Arizona banking industry continues to struggle

by Russ Wiles The Arizona Republic Feb. 25, 2010 12:00 AM

Economic recovery is a ways off for Arizona's beleaguered banking industry. Stung by more bad loans, Arizona-based banks continue to suffer from rising delinquencies, declining capital and poor earnings.

About 84 percent of the state's mostly small banks ended 2009 with a loss, up from 74 percent in 2008 and 39 percent in 2007, according to the latest progress report issued this week by the Federal Deposit Insurance Corp.

"It just shows that more recovery needs to happen here," said Tanya Wheeless, president and chief executive officer of the Arizona Bankers Association in Phoenix.

In contrast, the FDIC report painted a picture of improvement for some of the biggest national banks.

Industry net income for 2009 rose to $12.5 billion from $4.5 billion in 2008, with much of the rebound concentrated in larger banks, the FDIC said. Loan-loss provisions showed their first year-over-year improvement in three years.

"Consistent with a recovering economy, we saw signs of improvement in industry performance," said FDIC Chairwoman Sheila Bair in a statement. "But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets."

About 30 percent of banks nationally were unprofitable in 2009, the highest figure since 1984.

Big national banks benefit from operations in multiple states, many of which have economies that are faring better than Arizona.

"If you're an Arizona-chartered institution, you're living or dying by the economy here," Wheeless said.

She predicted the aggregate performance of Arizona banks will improve this year as the local economy picks up steam.

With most Arizona banks reducing capital to reflect loan problems, the combined equity capital of the 44 Arizona banks included in the FDIC report slid to $1.7 billion at the end of 2009 from $2.1 billion last year and $2.3 billion in 2007. The ongoing bad-loan trend has put pressure on banks to raise additional capital, which hasn't been easy.

"It's a challenging time to raise capital because investors aren't sure about the long-term viability of certain banks or about the long-term investment returns they can expect," said Ryan Suchala, president of Bank of Arizona in Phoenix.

Even with the economy slowly recovering, banks face a difficult outlook, especially with problems mounting in commercial real estate.

"Commercial real estate will be the biggest problem facing banks over the next year, without a doubt," Suchala said.

On the bright side, banks have been able to maintain a healthy deposit base, with Arizona banks counting year-end deposits of $12.4 billion, virtually unchanged from the end of 2008.

Higher savings rates, continuation of the FDIC guarantee and lingering uncertainty about stock-market returns have helped banks retain deposits, Suchala said.