Banks face rough profit environment in 2008

By nearly any measure, 2008 was a rough year for the banking industry.

No bank based in the Springfield metropolitan area - comprising Greene, Christian, Dade, Webster and Polk counties - posted higher profits in 2008 than in 2007, according to call reports filed with the Federal Financial Institutions Examination Council, a federal group that creates and manages information for several financial agencies, including the FDIC and the Federal Reserve.

Many bankers point to soured loans and debt write-offs as major reasons for the malaise.

Despite the gloom, however, several banks managed to post profits for the year, based on a combination of strong returns on investments, service charges and leaner operations.

In the black

The bright spot among banks doing business in the Springfield market last year is UMB Bank. The Kansas City-based institution posted bankwide profits of $86.2 million in 2008, up nearly 50 percent compared to 2007.

Ann Marie Baker, UMB's southwest Missouri region president, said the strong performance is due to the bank's continued asset quality.

"Even in uncertain times, we've continued to maintain a quality balance sheet, and that translates into earnings as well," she said.

She noted that the bank's total loans grew by more than 12 percent in 2008, yet nonperforming loans made up only 0.2 percent of UMB's total. "That compares very favorably to our peer group."

Though the bank does not break down profit figures by region, Baker said the Springfield region was able to contribute to that profit because strong assets come from a culture of making loans to familiar borrowers with straightforward business models.

Of Springfield-based banks, Great Southern tops the list of profitable institutions. While its holding company, Great Southern Bancorp, posted a $4.7 million loss for 2008, the bank itself posted profits of $17.4 million last year.

Great Southern Chief Financial Officer Rex Copeland said most of the bank's profit came from net interest income, which totaled about $74 million.

Feeling the pinch

Not all banks were so fortunate last year; at least five locally based banks posted losses in 2008.

One of those was Guaranty Bank, which posted a 2008 loss of $5.4 million due in large part to what the bank calls "one problem loan," which it has declined to name.

Guaranty officials have said the bank remains well-capitalized by regulatory standards, and the bank added Sheri Biser as executive vice president and chief lending officer to provide additional oversight for its $600 million loan portfolio.

"This (loan) growth, along with the challenging economy, a changing regulatory environment and our desire to prudently continue to grow the company, made it imperative to increase our leadership in our loan area," CEO Shaun Burke said in a February news release.

Bank officials declined further comment for this story.

Loan loss provisions

Despite consistent performance in interest income, Great Southern profits dropped 44 percent in 2008. The decline, according to Copeland, can be traced to a combination of additional provisions for loan losses due to loans that won't be paid back and a one-time loss of $35 million from its loan to Arkansas National Bank, which failed in May.

"If you look at 2007 numbers versus 2008 numbers, that's the big difference in our net income being lower - we had a lot more provision expense to set aside for charge-offs or potential problem loans in the portfolio," Copeland said. "If you look at other banks in general, most had larger (loss) provisions in 2008, and that's what caused many banks to become unprofitable or, in our case, to see their profit levels go down."

Loan-loss write-offs also were responsible for a drop at The Bank of Missouri, where profit fell by 45 percent to $2.2 million. Springfield President Mick Nitsch said the bank recently increased its fund to handle bad loans due to the uncertainty of the economy.

Despite the write-offs, however, Nitsch said the bank has been able to maintain profitability because of its use of U.S. Small Business Administration backing to counteract commercial loan losses. He added that the bank stayed away from speculative lending, allowing it to maintain asset quality without using federal stimulus money.

Dave Tooley, president of Metropolitan National Bank - which posted 2008 profits of $1.9 million, down 78 percent from 2007 - said loss provisions also have increased because of new government regulations related to the federal stimulus package, which also is squeezing profits.

"Our cost of money is going down, because (interest) rates are dropping for our depositors. But the loan yields are dropping faster because people are refinancing because the government has pushed the rate so low," Tooley said. "Regulators are making banks put more money in reserves for loan losses, because people are losing their jobs and their businesses."

Making up the difference

Banks receive significant income from account fees such as overdraft charges and monthly fees on checking accounts. Great Southern, for example, earned nearly $12 million in 2008 from service charges on deposit accounts, representing more than one-third of the bank's noninterest income. Most banks, however, are not eager to raise customers' fees to make up for additional losses in other areas.

"When you make a decision like that, you have to look at what the market is doing and consider competitiveness," said Great Southern spokeswoman Kelly Polonus, who added that the bank did not change its fees in 2008 despite the challenging economic climate. "That's a big decision when you have to make choices like that on what you're charging your customers."

Tooley said banks can't depend on fees for profits anymore.

"Depositors are so much more savvy than they used to be," Tooley said. "Transaction fees have deteriorated, because a lot of customers want the free account. Competition has made the fee income in banks dwindle."

Metropolitan posted noninterest income of $2.7 million in 2008, compared to $3.7 million in 2007, according to the FFIEC.

Bankers say the best option for profitability in the face of dwindling fee income is to reduce expenses as much as possible.

Great Southern's noninterest expenses however, totaled $53.7 million in 2008, up from $51 million in 2007.

"The main thing there is salaries, benefits and the cost to operate the banking centers," Copeland said, "and in our case our operating expenses tend to be pretty low compared to our peer group."