Fed: 13 state banks crested crisis

LITTLE ROCK — Thirteen Arkansas banks were able to maintain the highest regulatory rating leading up to and after the national financial crisis, according to a report from the Federal Reserve Bank of St. Louis.

That equals 10.7 percent of Arkansas’ 122 community banks - those with less than$10 billion in assets - included in the survey, placing Arkansas 14th in the country, the report said. Every bank based in Arkansas except for Arvest Bank of Fayetteville has less than $10 billion in assets.

The report - “The Future of Community Banks: Lessons from Banks That Thrived During the Recent Financial Crisis” - focused on the distinguishing features of community banks that maintained the highest supervisory ratings from 2006-2011.

The criterion for the highest regulatory rating was keeping a CAMELS rating of 1 for the six-year period, the highest rating possible. CAMELS is an acronym for six areas judging a bank’s safety and soundness - capital production, asset quality, management competence,earnings strength, liquidity risk exposure and market risk sensitivity. In the U.S., 702 banks maintained a 1 rating throughout 2006-2011. There were about 7,200 banks in the country that had less than $10 billion in assets.

Louisiana community banks were the best performing in the country, with 50 banks that maintained the highest regulatory rating for the period, or 40 percent of the state’s banks. Oklahoma was next with 27 percent of its community banks with a regulatory rating of 1, followed by Texas with 22 percent.

The states with the most successful banks combined a healthy agricultural sector with a strong energy sector, the report said.

“We’re well aware that if we had done this study in the late 1980s to early 1990s, banks with more of a concentration in agricultural loans would have been among the ones doing worse,” Andrew Meyer, one of three authors of the report, said in an interview Wednesday. The other authors were R. Alton Gilbert and James Fuchs. All work at the St. Louis Fed.

During the six-year period, two banks in Arkansas failed and 19 survived but had the poorest regulatory ratings of a CAMELS 4 or 5, the report said. There were no banks identified by name in the report.

Arkansas’ gross domestic product grew at a relatively healthy 2 percent annually during the six-year period, and the state had a strong base of banks that excelled, Meyer said.

The banks that excelled were not overly ambitious, said Randy Dennis, president of DD&F Consulting Group, a Little Rock bank consulting firm.

“They didn’t look for the hot markets and try to branch into those areas,” Dennis said. “They weren’t trying to catch the next wave. They didn’t branch to Northwest Arkansas or Phoenix or Las Vegas.”

From a subjective viewpoint, banks throughout the country that excelled during the crisis had strong ties to the community, managers and directors involved in the operation of the bank, were conservative in their loan underwriting and managed risk well, said Julie Stackhouse, a senior vice president at the St. Louis Fed.

Banks with those fundamentals thrived in strong economies, such as in Louisiana, Oklahoma and Texas, but also in states such as Missouri, where 13 percent of the banks had the highest regulatory rating while the state’s annual gross domestic product declined slightly.

“Several bankers said, ‘We were just in the right place at the right time,’” Meyer said.

The authors interviewed bankers from 28 banks that maintained the highest regulatory ratings throughout the period of the study. Many spoke of the need for employees to have good people skills, Fuchs said.

“Many said they could teach an employee banking but they can’t teach interpersonal skills,” Fuchs said.

The community banks that will prosper in the future will have characteristics similar to those of thriving banks that performed well during the recent financial crisis and its aftermath, the authors said in a prepared statement.

“The events of recent years can be considered a real-world stress test of the community bank business model,” they said.

Business, Pages 27 on 03/14/2013

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