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Opening the vaults

A review of eight banks either based in Southern Oregon or doing a significant amount of their business here shows all of them reporting losses during the first half of 2009 and several with signs of serious struggles.

Bankers say they've been caught in a squeeze between the declining real estate market and an economy that can't seem to right itself.

"It's been a yo-yo and we expect this for several more quarters," said Umpqua Bank Chief Financial Officer Ron Farnsworth. "We're managing through this and our core banking is earning money."

In addition to the banks, Rogue Federal Credit Union and Southern Oregon Federal Credit Union both lost money during the first half of the year. Evergreen Savings and Loan Association of Grants Pass, which falls in a different category than the banks, earned $485,000 in the first six months.

Exposure to home mortgage defaults hit banks across the country last year. Now the worry — more pertinent to many Southern Oregon bankers than the sub-prime lending fallout — is about loans for commercial real estate projects that have soured.

"What seems to be the case is that non-performing assets are still a problem and a growing problem for many banks — particularly for those with commercial real estate exposure," said Tim Duy of the Oregon Economic Forum at the University of Oregon. "If banks missed the residential element, the other is still out there. There has been general concern about earnings and the challenge of relatively weak earnings against non-performing assets."

The bank's weakened positions are not a threat to the vast majority of depositors, since up to $250,000 in deposits is currently insured by the federal government. But investors in the financial institutions have no such guarantees.

Across the board, Oregon banks saw their return on assets decline to minus-1.02 percent during the first six months of 2009.

"Banks like to make 1 percent on their assets," said Ken Thomas, a Miami-based independent bank consultant and economist. "During good years like 2006, Oregon banks made a 1.08 return."

Including the District of Columbia and Puerto Rico in its count, the Federal Deposit Insurance Corporation ranked Oregon 29th best out of 52 states. Of 38 Oregon-based banks, Thomas said, 23 lost money.

For the period ending June 30, losses for the banks with Southern Oregon ties ranged from $212,000 for Home Valley Bank, based in Cave Junction, to Umpqua's $121.3 million. In addition to Umpqua, the biggest losses for the period were recorded by Sterling Savings at $50.8 million, PremierWest Bank at $30.5 million and Bank of the Cascades at $29.6 million. (The profit or loss numbers can be somewhat misleading because of the relative sizes of the banks: Umpqua Bank, for instance, reported $8.7 billion in assets, while Home Valley Bank had about $218 million.)

Oregon's banks are not alone in their woes. Alaska, Montana and Wyoming were the only states whose banks on average were profitable from Jan. 1 through June 30. Those three and Oklahoma were the only states where banks earned a return of more than 1 percent on their assets.

There is movement in the right direction for some institutions.

Umpqua and Liberty had lower percentages of bad loans to overall loans in the second quarter. Umpqua reduced its percent of those bad loans — called non-current loans — to 1.85 percent — putting it in the top 26 percentile of the nation's 189 largest banks. Eugene-based Liberty Bank recorded an improvement to 7.20 percent in bad loans — but that still left it in the bottom 12 percentile of its peer group.

"If you are talking about a billion-dollar bank, every percent that is non-current is $10 million," Thomas said.

Some of the region's banks have taken harder knocks than others. Bauer Financial of Florida, which tracks bank performances, included Bank of the Cascades and Liberty Bank, with two offices in Medford, on its list of troubled banks.

Bank of the Cascades, based in Bend, was in the center of an overheated residential property market a few years ago and saw both Central Oregon and its Idaho markets take a tumble. In the second quarter, Bank of the Cascades lost nearly $27 million.

Last month, Bend-based Cascade Bancorp disclosed that the FDIC and Oregon Division of Finance and Corporate Securities were requiring Bank of the Cascades to improve its capital position, maintain liquidity ratios, reduce its level of bad loans, reduce loan concentrations in certain fields and ensure they have adequate funds to cover potential bad loans.

According to a regulatory filing, by year's end Bank of the Cascades will have to maintain its capitalization at a minimum of 10 percent. Regulators also required a three-year strategic plan and a plan to preserve liquidity, which is the money banks have available to meet their financial obligations as they come due.

While banks' financial problems are immediate, bankers are trying to take the longer view. People's Bank of Commerce Chief Executive Officer Ken Trautman said his bank took aggressive action in the second quarter to stave off losses down the road.

"Any payment contingent on the sale of real estate, we had the real estate reappraised," Trautman said.

If the property, after selling costs, was appraised at less than the loan, People's entered the potential loss on their books. That doesn't mean those losses will necessarily occur.

"A substantial part of those loans are still being paid and have never been late," Trautman said.

Another element PremierWest Bank and Umpqua have to deal with are federal Capital Purchase Program funds, often compared to TARP funds. Umpqua received $214.2 million and PremierWest $41.4 million. Umpqua CEO Ray Davis has previously said that Umpqua wants to repay those loans as soon as possible, because they're viewed by the public as a sign of weakness., even though they were awarded only to banks that were strong enough to qualify.

"It's been such a short period of time that it's hard to gauge the expense for those funds," Jim Sinegal an analyst with Morningstar in Chicago. "The problem is if the economy turns down again, it might turn out that paying back the funds might have been premature. From March to summer things were better, but if things don't improve or there is another turn downward, they might find themselves wanting that capital back."

In assessing PremierWest's position, Thomas said the upward trend of bad loans — 8.60 percent of all loans as of June 30 — was a warning sign.

"They lost $27 million in the second quarter and their capitalization went from 12 percent to 9.6 percent in the second quarter," Thomas said. "What it comes down to is capital and they're in a little stronger position because they got TARP money."

At the end of June, PremierWest had pushed its loan loss reserve to $40.3 million. President Jim Ford said other banks performing at the same level might have less in reserve accounts.

He said PremierWest has attempted to reduce its commercial real estate concentration over the past three to four years.

"In this area, that's kind of what is available," Ford said. "We're trying to supplement it with consumer and industrial lending; obviously you don't replace millions of dollars in loans quickly."

Ford said he doesn't see the prospect of much difference in the coming quarters.

"Economic conditions have been hurting borrowers and their ability to repay and that has been putting a damper on demand for loans," Ford said. "We have money to lend — if they are good projects. We've done our share of owner-occupied commercial buildings. What you're not going to see is demand for a new retail strip center. Two, three or four years ago there was plenty of demand for those loans."

While many competitors were evaluating negative numbers, Evergreen Federal Savings & Loan had positives for the first six months.

"We've been blessed with a portfolio that performed pretty well and we're pretty conservative as a lender," said Jeff Hyde, Evergreen's executive vice president. "The bottom line in lending is equity and our borrowers had the equity."

Reach reporter Greg Stiles at 776-4463 or e-mail business@mailtribune.com.

Opening the vaults