Sunday, June 5, 2011

Ariz. banks still among most fragile

If a rising tide lifts all boats, then Arizona's banking industry is like some hurricane-lashed craft lying half-submerged in the harbor. It isn't sinking anymore, but it's far from buoyant, either.

The latest quarterly numbers from the Federal Deposit Insurance Corp. show the state's banking industry is slowly patching its leaks. As reported in mid-May, banks headquartered in Arizona, in general, have turned profitable again for the first time in three years.

The FDIC report confirms that: Banks here earned $20 million in overall net income for the three months that ended March 31.

Most large banks operating in Arizona such as Wells Fargo, Chase and Bank of America are based in other states and thus not including in the FDIC's report on Arizona institutions.

Nationally, the banking industry is clearly benefiting from a rising tide, with overall profits nearly back to pre-recession highs.

"The industry shows continuing signs of improvement," said Sheila Bair, the agency's chairwoman, in a statement.

Yet problems persist for many Arizona banks, and they could get worse if the economy lingers in a soft patch and real-estate prices weaken further, as now seem possible.

Most customers here have under $250,000 in deposits and thus would be fully insured in the event of additional failures. But bank weakness could translate into other problems for the local economy, including a reduced willingness or ability by bankers to extend loans to their small-business customers.

Among dubious distinctions, Arizona leads the nation with the highest concentration of unprofitable banks, with 18 of the 37 banks here still in the red. That translates to 49 percent of banks losing money. The Arizona percentage is higher even than Florida (43 percent unprofitable) and Georgia (38 percent).

In banking circles, those are not good states with which to keep close company. Swamped by many of the same real-estate problems as Arizona, Florida and Georgia have each lost more than 30 banks just since the start of 2010 to failure.

Nationally, only 15 percent of banks were unprofitable in the first quarter, during which time 26 banks failed, including Legacy Bank of Scottsdale.

Meanwhile, the FDIC's list of problem banks rose by only four institutions to 888, the smallest increase since 2007. The agency doesn't name the banks on this high-scrutiny list for fear of inciting a run.

The FDIC's deposit insurance fund improved from a $7.4 billion deficit at the end of 2010 to a $1 billion deficit at the end of March, with Bair predicting the fund will soon return to having a positive net worth after seven straight quarters with deficits.

Overall, banks in the U.S. earned $29 billion, the best showing since a $36.8 billion profit in the second quarter of 2007. Banks have boosted profitability on a year-over-year basis for the past seven quarters.

The big catalyst has been a reduction in provisions to cover losses. These charges reduce earnings, and with loan portfolios now stabilizing, banks don't have to incur the charges as much.

Arizona banks are gradually making progress. Bad-loan charge offs are down, the average return on assets is up and the interest-rate spread between what banks earn on loans and pay on deposits has improved.

Even that figure of 49 percent of banks unprofitable is down from the 84 percent that were operating in the red at the end of 2009 (though the state did lose five weaker ones to failure since then).

Even banks nationally face hurdles. Bair cited continuing mortgage-servicing problems that are contributing to housing weakness. Also, she noted that the economic recovery remains weak, with sluggish demand for loans.

Longer term, she said profitability could get squeezed by a return to higher interest rates, forcing banks to pay more on deposits.

Time might heal the remaining wounds for Arizona's banks, but a surer bet would involve a return to more-vibrant economic growth and a recovery in real estate.

by Russ Wiles The Arizona Republic - Jun. 5, 2011 12:00 AM

Ariz. banks still among most fragile

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