INVESTMENT GAINS LEAD TO IMPROVED NUMBERS
A recent Memphis Business Journal article talks about local banks have opted to count gains on previous year investments to offset 2010 losses. Triumph Bank is noted as one of only two Memphis banks posting back-to-back profits without relying heavily on investment gains.
February 11, 2011
Memphis Business Journal
On paper, it would appear that Shelby County-based banks rebounded quite nicely in 2010, with all but two of 12 reporting positive earnings for 2010. That’s after eight of the 12 locally based banks posted losses in 2009, some quite sizable.
But analysts and bankers say it’s more a case of some banks opting to take gains on investments last year to beef up net income as opposed to any real core revenue growth.
That strategy could cost them down the road and the positive earnings numbers don’t mean bankers are going to necessarily loosen the purse strings in 2011.
“Virtually all banks are still in a cost-cutting mode, very nervous, very conservative,” says Memphis banking consultant Trent Fleming. “Many banks have dealt with their loan issues, put a lot in reserve and are going to be OK, although earnings will be depressed as they cut back on lending.”
The big winner in the market continues to be Independent Bank, which posted a $7.5 million profit in 2010, according to Federal Deposit Insurance Corp. data. That’s on top of $5 million in 2009. Triumph Bank is the only other bank to post back-to-back profitable years with $1.4 million in 2010 and $844,000 in 2009. Neither had sizable gains from securities sales in 2010 – Independent had $1,000; Triumph had $98,000 according to FDIC data.
Andy Gibbs, senior vice president at Mercer Capital and leader of Mercer’s Financial Institutions Group, says banks are getting a strong tailwind from having put so much in reserve in the first part of the recession.
Since they didn’t have to keep adding to that significantly in 2010, those funds could be counted as earnings, he says.
“Some segments of the loan portfolios have been worked pretty good and there’s not a lot of exposure left,” says Gibbs. “That’s the best trend for the city as a whole is that they have turned the corner.”
That said, one alarming trend is that asset quality didn’t improve year-over-year, indicating to Gibbs that there continues to be problem loans looming as the stronger borrowers are now facing issues.
“Even some of those guys are running out of liquidity,” he says.
Fortunately, as a whole, Gibbs says most of the banks in the Memphis market continue to be well capitalized. While some lost money- like Cordova-based First Alliance Bank and Paragon National Bank- capital ratios continue to be high.
For Paragon, its total risk-based capital ratio is 14.35 percent; First Alliance is at 11.67. Anecdotally, bankers say regulators want to see levels approaching 15 percent. Among the lowest is Bank of Bartlett at 8.41 percent; the highest is Tri-State Bank of Memphis with 21.1 percent total risk-based capital.
“That’s what regulators are looking at is capital ratios,” Gibbs says.
Among the biggest improvements from 2009 was Germantown-based First Capital Bank. It posted a profit of $500,000 in 2010 after a loss of $3.6 million in 2009.
First Capital president Kent Davis says the bank’s loss in 2009 was part of the bank’s strategy to aggressively tackle its iffy loans and put aside a lot of capital for losses. In 2009, it set aside a loan loss provision of $3 million that is still kept on the books even as it has worked to write off and sell off bad loans.
The bank has eliminated all loans past due 90 days or more. It’s also dramatically cut construction and development loans past due 30 to 89 days. That number was $1.1 million in 2010, down from $2.5 million in 2009.
“We know the franchise value is based on the strength of asset quality,” Davis says.
Hoping the worse is now behind it, Davis says the bank is looking at greener pastures. Like many competitors, it’s moving away from land and development lending to more commercial and industrial, owner-occupied and consumer lending.
“We’re still good for 2011,” he says. “But it will still be a slow year from a growth standpoint.”