Local banks relatively stable amid shaky market

The global financial crisis and the fear of a collapse has led to unprecedented government intervention in the banking industry, but an analysis of data reported to federal regulators shows that Columbia’s commercial banks remain relatively stable.

While national banks and big regional banks operating in the local market have seen a drop in net income from June 2007 to June 2008, local banks such as Boone County National Bank, First National Bank, Callaway Bank and Bank of Missouri have managed to post gains in net income over the last year. The state banking performance summary shows that commercial banks have seen net income drop from $570 million in June 2007 to $388 million in June 2008.

With the exception of Callaway Bank, Columbia’s 10 largest commercial banks reported an increase in past-due loans. Five of them-BCNB, FNB, UMB, Bank of Missouri and U.S. Bank-reported an increase in deposits from June 2007 to June 2008.

BCNB is still far and away the biggest player in the market, holding more than 34 percent of the market’s deposits, according to June 30 reports to the Federal Deposit Insurance Corporation. The bank’s nearly $850 million in deposits more than doubles its nearest competitor, FNB, whose deposits account for a little over 15 percent of those in Columbia-area banks.

While deposits for BCNB have continued to rise over the past 12 years, its market share is down from the early part of the decade, when it hovered at over 37. Since 2000, five new institutions have joined the market.

First National has retained a relatively constant 15 percent share of the deposits in the market for the past 12 years while steadily increasing its deposits. Commerce Bank has been the third largest player since 2001 when it overtook Bank of America for the spot. However, Commerce’s deposits have dropped by almost $8 million within the Columbia market in the last year.

Local banks have fared the best in terms of deposits over the past 12 years, watching them increase almost every year. Huge national banks that bought into the market, like Bank of America and U.S. Bank, have seen their market shares decline over the past eight years. In fact, since June 2007, few banks in the Columbia market have seen their deposits increase significantly. Many banks have seen them fall, including large regional banks like Commerce, Premier Bank and Regions Bank.

Of the $57 million deposit increase from last June within Columbia market banks, over $35 million has been in BCNB. The $57 million of new deposits in Columbia is in contrast to the $8.1 billion increase in deposits throughout Missouri, of which Columbia accounts for only .7 percent despite containing about 1.6 percent of the state’s total population, according to 2006 Census bureau statistics.

If the economy continues to decline, banks may see a rise in deposits, said John Howe, a professor of finance and Missouri Bankers Chair at the University of Missouri College of Business.

“Historically, when the market goes down, people get quite skittish and migrate toward safer investments, such as secure deposits,” Howe said.

Despite the sagging economy, many local banks have seen their net income continue to rise. That is in sharp contrast to Missouri banks overall, which have seen net income drop by 46.2 percent since June 2007, and much better than banks throughout the country, which saw a more than 50 percent drop. BCNB, First National Bank and Callaway Bank saw modest gains in net income, while Bank of Missouri saw a nearly 50 percent rise in net income.

But not all local banks escaped the wider trends in net income. Premier Bank, after experiencing rapid growth over the past eight years and climbing to the fifth highest market share in Columbia, reported a loss of $11 million in net income this June. That is a drop of over 300 percent from the net income reported in June 2007. Coinciding with the bank’s net income drop is an increase of over $56 million worth of loans and leases over 90 days past due.

Premier Bank’s Columbia president, Steve Smith, said the bank has added a significant amount to its loan-loss reserves, which accounted for the greatest portion of the drop in net income. Smith said despite losses earlier this year Premier is well capitalized and focused on maintaining its loan-loss reserve and its capital reserves. He added that almost a year ago, the bank tightened its lending standards.

While Premier’s non-performing loans measurements are more pronounced, most banks have seen an increase in non-current loans as the economy has slowed.

“Banks are going to be hurting from here to the foreseeable future because of a contracting market,” Andy Puckett, an assistant professor of finance at MU, said.

Banks with regional or national reach began seeing an increase in past-due loans over the past two years, with their number of past-due loans more than doubling. Many fingers have been pointed to sub-prime lending, which led to overbuilding in the housing market. The past-due loans for larger banks coincide with the time period when many say the country’s housing bubble popped.

But it was not until this last year that local banks BCNB and FNB have seen significant increases in the value of past due loans they hold. Mary Wilkerson, director of marketing at BCNB, said the bank did not participate in sub-prime lending, and she doubted that there was much sub-prime lending in Columbia. Howe said most sub-prime lending occurred in Florida and California.

Wilkerson attributes the rise in past-due loans in Columbia to the city’s development slowdown and larger economic trends rather than poor lending.

“A lot of banks in town were heavily invested in real estate, and when developers saw a dip in demand, banks are going to feel it,” she said.

One bank over the past four years, however, has consistently reduced the dollar amount of its past-due loans: Callaway Bank. President Gary Meyerpeter said three years ago, Callaway decided to take a more conservative stance in construction and development lending. They required more cash on customers’ balance sheets upfront before loaning for development because, “We didn’t think (Columbia’s construction boom) could last forever. It was an anomaly.”

Meyerpeter said some customers weren’t overly pleased, but the numbers show it has paid off for the bank. Since 2004, the bank has seen the value of its non-current loans and leases decline every year, from $2,452,000 to $430,000 in June 2008.

But overall, the numbers do show a definite turn for the worse, especially at the national level. At state and national levels, bank returns on assets and equity, common measures of the general health and profitability of banks, have plunged in the last year.

“We are in uncharted territory,” Puckett said. “People are comparing this to the crash in ’29 and the crash in Japan in the early ‘90s and their Lost Decade.”

Howe said the area will not be completely unaffected by the credit-crunch. Banks will lend less, and thus growth is going to taper off, he said, leading to a recession. But Columbia’s stable job base at the university will provide a degree of insulation to the recession. Plus, local banks tend to be run more conservatively and should not be as affected by the recession, he said.

Wilkerson said every day for the past four to five weeks, BCNB has been getting calls or talking with customers who are asking what the developments in the national financial system mean to them locally. The bank has had to educate its staff as well, she said, so that they can explain to customers what is going on nationally and what is going on locally.

“It doesn’t really matter what reality is,” Wilkerson said. “It matters what you believe reality is. It’s really hard when people are scared and upset. But most people just want to be educated. The vast majority of people walk out feeling just fine.”