Banks enjoy ROA revival after period of decline

The first half of 2004 looked good for the Colorado banking industry with banks statewide showing improved earnings after period of several years when return-on-asset figures had slipped.
“Great,” is how Richard Fulkerson, Colorado State Division of Banking commissioner, described January through June for the state’s banking industry.
“Since about 2000, earnings have been declining largely because of the drop in rates and obviously because of the economic decline. The good news is that it has turned. It started back up from about December on,” Fulkerson said.
Return on assets for all Colorado-chartered banks was 1.33 as of June 2004. It takes a graph to detect the trend, but indeed ROA began to turn upward this year after declining more or less steadily since June 2000. At that time Colorado banks posted a return on assets of 1.64 percent.
“The economy is starting to come back and we’re hearing from the bankers the loan demand is starting to come back,” Fulkerson said.
Bankers say the slight improvement in the margin between the cost of buying deposits and lending money has helped polish earnings. When the Fed nudged interest rates upward earlier this year it opened that margin, Fulkerson said.
The change in rates didn’t serve to dampen borrowers’ ardor. “Rates are still at historic lows,” observed Don Churchwell, president and CEO of Home State Bank.
Churchwell said the change would likely help usher his bank through the balance of the year and into the next year in good shape.
“We’ve had really a pretty good year and that’s because it’s been fairly consistent from January to June,” Churchwell said. Home State is an independently owned bank with six locations in Loveland and Fort Collins.
With the dust settled after the merger in late 2002 between Home State and American banks, 2004 was solidly a back-to-banking year, Churchwell said. “In 2004 we were able to start off the year on a very positive note.”
Churchwell also noted that his bank has watched the health of the region’s economy with a skeptical eye. Paying careful attention has resulted in quality loans and adequate reserves, he noted. “We were concerned about the economy going back (as long as) three years ago.”
Rising bankruptcy rates and mortgage loan foreclosures are indicators of weakness in the economy, even if they don’t directly affect some banks.
“It’s still very difficult out there, and in lending you have to be very cognizant of the capacity of your borrowers,” Churchwell said. “Because what knocks down a bank’s ROA quicker than anything else is having to put more money in reserves for loan loss.”
Darrell McAllister, president and CEO of Evans-based Bank of Choice, said his bank has seen its return on assets rise this year. Bank of Choice was formerly Weld County Bank. It has locations in Evans, Greeley and Platteville.
McAllister said that in the tough, competitive environment that is banking in Northern Colorado, paying close attention to the cost of inventory has helped his bank boost returns.
“We just started to, we think, manage our bank smarter,” McAllister said. “We looked around and realized that we were paying too much for our inventory. Our inventory is money and we buy money by bidding on it with other banks around for certificates of deposit.”
McAllister said his bank opted out of the bidding war for CDs and is focused instead on customer service for bank clients who plan to do more with the bank than shop CD rates.
Bank of Choice also purchased a bank in Palisade on Colorado’s Western Slope in part because that area may offer a cheaper inventory source, McAllister said.
Like neighboring Northern Colorado bankers, Jim Strovas, branch president of Adams Bank and Trust in Berthoud, said the first half of 2004 was good for his bank. In addition to Berthoud, the Ogallala, Neb.-based bank, has three branches in Colorado Springs. A fifth Colorado branch is under construction in Firestone.
Strovas looks for the year to end on a positive note, as well.
“I have seen the construction of homes and office buildings pick up and development areas pick up this year. That’s why I think it’s looking very bright in the second half of the year and even into the first half of next year.”
Northern Colorado bankers look for the second half of 2004 to mirror the first half with ROA numbers holding steady or gaining slightly as the year draws to a close.
“I think we’ll be right on track,” Churchwell said of Home State Bank. “We’re just a little bit ahead of our budget we put together for 2004 and I think we’ll finish that way, too.”
McAllister, too, sees the trend that started in the first half of the year continuing through the close of 2004. The second half could be a little tighter, he said, describing the bank as “getting and giving a little.”x09x09
“Our variable rate loans are going to re-price up a little so we’ll get a little relief and help on our income side and we’ll have to pay a little more for our deposits, so we’re getting and giving,” he said.
The Federal Deposit Insurance Corp.’s assessment, in its summer 2004 state profile, is that Colorado’s economy remains in recession. That’s an opinion that regional economist John Green shares.
“I think there’s going to be less opportunity for profitable investment by banks,” Green said.
The FDIC report points to a job-loss rate in Colorado that exceeds that in the nation; lackluster job growth and declining growth in per capita income and personal income growth as factors outlining continued recession here.
The long-term picture is brighter, Green said, because people want to retire here. “Retired people bring money and buy houses and you don’t have to provide them with jobs.”

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