Opinion: Local banks may be in for tough year

If you are looking for bank financing to develop, expand or just maintain a business, expect to undergo tougher scrutiny this year as financial institutions look to minimize risk.

As part of this year's Business Today issue on banking, I looked at the banking market in the region. I found that while all the banks operating in our area remain profitable, the first three months of the year presented challenges to maintain that surplus.

I looked at four key measures of a bank's health — profits, loss set-asides, actual credit losses and the exposure of each bank for loans and leases where debtors are falling behind in their payments. And while profits are growing at most banks operating in our region, the other measures show that many area financial institutions may have a difficult time maintaining those growth rates during the coming year.

The figures come from the quarterly reports to the Federal Financial Institutions Examination Council. The reports, known as the Uniform Bank Performance Report, require every bank from the smallest to the largest to detail its sources of income, net profits and the status of its loan portfolio.

In all, 40 banks and two savings and loans operate in the 13 counties targeted by Business Today. The banks with branches here range from the largest to the smallest categories, but depositors in our area definitely prefer smaller banks with ties to their communities.

As of June 30, 2007, the latest available figures, the region has $6.29 billion on deposit. And while US Bank has the largest market share in the 13 counties with $513.7 million in deposits, that represents only 8.17 percent of the total. Montgomery Bank, with headquarters in Sikeston, is right behind with $511.6 million in deposits in the region and 8.14 percent of the market.

The five largest banks operating in our region have a total market share of 25.03 percent of deposits, while the remaining 35 banks hold the other 75 percent. Most of those 35 banks either have their headquarters here or do a substantial percentage of their business here.

An analysis of the most recent reports for the 40 banks showed the following:

• Profits rose at 21 banks during the first quarter of 2008 and during the full year of 2007. Of the remaining 19 banks, 13 reported lower profits for the first quarter after showing an increase in 2007, five reported profits fell both in the first quarter of the year and in 2007 and one showed an increase in profits after declining profitability in 2007.

Four of five largest banks operating in our area — US Bank, Bank of America, Commerce Bank, First Bank and Regions Bank — reported lower profits during the first three months of the year as their net credit losses rose by amounts ranging from 155 percent to 6,213 percent. Those banks are showing the effect of national trends in mortgage lending, credit card defaults and other problem loans.

• Loss set-asides, a direct charge against profits used to establish a reserve to offset losses, were increased at 26 banks, including seven that decreased their set-asides during 2007. Only nine banks reported lower set asides during the first quarter for 2007, while the remaining showed a mix of results.

For the banks setting aside more to cover anticipated losses, 17 increased the loss provision by 50 percent or more.

• Net credit losses increased at 32 of the 40 banks during the first three months of the year. For 22 of the banks, the increased losses came on top of higher losses in 2007. Only seven banks reported lower net credit losses during the period, and only four banks can boast that they lived through the period with lower net credit losses both in 2007 and the first quarter of 2008.

For 22 banks, the increase in net credit losses for the first three months of the year was more than double the losses reported for the same period last year.

• Non-current loans and leases, the measure of the amount of money at risk in each banks loan portfolios, showed the most troubling trend. Of the 40 banks reviewed, 33 showed an increase in these troubled loans, with 24 of that number also showing an increase in their troubled loans for 2007. For seven banks, the size of the troubled loan portfolio tripled in the first quarter compared to the same period a year ago.

Bankers like to present a rosy picture when asked about any of these measures. The bankers who do business in our area will emphasize that they are conservative lenders, which they must be in order to continue to attract depositors and obtain the capital needed to continue making loans.

None of the area banks are in any danger; the healthy profit reports are the best evidence of their strength. But bankers will be working twice as hard this year to maintain those profits as economic woes make them wary of risk.

So remember the old saying about lenders when you seek that loan to expand — if you want money from the bank, you better be able to prove you don't really need it.

Rudi Keller is the Southeast Missourian's business editor.