Local banks mix it up with mid-year returns

The economy in 2006 has been somewhat of a contradiction.

Indicators that typically move along a common scale have been moving in opposite directions. One day the headline reads that foreclosures are at all-time highs, and the next day a report shows that home sales are still outpacing last year.

It’s no wonder that the banking industry in Northern Colorado is reflecting a similar flux. Mid-year reports from the Federal Deposit Insurance Corp. show no discernable trend in return on assets or return on equity in locally chartered banks. Of the 16 locally chartered banks, seven of them experienced decreases in ROA, while five saw decreases in ROE.

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“It depends on your loan mix,´ said Larry Wood, president of Union Colony Bank in Greeley. “Everybody’s loan mix, investment mix and deposit mix is different.”

Cycles in industries are likely the reason for such varied ROA and ROE results, Wood pointed out. For instance, banks that are heavily vested in construction lending such as Union Colony are likely experiencing a return downturn. Union Colony’s return on assets decreased from about 0.8 percent of a point to 0.5 percent, and its ROE declined 2.73 percent points to 4.6 percent.

Wood said that banks that are focused on retail are likely flat and those in commercial real estate are probably still doing well.

Another reason for decreased return ratios is the current state of alternative investments. For banks that watch their portfolios shrink as customers pay off loans, few other investment options are available with yields at the same levels.

Fred Bauer, president of Ault-based Farmers Bank agrees that funds are tighter.

“The biggest part is the squeeze on the cost of funds,” Bauer said. “It’s hard to pass 100 percent of those increases to your borrowing customer.”

Between competition and increased operating costs, banks are tightening their belts. Bauer said he would expect to see return ratios hit a downward trend in the coming months as the Federal Reserve allows the prime rate to remain stable.

“As it stabilizes, it diminishes profit margins,” he said.

While lower interest rates have allowed banks to charge a little more than the spread , many of them now will lower their margin in order to help their customers.

“Every bank is a little bit different than the bank next door,” Bauer said, adding that he thinks everyone is going to feel the squeeze eventually.

Strong customers, sound practices key

For Farmers Bank, though, the squeeze isn’t a big threat. Farmers had the highest ROA of locally chartered banks at 2.74 percent, and that was down from last year’s 2.95 percent. The bank’s ROE was also the highest in the region at 24.7 percent.

In fact, Farmers Bank was recognized as one of the top small Subchapter S banks in the nation for ROA. In the June issue of the magazine Independent Banker, Farmers Bank ranked seventh in the nation for ROA at banks with $100 million to $250 million in assets.

Farmers Bank is one of only three locally chartered banks that beat out the median ROA for the entire state. Colorado banks reported a median ROA of 1.34 percent – an increase of only 0.04 percentage points from the year before. Advantage Bank, with a 1.35 percent ROA and First National Bank of Estes Park with a 1.77 percent ROA were the only other local banks to beat the median. The U.S. ROA as of June 30 also was 1.34 percent.

Greeley-based New West Bank came in under the median, but experienced strong increases in both ROA and ROE. For June 30, the bank reported 1.16 percent ROA and 13.15 percent ROE. Such results are a product of sound banking practices, according to chairman and CEO Leroy Leavitt.

“We’ve continued our growth with an emphasis on banking quality businesses,” he said.

In order to measure New West Bank’s success, Leavitt compares its performance to a peer group of banks that formed in 2003, the same time that New West did.

“Our goal is to be in the top quartile of that peer group,” Leavitt said, adding that the bank consistently hits that mark.

Also key to preserving return ratios is the recognition that the economy has slowed, Leavitt explained. Because of the cooling, especially in the real estate market, New West is more cautious and is careful to bank strong customers using sound practices.