COLUMBIA — Cindy Wells likes to approve loans the old-fashioned way.
“Before we lend money to a farm, for example, we go out in our mud boots and count the cows and pigs,” said Wells, the assistant vice president for Glasgow Savings Bank in Glasgow, a Missouri River town northwest of Columbia.
Return on assets is calculated by measuring how much money a bank is
making on the assets that it has on its books. For example, if a bank
has a mortgage for a house worth $100,000 and it has a return on assets
of 1 percent, it is making $1,000 in profit. If the bank’s return on
assets is -0.50 percent, it’s losing $500 on the mortgage.
Return on assets is a universal bank accounting measure that must be reported by all banks to either state agencies, the Federal Deposit Insurance Corp., or FDIC. And because return on assets is a percentage, just like interest on a loan, and not reported in dollars, it can be used to compare banks of all sizes.
“The bank is more likely to survive and continue providing its services the higher the return on assets,” said John Howe, the chair of Missouri Bankers and professor of finance at MU.
It’s a practice that hasn’t changed much since the bank accepted its first deposit in 1852.
“We get to know our clients personally before we make a loan,” said Margie Aholt, vice president of the bank.
Conservative financial practices are helping Missouri bankers survive the lingering economic slump, and a new federal policy means that for now, they won’t pay more than their fair share to correct risky lending practices on Wall Street.
Less profit, more stability
An analysis of returns on assets from 2004 through the first quarter of 2009 to compare how most banks only operating in Missouri fared when compared with the five largest banks in America — Bank of America, HSBC Bank of USA, Citibank, Wells Fargo and JPMorgan Chase & Co. — and the U.S. banking industry as a whole.
The analysis found that the state’s banks on average were not as profitable but have not been hit as hard by the banking crisis.
In the last three months of 2008, the average return on assets for the five largest banks in America was 0.16 percent. The average return on assets for 274 out of 284 Missouri banks was 0.70 percent on the whole. Missouri banks made an average of $540 more per $100,000 in assets than the five largest national banks.
The 10 Missouri banks excluded from the state number lost a combined $344.35 million in 2008 and posted an average return on assets of -2.26 percent in the fourth quarter. The Missouri Division of Finance said the 10 banks are outliers and that excluding them would give a more realistic picture of the financial stability of Missouri banks
“The income decline continues to be primarily influenced by a small number of banks,” the agency’s 2008 fourth quarter report said. “After adjusting out 10 banks with the largest losses, the return on assets for the remaining 274 banks was 0.70 percent.”
“If you take out the 10 banks that experienced the largest losses, you can see that most of the banks are safe and sound and earning a good profit,” said Jeff Maassen, chief examiner for the Missouri Division of Finance.
Premier Bank is the only one of the 10 banks with large losses operating in mid-Missouri. The bank lost more than $31 million last year and posted a -2.08 percent return on assets in the fourth quarter of 2008, according to Federal Deposit Insurance Corp. numbers. Premier Bank’s holding company, Premier Bancshares Inc., was placed under the supervision of the Federal Reserve in March.
Premier Bank was heavily invested in new construction development and took substantial losses when building dropped off last year, said Steven A. Smith, president of the bank’s Columbia market. Premier Bank did not participate in subprime lending, he said.
Although a handful of banks such as Premier have taken heavy losses over the past four quarters, most Missouri banks have outperformed the national average.
During the first three months of 2009, the FDIC reported an average return on assets for U.S. banks of -0.94 percent. That’s down more than 169 percent from the first part of 2006, when the FDIC reported a near-record average return on assets of 1.35 percent.
By comparison, the return on assets for Missouri’s state banks was down 40 percent — when the 10 banks that experienced heavy losses are excluded — during that same period.
“This arises from the relatively conservative way in which community banks are run, and this conservatism serves them well in times such as these,” said John Howe, professor of finance at MU. “They are much less likely to go under when compared to the bigger banks that have needed bailing out.”
Mary Wilkerson, vice president of marketing for the Boone County National Bank, said that her bank wasn’t involved in subprime lending or risky investing and, as a result, has plenty of capital to make loans.
“We’re not going to put someone in a loan they can’t afford,” Wilkerson said.
Martinsburg Bank and Trust operates three of its five branches in Boone County and reported a return on assets of 1.64 percent in the first quarter of 2009. The bank’s relative success in lean economic times can be credited to more than steering clear of subprime loans, bank president Bob Darr said.
“We have one-on-one contact with customers," Darr said. "We know them by name and know their backgrounds. We try to build relationships with our customers by working with them.”
Ties to community
Lorry Myers, marketing officer for Martinsburg Bank and Trust, prepared one day for a 2:30 p.m. appointment at the Centralia branch.
She wasn't meeting with an executive, prospective investor or new bank member. Myers was getting ready to meet with a high school student for a mock interview and resume critique.
“She was sick the day we had mock interviews at the high school,” Myers said. “We didn’t want her to feel left out, so I told her she could come see me.”
For Myers, who has 30 years of experience in community banking, keeping appointments like this is more than being a good neighbor — it’s good business.
“We encourage our employees to be active in the community," she said. "We want people to think ‘Oh, they’re just like me.’”
When customers see news about the faltering U.S. banking system, they come to Myers for reassurance. She offers to go over the bank’s financial statements with them but said most people know her well enough to take her at her word when she tells them the bank is financially sound.
“I have customers who lived through the Great Depression, and they are nervous because they know how fast things can change,” Myers said. “I offer to show them the financials, but most of them just want my word that the bank is doing fine.”
Many owners of community banks live in the same towns as their customers and consider the impact their decisions will have on local economies, said Jerry Sage, executive director of the Missouri Independent Bankers Association.
“Customers can go see the bank president or loan officer or (chief financial officer),” Sage said. “There’s a whole different level of access and understanding of the bank’s place in the community.”
Darr agreed and said that Martinsburg Bank and Trust’s financial future is so closely tied to communities in mid-Missouri that he has to consider the full impact of his decisions.
“We’re the ones who sponsor the baseball team and buy the cheerleader outfits,” Darr said. “I think smaller banks do a better job of servicing communities.”
In order to quell fears about the security of bank deposits and stabilize a shaky financial industry, the FDIC in late February raised the amount it insures from $100,000 to $250,000. Many community bankers took issue with the way the FDIC planned to fund the increase.
Money the FDIC uses to insure deposits comes from banks, and in order to pay for the increase, the FDIC proposed doubling the required contribution fee from 10 cents to 20 cents per every $100 a bank has in deposits. Because some large banks have recently ceased operation or have substantially diminished assets, many small bankers thought the increase meant they would be paying to fix a problem they didn’t create.
“It doesn’t seem fair that we’re paying for bad decisions out West or out East,” Darr said. “I don’t think any small bank is opposed to paying its fair share, but smaller banks are going to pay the bulk of building the (FDIC) fund back up.”
Sage’s association represents more than 200 small and independent banks in Missouri. The increased contribution amount was unfair, he said, because the vast majority of small banks was not involved in the risky lending practices that are largely to blame for the national banking meltdown.
“Community banks rely on common sense banking practices and don’t try to invent some new type of fund to line their own pockets,” Sage said.
Shortly after the FDIC raised its contribution rates, small bankers across the country began calling Congress, Sage said.
Congress was listening, and on May 20, President Barack Obama signed legislation that gave more borrowing authority to the FDIC, clearing the way for the agency to set lower contribution rates for small banks. On May 22, the FDIC board of directors, in a 4-1 vote, used its new authority to lower contribution rates for small banks. But should another large bank failure occur, the FDIC could also use its authority to again raise contribution rates for small banks.
Wells doesn’t think new regulation or increased deposit insurance will fix what is at the heart of the banking crisis.
“It was caused by greed,” Wells said. “The regulators are trying to fix the problem, but it’s like closing the barn door after the horse has already escaped.”
Missourian reporter Mark Stanley contributed to this report.