Arizona banks seeing a profit

After considerable pain, downsizing and nearly $1 billion in cumulative losses, Arizona's native banks finally might be turning the corner.

The 37 banks still based in the state just wrapped up their best quarter since the financial crisis and recession began, breaking a string of 12 straight quarters during which the majority of institutions here lost money.

On balance, the local industry is profitable again, albeit by a razor-thin margin that partly reflects the demise of some of the weakest players. Still, bankers are sensing a silver lining in the latest numbers, and they're not complaining.

"It's a good story, a change in the weather," said Stephen Haggard, president and chief executive officer of Metro Phoenix Bank. "The local economy is doing better, with definite improvement from six months or a year ago."

As local banks recover, that could make more lending dollars available to customers here, especially small businesses, while improving overall banking services and perhaps even reversing the three-year decline in employment at these firms. Healthy local banks also are in a better position to donate to non-profits and support the community in other ways.

Metro Phoenix Bank posted a $624,000 first-quarter profit after basically breaking even one year earlier.

The big news is that bad-loan difficulties are easing, at long last.

"Problem assets have been dramatically reduced," said Scott Schaefer, president of Meridian Bank, which improved to a $2.9 million first-quarter profit from a loss of $11.1 million a year earlier.

"We took our lumps in 2009 and 2010," he said, citing write-downs and other responses for dealing with problem loans.

The banks headquartered in Arizona earned nearly $20 million combined from January through March, with 19 of the 37 turning a profit, based on a preliminary tally of financial reports supplied to the Federal Deposit Insurance Corp.

The agency will release final statewide numbers later this month.

Many local banks were and remain highly exposed to real-estate lending, since that industry was the state's main growth catalyst for so many years.

The Arizona totals exclude figures for banks that operate here but are based elsewhere, such as the three largest companies with an Arizona presence - Wells Fargo, Chase and Bank of America.

They also don't include banks that have failed, merged or been acquired over the past few years.

The majority of local banks have been running in the red for the past three years, hammered by real-estate setbacks and hemorrhaging the capital that regulators require for them to stay in business.

At the nadir in late 2009, 84 percent of Arizona's banks were unprofitable.

Combined, Arizona's local banks lost $950 million across 2008, 2009 and 2010.

Since the end of 2007, the state has lost 20 banks through failure, merger or acquisition and shed more than 1,500 related jobs.

Also, market share has become more concentrated in the hands of the big out-of-state entities that, critics say, are less motivated to lend locally.

"Local banks will reinvest the money in small businesses," said Ernest Garfield, president of Independent Bank Developers of Scottsdale and a former Arizona state treasurer and Corporation Commission member.

"The big banks will drain it out of the state."

Bankers at large institutions contest that claim, but it's clear that having more healthy entities increases the availability of local loan dollars.

The improved recent numbers for local banks don't mean all is well. Some of the weakest banks in Arizona and nationally continue to struggle.

The FDIC's list of "problem" banks is still rising, with one in nine institutions nationally and an untold number in Arizona under close scrutiny. The agency doesn't name banks on its list out of concern for inciting runs by depositors.

The FDIC generally insures depositors up to $250,000 per bank.

Small community banks that represent the backbone of Arizona's industry have been hit harder than larger national banks, which have more diversified operations.

The U.S. industry actually remained profitable throughout the slump and earned $87 billion in 2010 - almost back to pre-recession levels.

Arizona banks, as noted, have been heavily dependent on real estate.

Perhaps the main reason banks in Arizona and elsewhere are reporting better numbers is that loan problems and delinquencies are easing, so banks don't have to increase their reserves to cover losses.

When banks must boost reserves, that eats into profits and capital.

Also, banks are earning higher spreads between what they generate on loans and pay on deposits, and they're earning more in fee income, Haggard said.

Schaefer sees opportunities for well-positioned banks but cautions that metro Phoenix's economic recovery remains "spotty."

Haggard is more optimistic. While real estate remains depressed, prices aren't dropping as fast as before, he said.

Also, borrowers in other industries generally are faring better.

"The financial reports we're receiving from clients are showing stronger cash flow and top-line revenue numbers," he said.

Garfield feels now is a great time to start a bank in Arizona, reflecting the decreased competition, gradual improvement in the economy and other factors.

"Also, bankers have finally learned what gets them in trouble," he said.

Add it all up and there are reasons for optimism.

Local banks focus their lending within Arizona and thus are a key cog in the economic-development machine.

If they have finally turned the corner, that could be a good indicator for everyone in the state.

by Russ Wiles The Arizona Republic May. 15, 2011 12:00 AM





Arizona banks seeing a profit