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Several Greater Des Moines banks reported multimillion-dollar net losses in the fourth quarter as they wrote off loans that went sour. The state’s head banking regulator said more losses may be ahead for Iowa banks in 2009 as layoffs and a struggling economy continue to take their toll.

“The dramatic slowdown of the housing industry created quite a few problems for banks that were lending to construction and development firms,” said Tom Gronstal, Iowa superintendent of banking. “And as we look forward with the layoffs in manufacturing and pretty much every other industry, that’s going to definitely have an impact on loan repayment. And you’re not seeing many businesses expand, so it reduces the potential for new lending and new sources of profits for banks.”

Statewide, 6.27 percent of Iowa banks were unprofitable in the fourth quarter of 2008, compared with 3.6 percent the previous year. Overall, Iowa banks’ net operating income in 2008 shrank 4.5 percent from year-end 2007, to $420 million. Iowa’s figures are far better than those for the nation as a whole, however. About one in five U.S. banks were unprofitable last year, driven by losses in states most heavily hit by the decline in housing values.

Among 36 banks with Greater Des Moines operations for which data was available, nine of them reported net losses, though the majority of them, 75 percent, recorded a net profit for the quarter. For the quarter, 12 of the banks recorded a decline in earnings compared with their third-quarter results. (See chart.)

“Certainly, there are a number of them that took some pretty big loan-loss provisions,” Gronstal said after glancing at the Greater Des Moines banks’ data. “That’s what drives most of these loss figures. I think they were trying to recognize all the losses they could, to try to get it cleaned up so they could move forward this year and not have much more losses.

“But obviously, from all the stories we heard last year, we know that the banks that were involved in real estate development and construction, when that all dried up last year, it really caused some problems for them. So they’re recognizing those losses and are trying to make sure they’ve got all that taken care of.”

Among the banks with significant losses was Community State Bank in Ankeny, which had a net loss of $4.2 million in the fourth quarter. The bank charged off $13.4 million in loans and leases last quarter and added $14.4 million to its provision for loan and lease losses, primarily for defaulted commercial real estate loans to several companies that were owned by the late Ed Boesen and on loans to the defunct Regency companies.

“It was definitely a tough year, no doubt about that,” said Mark Degner, Community State Bank’s president and CEO. “Most of our losses were related to the Boesen and Regency relationships. Our fourth-quarter write-off was due to falling real estate values on the Boesen properties we took back, in particular, valuations of the Midland Building.”

Without the Regency and Boesen write-offs, “we would have been very profitable,” Degner said, adding that the bank “remains in good financial position with strong capital; we look forward to better times ahead.”

Among Iowa banks, provisions for losses on loans and leases, the amount that banks added to their loan loss reserves for possible bad debt, ballooned to $186 million in 2008, up from $71 million at year-end 2007.

Matt Marsh, an executive vice president at Iowa State Bank in Des Moines, said he and his colleagues generally weren’t surprised by the downturn in 2008.

However, “the thing that was surprising was the depth of the downturn with respect to business, and the dramatic speed at which it affected certain segments of the economy,” he said. Iowa State Bank finished 2008 with fourth-quarter earnings of $3.6 million, following a weak third quarter with just $756,000 in net income.

Demand for business lending has slowed due to weak consumer spending, Marsh said. “In general, it’s limited expansion plans for new hiring, equipment purchases and the need for new space,” he said.

However, lower interest rates have recently created a small uptick in mortgage lending. “We are seeing some refinances and some new purchases,” he said. “I don’t know if you’d call it a bright spot, but we are seeing some optimism.”

Gronstal said many Iowa banks’ safety and soundness ratings have eroded over the past year, as measured by their CAMELS ratings, which assess financial strength based on capital, assets, management, earnings, liquidity and sensitivity to market risk. The majority of banks still carry composite ratings of 1 or 2, which are the two highest on a scale from 1 to 5.

“We’ve seen a lot of component ratings drop, and several composites drop,” he said. “I think we now have 15 or 16 banks that are rated 3 or worse. That’s probably up seven or eight from last spring. But it’s still a relatively low number.”

Gronstal said the direction of the economy will largely determine whether Iowa banks will face additional losses this year.

“I can’t predict that all of those institutions won’t continue to have losses, because none of us can predict what’s going to happen in this economy,” he said. “If the banks got the losses they knew about charged off in 2008 and that’s resulted in only about 6.25 percent of banks (being) unprofitable, we’ll come out of this pretty well. If there is a lot more losses to come, it’s going to be a different story. A lot of it just depends on the economy and a lot of things that are beyond our control.”