Despite profit loss and losses in uncollectible loans, local banks standing ground

Profit margins aren't as big as they were last year at area banks, and some banks are seeing an increase in uncollectible loans. But area bankers say financial institutions in Southeast Missouri are on solid ground.

"The public should not be concerned about the future of our local banks," said Steve Taylor, president and chief executive officer of First Missouri State Bank of Cape County. "Those banks which are in serious trouble are the ones giving out loans that go bad or they don't fully understand their market and customers. But as a whole, I'd say banks in Southeast Missouri will survive."

Since the beginning of 2008, 12 banks have failed nationwide. About 117 more banks are on the Federal Deposit Insurance Corp.'s troubled bank list, and that number is expected to grow by the end of the year.

Of 15 area banks in Bollinger, Cape Girardeau, Perry and Scott counties, nine reported a decrease in profits for the first six months of the year compared to the same time period in 2007.

Montgomery Bank suffered the largest drop in profits, with a $1.33 million decrease. However, chief operating officer Jim Limbaugh said that was because of less money made off loans due to a lower prime lending rate and a property the bank sold in May 2007, which inflated its net income earnings for that year by $700,000.

First State Bank and Trust came in second, with a $240,000 decrease and Security Bank and Trust third with a loss of $211,000.

The bank reporting the largest increase in profits was Bank of Missouri at $960,000. Others reporting gains included First State Community Bank with $430,000 and Wodd and Huston Bank at $90,000.

AARON EISENHAUER ~ aeisenhauer@semissourian.com Capaha Bank teller Lindsay Abercrombie counts $20 bills into stacks of 50 on Wednesday at the William Street branch.

John R. Abercrombie, president and chief executive officer of Capaha Bank, said his bank's $55,000 decrease in profits is directly related to a rapid drop in interest rates of 0.75 percent on Jan. 22 and 0.50 on Jan. 30.

"When the rates dropped as quickly as they did, banks were caught in a bit of a squeeze," Abercrombie said. "For us, that's what accounted for our earnings decline."

Taylor said he expects to see a dramatic improvement in the profit margin once the year-end FDIC market reports are released in early 2009.

"August and September have been our biggest months," Taylor said. "It's very difficult for banks to quickly recover when the interest rates drop twice within a few weeks, but I'm confident we'll see a recovery from the current market report. Banks generally are able to recoup, but it takes three to four months for that to happen."

AARON EISENHAUER ~ aeisenhauer@semissourian.com Mary Treece counts out cash for a customer at the drive-through on Wednesday, September 24, 2008 at the William Street Branch of Capaha Bank.

While 60 percent of the area banks reported a decrease in profits, a larger amount of banks suffered an increase in the number of losses on uncollectible loans through the first six months of the year compared to the same period last year.

First Midwest Bank of Dexter fared the best, decreasing its losses on uncollectible loans from $419,000 to $187,000. Only two other banks reported decreases as well; Eagle Bank and Trust Co. of Missouri's losses fell from $425,000 to $229,000 while Peoples Community Bank's losses were down by $9,000 from $17,000 to $8,000.

Of the 12 area banks reporting an increase in losses on uncollectible loans, Alliance Bank lost the most at $689,000. Others who reported an increase in losses were Wood and Huston at $389,000, Bank of Missouri at $315,000 and Montgomery Bank at $324,000.

Despite the less-than-stellar numbers, Abercrombie believes the local banking industry will survive.

"Our industry in this area is in sound shape," he said. "We are so far removed from all the gloom and doom we hear about national banks. While we are doing well, that doesn't mean we'll see a few failures along the way."

Dr. Michael Devaney, who teaches banking courses at Southeast Missouri State University, believes the current situation may be more problematic for smaller banks than larger ones.

"Small banks depend almost exclusively on interest income while larger banks generate more noninterest fee income," he said. "Small banks often have a larger percentage of their assets in more risky and less liquid real estate.

"I suspect that the greatest threat confronting small local banks is their exposure to real estate construction loans. Significant losses could impair capital requirements established by regulators."

Abercrombie said the problem of a potential $700 billion bailout of financial institutions could have been avoided if lenders and others had been more responsible.

"The bottom line is we need better regulation," he said. "This whole mess started when financial institutions lent money to those people who had no way of paying their mortgages off. If banks would get back to the business of making loans to those meeting the standards of repaying them on time, we'll be OK. The bottom line is better regulation."

In addition to enforcing regulations, banks will need to be creative in order to survive, Limbaugh said.

He cited the company's commitment to pull out of troubled markets such as loan production offices in Florida and redirect its efforts to St. Louis and Southeast Missouri, where most of its business is conducted.

"And we'll continue to strengthen our relationships with customers in our markets here," Limbaugh said. "Our pipeline of new opportunities is expanding each month and has been stronger and larger than it's ever been before.

"While this whole process for banks nationally has been tough, it's a reminder that we must adhere to the fundamentals," he said. "That's good, sound lending practices. We must not become a part of the problem by creating bad lending practices that got people into trouble."

bblackwell@semissourian.com

335-6611, extension 137

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