25 posts categorized "Banking"

Ninth District Beige Book: Signs of moderate economic growth in spring

Since early April, some key sectors in the Ninth District economy have varied, but overall growth has been moderate. Home sales and prices increased at a strong rate, although residential construction remained flat. Energy and mining activity continued to decline, contributing to a slowdown in spending and employment in the energy-producing region of western North Dakota and eastern Montana. While prices were relatively stable and wage increases remained mild, some signs of increased wage pressures appeared.

Residential real estate and consumer spending grew

Residential real estate activity showed strong increases in many parts of the Ninth District during April compared with a year earlier. For example, in western Wisconsin, home sales increased 25 percent and the median sales price rose 12 percent, while in Minnesota, home sales were up 20 percent with the median sales price up 12 percent. Home sales were buoyed in part by a relatively mild spring in many parts of the district. Meanwhile, residential construction was flat overall.

Retail and tourism spending also contributed to positive economic growth. According to a recent survey of district business leaders conducted by the Minneapolis Fed, 40 percent of respondents noted that retail spending increased over the past three months, while 12 percent reported that sales had decreased. An auto dealers association expects Minnesota vehicle sales in 2015 to exceed last year’s levels. Tourism activity was solid in many parts of the district in part due to seasonably warm weather. A travel agency in Minnesota noted that leisure travel bookings for March and April were up over 10 percent.

Meanwhile, manufacturing activity was level overall in April and May. The impact of the recent increase in the exchange value of the dollar likely had an effect on district manufacturers, as 29 percent of manufacturer respondents to the district business-leader survey reported that the dollar’s rise had decreased sales, though most reported that sales had not changed. “Increased value of the dollar has hurt our bottom line because of lower revenue from outside the U.S. on same volume,” commented a respondent. An index of manufacturing activity by Creighton University increased in April from the previous month in Minnesota and South Dakota; the index fell in North Dakota, but was at levels consistent with slight growth in all three states.

Natural resources sectors were slow

Natural resources sectors, including agriculture, energy and mining, had a depressing effect on the district economy. While progress in crop planting was well ahead of its five-year average and drought conditions were relieved by recent rains in several areas, the Minneapolis Fed’s first-quarter (April) survey of agricultural credit conditions showed that 79 percent of respondents said farm incomes fell in the previous three months, with a similar outlook for the second quarter. The avian flu has impacted a number of poultry producers and is expected to cost Minnesota turkey producers more than $300 million.

In the energy-producing area of the district, the drilling rig count dropped to 79 in mid-May, all in North Dakota (no rigs were active in Montana), down from almost 200 in September 2014. The continued decline in drilling activity led to layoffs of oilfield workers and reduced demand for support services. Nevertheless, oil production levels and transportation remained relatively high, albeit down from record levels set in December. The slowdown in oil drilling made its way to Wisconsin and Minnesota, where output at mines producing sand for hydraulic fracturing was expected to decline this year and one facility was idled. However, the overall economic impact of the reduction in oil and gas drilling has remained relatively contained to the energy-producing area.

Some tightening in labor markets and signs of wage pressures

As the district continued to show signs of moderate economic growth, hiring increased on balance and labor markets tightened further. According to a recent ad hoc survey by the Minneapolis Fed, 40 percent of respondents said their ability to retain employees has become harder over the past 12 months, while just 3 percent said it has become easier. “We are seeing a lot of employee turnover, as most see this as the best way to impact salary and opportunity,” noted a respondent to the professional business services survey. A Minnesota manufacturers survey found that hiring plans for the upcoming year are similar to a year ago. However, labor markets softened in the energy-producing area of the district; online job openings were down 23 percent in April compared with a year earlier in the North Dakota oil patch (see Chart 1).

Prices were relatively stable, except for a recent increase in gasoline prices. Wage increases remained mild in April and May, with some instances of increased wage pressures. For example, about a quarter of respondents to the aforementioned ad hoc survey were raising starting pay for most job categories to attract new hires (see Chart 2). Three health care systems in Minnesota have agreed to a minimum wage of $15 per hour under recent contract agreements.

Beige Book June 2015 -- 6-12-15

Start me up: Tech start-ups in the Midwest

In recent years, tech start-ups have made big headlines for massive rounds of funding by venture capitalist firms looking to invest in the next Facebook or Twitter. In a geographic sense, Silicon Valley receives by far the most start-up funding, according to data from PricewaterhouseCoopers and the National Venture Capital Association.

But the Midwest has two metro areas—Chicago and Minneapolis-St. Paul, Minn.—with considerable start-up funding. Comparing the tech start-up financing in these two regions shows that Chicago has a considerable lead over the Twin Cities in an absolute sense, with more than $3 billion in start-up funding from 2010 to 2013, according to local sources in each region (see Chart 1).

However, viewed on a per-capita basis, there is more balance (see Chart 2). While Chicago still holds a considerable edge, Minneapolis-St. Paul has been slowly gaining some momentum in start-up funding over this period. Much of Chicago’s funding in 2011—easily the largest annual gap between the two metros—is also due to a single start-up, when Groupon raised $972 million.

Tech startups -- 8-19-14

Made in (but not owned by) the USA

Investment is typically seen as a sign of economic strength, as people and financial entities put their money where they believe it can be most productive and profitable. Foreign direct investment (FDI) tracks the amount of money international firms invest in the United States, and a recent report on the matter by the Brookings Institution shows that it’s growing in the Ninth District, but not as fast as it is elsewhere in the country.

In 2013, for example, companies invested $1.46 trillion in locations outside their home country, and the United States is the single largest destination of that capital, receiving $193 billion, according to the report. This investment manifests itself in many forms: spreading technology, facilitating the exchange of knowledge and inducing new trade.

It also employs millions of people, which the Brookings report investigated more closely. Among Ninth District states, the trends are somewhat diverging. In five Ninth District states (cumulative), total employment at foreign-owned establishments (FOEs) grew by about 50 percent from 1991 to 2011, and the share of total private employment at FOEs increased as well (see Chart 1). The growth in this share of employment tended to be modest—about one-half of a percentage point—with the exception of North Dakota, whose share of FOE employment tripled over this period, most likely as a result of foreign firms investing resources in (and hiring workers for) the Bakken oil patch.

However, across the board, district states have a lower share of FOE employment than the national average and (with the exception of North Dakota) saw less growth in the share of FOE employment. As a result, most distrct states fell in ranking among their peers in FOE’s share of total private employment (see table embedded in Chart 1).

One caveat to FDI trends: Much of this investment is the result of acquisitions or mergers of U.S. companies by international firms. So a considerable amount of the resulting “growth” in FOE employment is a methodological quirk—namely, a shift in the nationality of the parent company. This was particularly the case in North Dakota. Among district states, only Wisconsin was close to the national average in the share of FOE employment growth coming from new openings (see Chart 2).

FDI Ch1-2

Growth in student debt slows, but will it last?

For much of the past decade, student debt has grown rapidly on two margins—the share of consumers affected and the amount owed by each debtor—and has generated considerable concern over the attendant pressure on household budgets and rise in delinquencies. But growth in both measures has slowed recently in the Ninth District.

In the Ninth District in early 2005, about 15 percent of consumer credit files included some form of student debt, with a median balance owed of about $7,000, according to the Federal Reserve Bank of New York/Equifax Consumer Credit Panel. By early 2011, the share of district files with student debt grew to over 20 percent and the median balance owed by those with student debt rose to over $11,750. The prevalence and median balance for most other forms of consumer debt grew much more moderately or even contracted over the same period (see Figures 1a and 1b).

Student debt ch1-2 6-5-14

However, since 2011, the two measures of student debt are no longer growing rapidly in tandem. Growth in the share of district residents with student debt slowed first. This share grew by just 0.2 percentage points per year between the first quarter of 2011 and the first quarter of 2014, compared with 0.9 percentage points per year between the first quarters of 2005 and 2011. The median student loan balance among district residents with student debt climbed rapidly until more recently, rising by 6 percent from early 2011 to early 2012 and by a further 9 percent by early 2013. However, it has been nearly flat since, rising just 0.2 percent from the first quarter of 2013 to the first quarter of 2014.

It is premature to say that the period of rapid growth in student debt is over. As seen in Figure 2, both measures are volatile from quarter to quarter and even year to year. For example, although generally slow since 2011, growth in the share of district residents with student debt rebounded after a dip in 2012, and by late 2013 this share reached 21 percent for the first time. Still, for those concerned about the burden of student debt, these recent data show at least a pause in its previous rapid, two-edged pace of growth.

For further details on student debt and general consumer credit conditions in the Ninth District and the nation, see the Consumer Credit Conditions web page.

Student debt Ch3-- 6-5-14

All fall down: Rising mortgage rates and the refi crunch of 2013

The mortgage refinance business headed into 2013 on the upswing, but the pendulum swung swiftly in the other direction by year’s end. And this reversal included borrowers across the credit-score spectrum.

According to figures from Black Knight Financial Services (BKFS), which typically represent 60 percent to 70 percent of the mortgage market, the number and dollar volume of refis in the United States and Ninth District trended up in the second half of 2012, reaching a two-year high in the fourth quarter of 2012. Activity remained high in January 2013, when BKFS reported over 7,800 new refis worth almost $1.4 billion in the Ninth District.

But then refi activity began a steep slide (see Figure 1). Between January 2013 and January 2014, activity reported by BKFS fell by almost 80 percent, to about 1,600 new Ninth District refis worth less than $285 million. Most of the decline occurred after May, when mortgage interest rates began moving up from about 3.5 percent to a range of 4.2 percent to 4.5 percent in the second half of the year. By January 2014, Ninth District refi activity was at its lowest level in the past 10 years of BKFS data, even weaker than during the refinance bust of 2008 at the height of the Great Recession.

Refi Figure 1

The sensitivity of refi activity to interest rates is easy to understand, since obtaining a lower rate is one of the main motives for refinancing. Big surges in refi activity have long tended to follow drops in mortgage rates, and just the reverse when mortgage rates rise.

However, grouping borrowers into low, medium and high credit score categories suggests that movements in housing prices have also influenced refi activity over the past 10 years (see Figure 2). For example, borrowers with low credit scores (below 660) have accounted for less than 10 percent of BKFS’s Ninth District refi dollar volume since the housing bust, but represented as much as a third of market volume during the housing boom (2004-06). Rising home prices at the time boosted borrowers’ home equity and made refinancing low-score borrowers seem safe to lenders and attractive to these borrowers, for whom cash-out refinancing (i.e., borrowing more than the former mortgage balance) was a cheap and accessible form of liquidity. When home prices fell and credit standards tightened after 2006, refi activity by low-credit-score borrowers crashed and has generally remained much lower.

Refi Figure 2

By contrast, borrowers with high credit scores (780 or more) appear to refinance mostly to obtain lower mortgage rates. Since 2009, refi activity by these borrowers has accounted for about one-third to one-half of the value of Ninth District refinancings, a marked increase compared to the group’s share during the housing boom (less than 16 percent ), when the rate on 30-year conventional mortgages was trending up. As mortgage rates trended down over the next six years, and especially when they dipped abruptly, high-score mortgagors took advantage of these opportunities to lower their financing costs by elevating their refi activity.

Borrowers in the middle, with credit scores between 660 and 779, dominate the refi market, accounting for half to two-thirds of the value of Ninth District refinancings reported by BKFS since 2009 (compared to 65 percent to 70 percent a decade ago). These borrowers seem to have been sensitive to both interest rates and home prices. Like the low-score borrowers, their refi activity was on average higher during the housing boom than afterward. But, like the high-score borrowers, middle-score borrowers have refinanced fairly aggressively in response to post-boom interest rate dips.

Despite their varying refinance motives over the past decade, Ninth District mortgagors in all three credit score categories cut back sharply on refinancing in 2013. By January of 2014, the dollar volume of refi activity was down from January 2013 by 68 percent among low-score borrowers, 77 percent among middle-score borrowers and 85 percent among high-score borrowers. For all three groups, this represents the steepest 12-month fall over the past decade. The large scale and relative uniformity of the decline across credit score categories suggests that last year’s big rise in mortgage interest rates was indeed the main factor behind the refi crunch of late 2013.

Stop being so negative: Rising prices help underwater mortgages

Last year is generally regarded as a strong year for housing, with improved activity in starts for new single-family units, higher sales of existing homes and rising prices. Those rising prices are good not only for sellers, but for existing homeowners with a mortgage, because rising prices mean more equity.

Last year saw a dramatic drop in the percentage of mortgages with negative and near-negative equity, according to CoreLogic, a property information, analytics and services company. Negative equity is when the balance of the mortgage is more than the value of the home; near-negative equity has a loan-to-value ratio of between 95 percent and 100 percent. Nevada, for example, saw a 41 percent decline in negative and near-negative equity in 2013. The bad news for Nevada is that its final rate of 33.5 percent was still the highest in the country (see chart).

Ninth District states fare comparatively well on mortgage equity measures. North Dakota not only has the lowest rate of mortgages with negative and near-negative equity, it has held the top spot for two consecutive years. Montana holds the fourth-best ranking, and both states saw small improvements in 2013. Minnesota ranks 21st in the country and saw the percentage of underwater and nearly underwater mortgages drop from 21.5 percent to 13.2 percent. Wisconsin’s 2013 rate is still comparatively high and saw only modest improvement over 2012. While Michigan continues to have one of the highest rates in the country, it saw the fourth-best improvement of any state in 2013. No data were available on South Dakota.

Negative equity -- 3-13-14

Student loan defaults widespread, and rising

First, the good news: According to the National Association of Colleges and Employers, U.S. firms expect to hire almost 8 percent more class of 2014 grads than they hired from the class of 2013.

The bad news: It can’t come fast enough for many attending college, because many are facing unsustainable debt and defaulting on their student loans.

Nationwide, the student loan default rate jumped this year to 14.7 percent (for those starting loan repayments in fiscal year 2010), a significant increase from 13.4 percent (for those starting repayment in 2009; for default rate background and methodology, see description at the end). Every district state saw its cumulative default rate also increase for the 2010 cohort group, though rates are typically much lower than the national average (see table, left). North Dakota’s rate of 5.6 percent for the 2010 cohort group is a small fraction of the national rate and has risen comparatively little over the past two years.

But other district states have witnessed large jumps in their default rates, and all but North Dakota are now above or approaching 10 percent, led by South Dakota’s 13 percent. Higher default rates are widespread among institutions; for the roughly 250 district schools with students in the 2010 repayment cohort, 182 saw their default rate rise; for 110 schools, it grew by 2 percentage points or more.

In most states, proprietary and two-year schools are bearing the brunt of higher default rates. In Minnesota, for example, default rates have gone up across the board, but the increase and overall rates at four-year public and private universities are a fraction of those seen among public two-year and private, proprietary schools (see chart, right).

Student loan defaults -- 2-20-14

Default rate description and methodology: Student loan defaults at the institutional level are tracked and released annually in the fall by the U.S. Department of Education. Data were gathered for 273 higher education institutions in Ninth District states, including all of Wisconsin. The agency uses a three-year default rate, which tracks those entering repayment (whether graduated or not) at any point during a federal fiscal year (Oct. 1 to Sept. 30) and defaulting by the end of the third fiscal year. Student loans are not in default until they are 270 days late. In essence, default rates measure those ex-students who have fallen more than nine months behind in loan repayments at some point within 24 to 36 months (depending on how close to the end of the fiscal year they started repaying loans). The agency also tracks two-year default rates, but will be phasing this measure out in favor of the three-year default rate.

Ninth District businesses remain optimistic

There has been a fair amount of attention given to the possibility of an economic slowdown in 2014. While only a small anecdote in the volume of economic data, a recent survey still suggests a positive outlook in 2014 for the Ninth District economy.

The Federal Reserve Bank of Minneapolis conducted an ad hoc survey of 135 Ninth District firms and asked them about their outlook for 2014 (see methodology). Over 80 percent expressed optimism for their community’s economy over the next 12 months. This is comparable to the 74 percent of respondents to the November 2013 fedgazette Business Outlook Poll. Results by sector show that construction respondents were the most positive with 9 out of 10 reporting optimism, followed by manufacturing (87 percent), professional services (80 percent) and finance, insurance and real estate (79 percent).

“Seeing improved trends,” said a Minnesota banker, reflecting the overall mood of respondents; 53 percent expect increased sales for their operations compared with only 9 percent that expect decreased sales. Part of the sales increase is due to higher productivity, which 65 percent said occurred at their firm over the past 12 months. Higher sales expectations are partially reflected in the 39 percent of businesses that expect to increase prices, while 8 percent expect to lower prices.

More companies also plan more capital investment—30 percent expect an increase over last year’s spending, while 12 percent predict a decrease. Companies are having a better time financing these capital expenditures through better access to bank credit; 19 percent reported improved access, while only 5 percent noted deteriorated access.

More companies are hiring, too, with 34 percent expecting more employment and only 9 percent expecting less. Firms are facing some challenges; 44 percent noted that securing workers was a challenge, and over half reported that complying with government regulation was a challenge. FIRE respondents, at 69 percent, reported the most concern about complying with regulations.

Ad hoc survey methodology: On Feb. 10, an email was sent to 1,000 business contacts from various sectors around the Ninth District. By 5 p.m. on Feb. 12, 135 responses were received, representing a 13.5 percent response rate. The largest number of respondents came from finance, insurance and real estate (44 percent), professional services (24 percent), manufacturing (14 percent) and construction (10 percent). The disproportionate number of FIRE responses could have some unknown influence on results.

Sound the retreat? Credit scores for refinancing home loans come down a bit

As the mortgage refinancing boom ebbs, the refi market is shifting toward borrowers with less than stellar credit, according to new data from the Federal Reserve Bank of Minneapolis.

As the housing market tanked in 2008, average credit scores for those interested in refinancing their mortgage rose significantly, and until recently scores remained elevated, reflecting the stricter credit standards lenders used to reduce their exposure to the struggling sector (see chart). But in recent months, those credit scores have fallen noticeably—to 2010 levels for loans from the Federal Housing Administration and Veteran’s Administration and to 2009 levels for conventional loans. The trend is apparent nationwide and in the Ninth District, although the level of average refinance credit scores is a bit higher in the district.

The reasons for this shift are hard to pinpoint with certainty, but could indicate a combination of some relaxation of high credit standards by lenders, growing awareness and ability to respond to refinance opportunities among consumers with lower scores, or relatively sated demand for refinancing among consumers with high scores. For example, rising home prices in the Ninth District may have made it easier for consumers with somewhat lower credit scores to qualify for refinancing. Any expansion in the range of consumers qualifying for refinances would have helped boost the volume of refinancings in early 2013 or have moderated the decline in volume in the second half of the year.

These and other housing trends can be found on the Minneapolis Fed’s Housing Market and Mortgage Conditions web page, which gathers data on housing originations, mortgage performance and prices.

Credit scores refinance -- CD 12-18-13
Source: Federal Reserve Bank of Minneapolis staff calculations based on data provided by Lender Processing Services (LPS)

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.