The net income of Missouri banks increased from 448 million dollars in Fiscal Year 2011 to 587 million in FY2012, according to Missouri Division of Finance. That’s a 31 percent spike, and it’s the highest since the 2008 economic crisis. During the crisis, the net income of Missouri banks hit the bottom of 234 million dollars in FY2010.
John Howe, Missouri Bankers Chair and MU Finance Professor, said the data indicated banks are recovering pretty well overall. “The number of bad loans they hold is probably going down,” he said.
Max Cook, the president of Missouri Bankers Association, said he thinks getting rid of the problem loans help banks gain a clean portfolio, which partially leads to the increase of net income.
However, Mr. Cook pointed out that another reason for the increase lies in the accounting system.
“Capital reserve were brought back,” Cook said, “and money goes from reserve to profit.” Cook said the data might look better than it actually is.
Howe said even though the big picture looks good, there are some individual banks that are still struggling. Among these “individual banks,” a lot of them are small-sized banks or “community banks.”
“Missouri has relatively more small banks compared with other states and some of the smaller banks have the characteristic that they are not diversified,” Howe said. “That adds to the risk.”
Howe said even though there are remaining problems within the banking system, the recovery is slowly going on and having a positive impact.
“As the banks’ health recovers, it’s clearly going to have a positive spill-over to the overall business community because there are businesses that need loans now that aren’t getting them,” Howe said. “But I think we’ll see banks expanding more loans over the next year or so than they have in the past year.”
Michael Crist, the executive director of the Columbia office for Enterprise Corporation Development, said the improved banking system has given businesses more confidence so they can move forward to expand.
“We’ve seen more activity in this building this spring and summer, and actually there were some last year,” Crist said. “Particularly attitude – more of an attitude of confidence.”
Cook said confidence in the banking system is very important for people doing business with banks. “They need to know it’s in good shape, it’s profitable,” he said.
As the net income of Missouri banks fluctuated since since Fiscal Year 2007, the number of banks has decreased by 11.7 percent.
“The decreasing partially resulted from the fact that some banks were in failing condition, so they were closed by regulators and purchased by healthy banks, and in other cases, there were regular mergers,” Travis Ford, Communications Director of Missouri Department of Insurance, Financial Institutions and Professional Registration, said.
In fact, 15 banks in Missouri have failed since 2007 (as of Nov. 10), and the most recent one was Excel Bank in Sedalia, which closed on Oct. 19 and was acquired by Simmons First National Bank, according to the Federal Deposit Insurance Corporation.
There were another two failed banks closed earlier this year, one in 2011, six in 2010, three in 2009 and two in 2008 according to FDIC.
Across the country, Missouri ranks seventh in the number of failed banks since 2007, after Georgia, Florida, Illinois, California, Minnesota and Washington. Georgia has 84 failed banks since 2007, and Florida has 66. View the whole list of failed banks on FDIC website here.
Crist said it made everybody nervous, but the nearly 12-percent decrease is not a big issue. “It’s only a little bit more than 10 percent,” he said. “That loss is less than I would have thought.”
Crist also said it’s a positive thing, because a few weak banks were washed out and not the banking system is functioning better. “It made everybody nervous though,” he said.
Howe said he doesn’t think fewer banks will have a big impact on the business community. “There are lots of banks in Missouri. It is possible that [there] might be a small community somewhere that could lose its bank. But for a place like Columbia or Springfield, I don’t see much impact,” he said.
Howe said after Obama’s re-election, the Dodd-Frank rules would probably not be changed much from the way it was envisioned when it was passed.
The Dodd-Frank rules, formally known as Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed into federal law by President Barack Obama in July 2010 after the recession, aiming to increase transparency and enhance regulation of financial institutions.
“It has significantly increased the cost of doing business in the banking industry and it’s going to make some banks unprofitable, especially some small ones,” Howe said.
Howe said it’s not clear to him that this kind of regulation has hit the right balance between the cost of these regulations and the benefits of them. He anticipates the regulations to continue for the next two to three years.
“The near-term future of the banking system doesn’t seem to be terribly bright,” Howe said.
On the borrowers’ side, there are many factors deciding whether business people will borrow money from the bank or not, Cook said.
Cook said business people make decisions based on the belief of what their customers would demand, but people aren’t buying goods and services right now. “Consumer spending – the driving force of our economy, hasn’t come back yet,” he said.
Cook also mentioned some other factors. “The federal level fiscal cliff, tax increase, national debt, people would step back for that.”
Howe said the tax rates may go up severely, or at least noticeably, on Jan. 1, when the government will cut back on spending. “That could weaken our economy,” he said. “With all these factors, there is uncertainty with the near-term future of banking.”
“I think the banking sector is going to recover slowly as a whole,” Howe said.