequate cash flow during the recession and subsequent recovery.

The greatest increases in UI tax rates came between 2009 and 2011, once the full effects of the recession had settled in and states had exhausted their UI trust funds. Since then, average UI tax rates have moderated; half of district states saw a slight decline in 2013 as a percentage of taxable wages, and the other half increased, with Michigan seeing a significant rise (see Chart 2).

In the Dakotas, strong economies and high job growth, coupled with low unemployment and modest jobless benefits, have pushed UI tax rates to exceedingly low levels (see Chart 2). Wisconsin’s rate has also started to bend lower. But rates for Minnesota, Montana and especially Michigan have continued to increase. (Technically, only the northwestern portion of Wisconsin and the Upper Peninsula of Michigan are in the Ninth District, but the whole of both states are included in this analysis.)

UI rate charts 1-2

In some ways, the ultimate cost of UI taxes to state businesses is easier to see as a percentage of total wages. Here, the rank among district states still generally holds, but the Dakotas set themselves off even further for the low cost of their UI programs, while other district states bunch more tightly together (see Chart 3).

There are other good-news stories outside of the Dakotas. While Minnesota’s UI rates have continued to increase in 2013, the state has managed to wipe out a $770 million loan from the U.S. Treasury that it needed to keep paying unemployment benefits a few years ago. Wisconsin has done that one better: UI rates inched down this year, and though the state UI trust fund still has a $300 million loan with the federal government, that’s down from $1.4 billion just two years ago.

(Update: On Tuesday, November 19, the Minnesota Department of Employment and Economic Development announced that UI rates will drop in 2014, thanks to growth of the state UI trust fund to $1.2 billion. It's  estimated the move will save state businesses almost $350 million in UI taxes.)

UI rate charts 3


Housing vacancy rates (mostly) falling in the Ninth District

After seeing some of the highest rates in recent memory, housing vacancy in the United States and most of the Ninth District has steadily fallen in recent years, according to data from the Census Bureau.

Separate measures are available for housing units that are “vacant for rent” and “vacant for sale.” For rental units nationwide, the vacancy rate for year-round units fell from a peak of 11.2 percent in the fourth quarter of 2009 to 8.2 percent in the second quarter of 2013 (see Chart 1). Homeowner vacancies also fell.

Ninth District states are seeing a similar trend for rental vacancies (see Chart 2). But there are some methodological quirks. For example, smaller samples at the state level make these data noisier and less reliable. In some cases, the results are counterintuitive. North Dakota is in the midst of a housing crunch given its robust economy, yet rental vacancy rates are on the rise, according to Census data. But the Census defines a housing unit as vacant if it is occupied entirely by people who have a usual residence elsewhere. As a result, the state’s rising vacancy rate is likely the result of high numbers of out-of-state workers renting temporary housing near the oilfields.

Housing vacancy CH 1-2 -- 11-6-13

An alternative way to analyze this trend is to look at the data on vacant addresses from the U.S. Postal Service, which has an agreement with the Department of Housing and Urban Development to provide quarterly updates on the number of addresses it identifies as vacant. An address is deemed vacant if mail is not collected for more than 90 days. According to this much larger data set, there has been some decrease in the share of vacant residential addresses in most district states over the same period, though it is much less pronounced (see Chart 3; Montana and Wisconsin saw rates tick up slightly).

An interesting twist: For units vacant for less than one year, vacancy rates declined nationwide and among all district states during this period (see blue bars in Chart 3). In contrast, rates for properties vacant for more than one year increased across the board (see orange bars on Chart 3), and much of the rise came from units vacant for more than three years.

Housing vacancy CH3 -- 11-6-13

District businesses expect to increase capital spending in 2014

Capital spending is an important benchmark for the economy and its expected trajectory going forward. In the Ninth District, a recent survey suggests a positive outlook.

The Federal Reserve Bank of Minneapolis conducted an ad hoc survey of 153 Ninth District firms (see methodology) and asked them about capital spending plans. About half noted no change for 2014, but 31 percent expect capital spending to increase compared with 19 percent who expect decreases.

Financial and health services respondents are the most optimistic, with more than 40 percent anticipating capital expenditure increases next year. In contrast, 44 percent of manufacturers expect cuts in cap ex, while a third expect increases in 2014 over 2013.

Firms that are expanding capacity are most often facing capacity constraints. The most common reason given for expansion was that current capital equipment is not well suited to future needs (42 percent), followed by 40 percent who said current capacity is already stretched too thin. One-third of the positive respondents noted improved sales prospects. Respondents could choose more than one reason.

Of those who expect to cut capital expenditures, the most common reason cited (by about half of respondents) was reduced sales, while 31 percent mentioned cost increases as a limiting factor, and current excess capacity was blamed by 23 percent of the respondents. Again, respondents could choose more than one reason. Other reasons given were uncertainty in health care costs and government funding and a changing environment. Uncertainty about the future is curtailing capital spending now, according to 53 percent of respondents.

The number one issue respondents cited for why there is uncertainty is the strength of the overall recovery (73 percent) followed by uncertainties regarding health care reform (57 percent). Only 7 percent noted weakness abroad as an uncertainty issue. Examples given in written comments include interest rates, lack of political leadership and government policy.

Survey methodology: At 8 a.m. on Thursday, Oct. 31, an email was sent to 1,000 business contacts from various sectors around the Ninth District. By 4 p.m. Friday, Nov. 1, we received 153 responses, representing a 15 percent response rate. The largest number of respondents came from professional services (21 percent), financial services (18 percent), manufacturing (14 percent) and government (11 percent).

Blowing out the candle? North Dakota improving on flared gas

The well-publicized growth of oil production in North Dakota is bringing with it increased production of natural gas and rising attention to the practice of flaring natural gas. A recent report by the North Dakota Pipeline Authority suggests that progress is being made in getting more natural gas to market, even as more gas (by volume) is being flared.

Over the past three years, natural gas production has roughly tripled (see Chart 1), but so too has the amount of gas burned at the wellhead rather than captured and sold. The pipeline agency estimates that there are almost 4,700 wells flaring natural gas in the state. Most of these are so-called low-flaring wells; roughly half of the wells account for 99 percent of flaring.

Today almost 30 percent of natural gas produced in the state, a byproduct of oil production, is flared off—for the simple reason that its collection requires localized pipeline systems and processing plants. This requires considerable capital investment, not an easy sell at current prices. (For more background and discussion on natural gas production, pipelines and processing in the Bakken region, see “Dealing with gas” in the April fedgazette.)

Of all flared gas, the pipeline authority estimates that about 45 percent comes from wells that are not connected to existing pipelines and processing plants. The rest comes from wells that are connected and selling some of their natural gas production, but existing infrastructure (including processing plants) can’t handle more volume. Also, some natural gas from lower-pressure wells is flared because it’s being displaced on pipelines by gas from newer, higher-pressure wells. The good news is that the percentage of new wells making some sales has increased (see Chart 2).

Natural gas flaring CH 1-2-- 10-31-13

Part of the solution to flaring is more processing capacity. One Bakken pipeline, completed in September, sits idle as it waits for expanded capacity at a Tioga, N.D., processing plant. But more capacity is coming online and planned for coming years (see Chart 3), though it’s uncertain whether it will keep up with rising production. The state currently has 20 natural gas processing/conditioning plants, and six new or expanded plants are expected in the next few years, increasing total capacity by about 45 percent.

The pipeline agency notes that “momentum is shifting in favor of further expansion of natural gas gathering and processing. The same market drivers that have worked to bring nationwide flaring below 1 (percent) in the United States exist today in North Dakota.” But it added that reducing flaring to below 5 percent in North Dakota “will take years to accomplish,” in part because under current practices and energy prices—particularly the high price of oil—producers can flare and still capture 93 percent of the energy content of well production and 97 percent of the economic value (see Chart 4).

Natural gas flaring CH 3-4-- 10-31-13 

All charts reproduced with permission from the North Dakota Pipeline Authority.