Analysis: Little lenders perking up

Digging a little deeper inside area banks' Q2 profit reports yields signs of an upturn

Let's file this analysis under the Neverending Wall Street-Main Street Debate section of the Great Recession.

Since the financial crisis flared up big time two years ago this month, the biggest names in the banking sector have delivered a steady stream of loan writedowns, goodwill impairments and other negative news. A number of market watchers are bracing for more of the same in 2011 – think souring commercial real estate loans and looming Federal Reserve interest-rate hikes – but, far away from Wall Street’s radar, many of Middle Tennessee’s banks appear to already be turning the corner.

The signs were there early this year, when Nashville-area lenders posted their first collective profit in a year. Now, in analyzing Federal Deposit Insurance Corp. data for the second quarter, also scrubbed the numbers to exclude three area publicly traded companies – Pinnacle Financial Partners, Tennessee Commerce Bancorp and Green Bankshares – as well as two de novo banks, Avenue and CapStar, whose early-life losses skewed historical numbers. (To view profit and credit quality data for all Nashville-area banks in the second quarter, click here.)

The remaining 22 institutions earned a combined $9.5 million in the second quarter. That was down from $11 million in the first three months of 2010, but still their second-highest tally in two years. The $20.5 million in combined first-half profits for this group was the highest for a six-month period since the March-September stretch of 2008.

Among the banks posting especially strong numbers were Volunteer State Bank, which grew its profits by 75 percent to $1.6 million on the back of nearly $20 million in loan growth, and Civic Bank & Trust, which posted its largest-ever profit – almost $400,000 – after having spent much of 2009 purging itself of bad loans.

Better yet: Many of these 22 institutions – who average about $270 million in assets and have a combined loan book of almost $5.3 billion — are again putting money to work. After pulling back slightly at the end of 2009 and in early 2010, the group lent out a net $36 million in Q2 and are now almost $60 million ahead of where they were a year ago.

While excluding the results of several of Middle Tennessee’s most prominent business lenders makes for a highly theoretical exercise – there’s no way to avoid the $200 million in losses Pinnacle, Tennessee Commerce and Green Bankshares have booked since the end of 2008 – other data points in our analysis of the FDIC numbers show that the majority of the area’s community bankers appear to left the darkest days of the recession well behind them.

For example:

• In addition to making more loans, the region’s smaller lenders also are growing their asset base more steadily than the market as a whole. In both the first and second quarters of this year, their combined assets were up about 5 percent. Add in the three publicly traded and two start-up banks and those numbers fall to 3.0 percent and 2.5 percent, respectively.

• Sixteen of the 22 posted higher second-quarter profits than a year ago. Only three, Community First Bank & Trust in Columbia, American Security Bank & Trust in Hendersonville and Nashville-based InsBank, lost money during the quarter.

• Mirroring a broader trend, their credit quality is gradually improving. The median ratio of noncurrent loans to total loans has steadily ticked down in the last three quarters. The median charge-off ratio in the second quarter came in at just 0.39 percent and only two of the 22 sported ratios of more than 1 percent.

Of course, not everything is coming up roses for this group of 22. MidSouth Bank recently agreed to work closely with the Federal Reserve to improve its risk management processes and flush out bad loans, which topped 7 percent of total loans in the second quarter. And the biggest of the group, Wilson Bank & Trust, has seen its profits almost cut in half from a year ago to $1.7 million.

But if you’re looking for signs of economic hope in the second half of 2010, you may not have to go farther than your friendly Main Street banker.

Past quarterly reports on Middle Tennessee's banks are available here.