Montana Banks OK, Lead Nation in Earnings

By Robert Struckman, 9-26-08

Montana banks lead the nation in one key measurement of earnings, despite a relatively high and rising rate of past-due commercial loans.

“First of all, I know because of what has occurred with recent events in the financial market, that our banks are in the spotlight,” said Annie Goodwin of the Montana office of Banking and Financial Institutions. “What we are monitoring, certainly, is the credit environment. We’re looking at residential real estate projects, commercial real estate projects, how the cash flow is occurring for our banks. We’re watching the asset-quality at our institutions. At the present time, there is not a concern that we have.”

Over the past two weeks, the foundations of the American economy have been shaken by losses from the collapse of the housing industry. The fallout extended from Wall Street investment firms to retail banks today with news that regulators closed Washington Mutual, a regional giant.

Despite the fears emanating from Washington and Wall Street, local bankers say that credit markets in Montana are operating relatively normally, with interest rates even dropping for high-quality borrowers. At the same time, though, there is concern that too many new bank branches, and a growing number of troubled construction loans, could be starting to pinch some institutions.

“Overall the Montana banking industry and the local economy are both relatively strong, compared to the rest of the West, as well as the nation,” said San Francisco-based regional manager Shayna Olesiuk of the Federal Deposit Insurance Corp.

So what does all this mean?

“It’s important to mention our banks are doing well in the economic climate in Montana. They are well-supervised. They’ve been conservative in their underwriting. Montanans should feel assured,” Goodwin said.

Every state-chartered bank in Montana is doing well, Goodwin added. Her office regulates Montana’s 64 community banks.

Montana banks have almost no direct exposure to the subprime real estate market, Goodwin said. Almost all of the subprime mortgages that originated in Montana were sold to investment banks, and Montana bankers purchased almost none of the worthless securities created from those loans.

As a result, a statistical snapshot of Montana banks looks quite a lot like it did a year ago. There are slight changes in some numbers, reflecting an economy that’s less strong than it has been.

According to the FDIC, which insures and collects data from all 78 banks headquartered in the state, Montana institutions have the nation’s highest median pre-tax return on assets, even with a slightly lower rate compared to a year ago.

“Looking at the asset quality, by that I mean the past-due ratio, the median is up slightly from a year ago, slightly above the national rate. That looks to be driven by commercial real estate categories,” Olesiuk said.

“Anyone who has been financing development to any extent has some weakness out there because real estate is not moving,” said Charlie Anderson, a Butte banker with 30 years of experience.

Other business risks include the costs of over-branching.

“Brick-and-mortar is expensive, and as margins tighten they may become too expensive,” Anderson said. “You might see some banks close those.”

Olesiuk said some FDIC statistics seemed consistent with Anderson’s sentiment.

“Strategically, if a bank doesn’t have a good plan right now, if it doesn’t know where it’s going, it’s going to go to the bottom line. And that bank’s going to flounder,” he said.

The banking industry has more intangible risks, Anderson added.

“Banks are suffering a risk of reputation, because the public sees banks and banking as not the solid institutions they’ve seen in the past,” he said. “That doesn’t mean you can’t get your money, and there’ll be a run on banks. But this is important.”

“It’s about the soul of banking,” he added. “And it’s a risk.”

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