Banks adapt to keep bottom lines solid

by Paul Schreiber

SBJ Reporter

pschreiber@sbj.net

As banks slog through less-than-optimal economic times, they adapt to their environment.

Raising the bottom line means garnering fee income, asset shifts, reducing rates on accruing liabilities and adjusting nonperforming loans. Also, expanding services through branch additions or mergers increases an institution's presence and ideally, market share in local communities.

Fee income

Charges on handling, investing and distributing money are revenue producers for banks.

Commerce Bank's bottom line was boosted by growth in noninterest income at "about an 8 percent clip" or $21 million, said Jeffrey Aberdeen, controller. For 2003, Commerce had $301.6 million in total noninterest income.

This fresh capital principally came from deposit account charges and other fees of $102.5 million, bank card transaction fees of $62.2 million and trust fees of $60.9 million, he added

Kansas City-based Commerce Bank does not provide total local asset figures anymore for its 25 local branches as they are no longer separated out from those of its holding company, Commerce Bancshares, according to Susan Kirkman, regional marketing manager.

The holding company, Commerce Bancshares, finished 2003 at $14.3 billion in total assets among its nearly 200 branches, Aberdeen said. This is against $13.2 billion for 2002, he added.

Fee income "has been very good," said John Himmel, chairman. Commerce continues to grow noninterest income "at a double-digit rate annually." Most of that growth occurs in treasury services, in brokerage and asset management in the Commerce Trust Company.

Likewise, credit card service fees are "growing very well," Himmel said, attributing it to a favorable client financial outlook and consumer willingness to use credit cards. He added, however, that credit card service fee changes have been "nothing of any significance."

Meanwhile, Commerce's Springfield region operations experienced about a 4 percent increase in loans and a total deposit increase between 1 percent and 2 percent, Himmel said.

Loans in the Springfield area increased from $646 million in 2002 to $711 million in 2003, while local deposits rose from $983 million in 2002 to $1.09 billion for 2003, he added.

Maintaining effective expense management was another factor in Commerce's results, Aberdeen said. "Expenses grew by about 3 percent year over year. The biggest component of our expenses were salaries and benefits and those were growing at that same 3 percent clip."

Asset shifts

Low-yielding assets can be dealt with by shifting assets around or exiting investments producing less-than-optimum rates of return.

Memphis-based Union Planters Bank's holding company, Union Planters Corp., posted total 2003 assets of $31.9 billion compared to $34 billion for year-end 2002, said Mick Nitsch, president over 12 branches in southwest Missouri. Total local assets were $355 million for 2003, said Craig Curtis, executive vice president.

Nationally, the more than $2 billion decline in UPB assets results primarily came from three company-wide changes, Nitsch said. The bank has exited some "low-value, high-risk areas of lending (like) highly leveraged brokered home equity products" where credit was extended up to 125 percent of the value of a home.

The two other loan areas adjusted or scrapped were "installment sales contracts" from car dealerships where the would-be buyer doesn't have a bank relationship and often defaults on payment, Nitsch said. Another area downsized was UPB's participation in "noncustomer shared national credits." This relationship often involved a number of banks on a large loan project, he added.

Selling existing loans locked in at an uncompetitive rate is another ways banks can rid themselves of low-yielding assets.

"One of the things that we do when we're making fixed-rate loans, because of the interest rate risk associated with those (is that) we typically sell those loans," said Rex Copeland, CFO with Great Southern Bank.

"Our model just doesn't make sense for us to retain the interest rate risk associated with long-term, 30-year fixed-rate mortgages," Copeland added.

Reducing interest

Adjusting interest rates downward on accruing liabilities keeps more money in house for banks.

"It's been a challenge to manage our margins in a low-interest-rate environment," said Jim Brandenburgh, Empire Bank executive vice president and CFO.

Empire posted total local assets of $589 million for its 15 branches in 2003, and the total assets for its Jefferson City-based holding company, Central Bancompany, were $6.2 billion, he said. This is a $200 million increases in assets against year-end 2002.

"We've had to stay in sync with the market, and you can do that on certificates and savings accounts, but you can't lower your checking rate any," he added.

"Ten percent to 20 percent of a bank's funding is going to come from checking accounts, and there's no way to lower the rate on those," Brandenburgh said. He estimated that most banks were able to reduce the interest rate they paid on accruing liabilities, such as savings accounts, certificates of deposit and money market accounts, in an effort to retain additional funds for bank operation.

Referring to the cost of handling checking accounts, Brandenburg said, "though I'm not paying the customer interest, I'm paying my bookkeeper salaries and that in turn is interest on that money. (In the end) it has created a challenge to manage the spread between what you charge on loans and what you pay on deposits," Brandenburgh said.

Nonperforming assets

Minimizing the number and volume of unpaid and overdue loans a bank has on its books is a persistent strategy for enhancing overall profitability.

Nonperforming assets are "loans that are not performing as agreed" and are languishing in their repayment schedule, Brandenburgh said.

"What we call nonperforming' (loans) are the ones that are no longer accruing interest. After we've not received three payments in a row, we put it over on a nonaccrual," said Mike Hill, CFO with Liberty Bank. "If (the bank) doesn't receive three payments, then once that 90th day hits, banks are supposed to stop accruing interest on that."

Springfield-based Liberty Bank posted $456 million in 2003 total local assets for its nine branches, which comprise Liberty Bancshares Inc., Hill said. This is against $417 million in assets for 2002.

For Great Southern, nonperforming loans were at $16.4 million on Dec. 31, 2003, down $2.4 million from last year, according to Copeland.

Nonperforming assets include "anything that real estate owns or anything we foreclose," Copeland said. About $7.4 million of this consists of real estate, autos and other items that are repossessed. The other $9 million is outstanding loans not accruing interest that are 90-days past due, he added.

Nonperforming loans decreased for Great Southern in 2003 with the sale of a $2.8 million property on North Glenstone and a $6.7 million group of properties near Lake of the Ozarks, which includes condominium buildings, lots, single-family homes, a golf course and other land that was moved to foreclosed assets, Copeland said. An additional write-down of $670,000 was taken on this property in the fourth quarter, he added.

Springfield-based Great Southern Bank closed out 2003 with $1.53 billion in total local assets against nearly $1.4 billion for 2002, said Kelly Polonus, corporate communications manager. Funds are held in Great Southern Bancorp for the company's 29 branches, she added.

Union Planters Bank had $453,000 worth of nonperforming loans on a $310 million loan portfolio. That money is loaned on three speculative constructive homes in Lawrence County, Nitsch said. The loans are "well secured, and they will be paid out from the sale of those homes," he added.

Liberty Bank had $83,408 in nonperforming loans at 2003-year end, according to Hill. Of this amount, $69,888 was in commercial business loans and $13,520 was for automobiles.

For Commerce Bank, total nonperforming assets (were) $33.6 million, Aberdeen said. While not disclosing a breakdown of what those specific assets were, he said $32.5 was held in nonaccrual loans and $1.16 million was foreclosed real estate.

Branch expansion

Establishing or expanding a physical presence in an area is essential to increasing visibility and drawing new customers.

Commerce Bank will occupy about 4,000 square feet on the ground level and be the "anchor tenant" at the Branson Financial Center at 500 W. Main, Himmel said. Features will include four drive-up lanes and an ATM. Commerce has been in the market for 11 years with a single location in Jubilee Foods in the Branson Mall on Highway 76, he added.

Lease rates run $14 to $16 per square foot with five-year minimum lease terms, said David Cushman, owner of Branson-based Cushman Properties LLC. Nabholz Construction is the general contractor for the $5 million project, which has 18 suites available. About 30 percent of the building is pre-leased, Cushman added.

Liberty Bank is planning on breaking ground on another Springfield branch location in either April or May, Hill said. Preliminary plans are for a three-story, 45,000-square-foot facility to go in on National Avenue, south of Kelly Green Apartments. "We've just now got the land acquired," Hill said.

Peoples Bank of the Ozarks will be moving from its Nixa location at 204 Village Center to 305 W. Mt. Vernon in about 60 days, said Richard Wilson, CFO. The facility will increase its square footage from about 4,200 to almost 12,800 and will continue to operate with its 20 employees, he added.

Brandenburgh said Empire Bank has purchased a lot in Republic for a branch there. Specific structural plans weren't complete, but he said the facility should be started by the end of 2004.

Feasible locations for bank branches are determined by population growth increases, Brandenburgh said. Considered next is the "convenience factor" for ease of patron access and visibility. Typically, Empire checks area Web sites for chambers of commerce and for information provided by area city governments to determine likely future locations.

Merger

And, of course, there's always the merger to beef up money muscle and add market share to already huge financial behemoths.

Union Planters Bank signed a definitive merger agreement with Birmingham-based Regions Bank that will give it combined assets of $82 billion and create Regions Financial Corporation, the country's 12th largest bank holding company, Nitsch said.

"Anticipated closing date is early June" and signage changes to Regions Bank should be in place by the end of that month, Nitsch said. There will be no divestures, staffing changes or branch sales for the Springfield area, but branch additions are likely in 2005, he said.

"Regions is very committed to growing the Springfield franchise," Nitsch added.

Full coverage of the UPB-Regions merger will appear in the Financial Services issue of Feb. 13.