Banks and the prime rate

New Mexico Business Journal, June, 1994

If the Federal Reserve Board continues raising interest rates as it did early this year, narrower interest rate margins could significantly affect bank profitability in New Mexico and elsewhere across the nation.

Banks, however, that can shift their profits from security-type investments to higher-yielding loans will be in a better position to survive narrower interest rate margins.

Unfortunately, loan demand has been low in New Mexico. New Mexico bank loans increased only 1 percent in 1993.

"Bank loans are a lagging indicator of economic activity," says Edward O'Leary, president and chief executive-officer of First Security Bank in New Mexico. "We didn't experience much growth in 1993, nor did we experience a great deal of change in our mix of assets."

First National Bank in Albuquerque's assets grew by only 0.4 percent in 1993. As of year-end 1993, First National Bank had 43 percent of its assets invested in loans, compared to 47 percent at year-end 1992.

In Farmington, First National Bank at year-end 1993 had 44 percent of its assets invested in loans. Jim Rose, executive vice president, says the bank is trying to get out of the securities market and into making more loans.

According to the numbers, the bank appears headed precisely in that direction. In 1991, only 37 percent of its total assets were loans; in 1992, 40 percent; and finally in 1993, 44 percent of the bank's assets are loans.

Assets at Sunwest Bank of Albuquerque -- the largest bank in the state -- grew 3.5 percent in 1993. And about 41 percent of its assets were invested in loans at year-end 1993, compared to 43 percent in 1992.

Ron Shettlesworth, chief credit officer at the Bank of New Mexico, says his bank's loan-to-asset ratio is 61.2 percent as of March 31, 1994. At year-end 1993, it was 51 percent.

Mike Stanford, president and chief executive officer of First State Bank in Taos, also reported a healthy ratio. At year end 1993, 73 percent of his bank's assets were invested in loans. At the end of the first quarter 1994, it went slightly down to 71 percent.

Some of the larger banks that experienced growing loan demand in 1993 included First National Bank of Farmington, 18 percent; First State Bank, Taos, 16 percent; First National Bank, Santa Fe, 14.5 percent; and Bank of New Mexico, 11.6 percent.

Mortgage loans at some banks have been increasing, according to Paul McClendon, executive vice president of Charter Savings Bank in Santa Fe.

"The Federal Home Loan Bank in Dallas, a bank that used to lend money to S&Ls only, is now lending half its money to banks," says McClendon. "Federal Home Loan Banks generally loan money to residential lenders."

Meanwhile, bank profits are increasing whether due to market forces, good bank management or a combination of both.

New Mexico banks posted a $140 million profit in 1993 and recorded a return on average assets of 1.13 percent, which means that New Mexico banks earned $1.13 for every $100 worth of assets.

Three mergers reduced the number of New Mexico banks from 84 to 81. First National Bank in Santa Rosa became a branch of First National Bank in Tucumcari; United New Mexico Bank in Santa Fe became the branch of United New Mexico Bank in Albuquerque; and Sunwest Bank of Sandoval County became a branch of Sunwest Bank of Albuquerque.

Total assets grew by $370 million in 1993, a 3 percent increase over the year before.

Nonperforming loans dropped by 22 percent, a sign that the quality of New Mexico's loans is improving.