EVERETT — Low interest rates, the loss of the home construction boom and investor pessimism all are weighing down on bank stocks, dealing a big blow to all three of the local banks traded on Wall Street.
Lynnwood’s City Bank, along with Frontier Financial and Cascade Financial — both Everett-based banking firms — have seen their share prices decline by more than half in the past year.
They’re not alone. The nation’s biggest banks and thrifts also are suffering. Shares of Seattle-based Washington Mutual, one of the hardest hit by the mortgage meltdown, have plummeted 90 percent from their peak in 2007. The Standard &Poor’s Bank Index, which includes such national names as US Bancorp, Keycorp and Wells Fargo, has tumbled 50 percent in the past year.
The Nasdaq OTC Index for the banking industry, which includes Snohomish County-based banks, is off more than 30 percent in the same period.
Concerns about the industry across the nation are so great, the Federal Reserve is considering new rules to make it easier for private equity firms and others to invest in banks, The Wall Street Journal reported Friday.
Sara Hasan, banking analyst at Seattle’s McAdams Wright Ragen Inc., said the local banks are seen as vulnerable to the downturn in housing, as a substantial number of their loans have been to the construction industry.
“In the Northwest especially, it seems like we’re seeing the first wave of difficulties with the housing market,” Hasan said. “Bankers are nervous, and their investors are nervous, too.”
In its quarterly call in late April, Cascade reported earnings were off 32 percent, mostly because the bank had to set aside $2.4 million as a provision against loan losses.
“The recent slowdown in the residential development and construction market has led to an increase in nonperforming loans, which makes it prudent to strengthen our reserve position at this time,” Carol Nelson, Cascade’s chief executive officer, said in the earnings announcement.
Similarly, Frontier saw its first-quarter income fall by more than 11 percent after increasing its loan loss provision by $7.5 million. City Bank, which made no such provision a year ago, set aside $500,000 for bad loans in the first quarter. Its earnings fell more than 6 percent, with the bank blaming “the general economic slowdown impacting financial institutions.”
The Lynnwood-based bank is still issuing its regular quarterly dividend of 15 cents a share. However, Frontier said this month its third-quarter dividend, to be issued in July, will be 6 cents, reduced by two-thirds from the last dividend. John Dickson, the banking company’s president and chief executive, said the action was taken in light of “continuing deterioration in the housing market and the impact it is having on many of our borrowers.”
Talking about the swoon of Frontier’s shares on Wall Street, Dickson said speculation that banks will have to raise more capital and dilute their existing shares in the process is driving down stock prices.
“I think there’s an incredible amount of pessimism and negativity out there in the media and amongst investors,” Dickson said last week. “I think in the Pacific Northwest, we’re in much better shape than most of the rest of the country, but most of the analysts are from other parts of the country and have seen other parts of the country deteriorate.”
He said Frontier is “doing everything we can to avoid” having to issue more stock to raise capital. That’s one reason for the dividend cut, he said.
“We still believe we have plenty of capital in reserves to weather this just fine,” he said.
Hasan said investors’ disappointment with community bank stocks is magnified by the fact that most are coming off a sustained period of great growth and rising stock prices.
“It’s quite the hangover after the party,” she said.
Frontier’s shares began this decade at less than $10 a share and traded well above $30 a share by late 2006 — a gain of 216 percent. At its height, Frontier’s market capitalization of more than $1 billion made it one of the three largest publicly traded companies based in Snohomish County. As of Friday, the company’s market value was just below $425 million.
Cascade Bank’s stock ran up from just more than $6 a share in 2000 to a high of more than $18 in early 2007, a 194 percent gain.
City Bank’s stock growth was more gradual, with a rise of about 65 percent from the beginning of 2000 to its peak price between $36 and $37 a share in late 2006.
Not all the news for local banks is bad. While potential loan losses are up, so is their daily business of deposits and loans.
Cascade’s deposits were up 7 percent in the first quarter, compared to a year ago, to $951 million. The bank’s assets increased 9 percent to reach $1.5 billion. At Frontier, deposits grew by 7.5 percent during the first quarter to reach $3.2 billion, and total loans grew by about 3 percent.
At City Bank, total assets reached $1.3 billion in the first quarter, up 17 percent from a year ago. Loans grew by 17 percent to $1.2 billion and deposits were up almost 20 percent.
And Hasan said that so far, even with worry over growing loan losses, all three of the publicly traded banks in the area seem to be solid. She said Frontier’s “pre-emptive defensive move” of cutting its dividend to boost loss provisions shows the banks aren’t ignoring their potential problems.
Reporter Eric Fetters: 425-339-3453 or fetters@heraldnet.com.
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