Banking and economic trends in Putnam County, Tennessee

with Roger Sorensen
Special to The Putnam Pit

The purpose of this paper is to determine the financial trends and economic status of Putnam County, Tennessee, and namely the county seat of Cookeville, to determine the economic and banking trends within the county. Putnam County, which is bisected by Interstate 40, is approximately 70 miles east of Nashville, and approximately 90 miles west of Knoxville. From a point of view of demographics, it has a normal distribution of population within the county, meaning that the distribution of population within age groups is similar to most cities its size in the United States.

The market base for banking is fairly small, with approximately 60,000 residents within Putnam County; and approximately 25,000 living in Cookeville.

Our approach to doing this study was to look at any involvement by means of the legally established banking community. In our study of banking, we have attempted to isolate banking management and lending practices in such a manner that would point to any economic inconsistencies and illicit banking practices within Putnam County, Tennessee. A financial analysis of the banks will include a review of assets, liabilities and allocations of funds within the institutions. This information would provide analysis and information for further use in investigating large deposits or unusual trends that may imply some type of mismanagement within the institution or by shareholders, officers, directors or clients of the banks.

We have looked at economic data and trends not only for Putnam County, but also for Tennessee as a whole; and Tennessee's economic relationship within the Southeastern United States. Banking and economic data has been compiled by means of internet searches through the web pages for the State of Tennessee, specifically the Tennessee Department of Financial Institutions and the Tennessee Division of Economic Development; the Federal Depository Insurance Corporation, (FDIC); the Federal Reserve Bank of Atlanta.

For information regarding bank holding companies and specific breakdowns of deposits within the various banks, information was obtained from the FDIC's website, utilizing the FDIC Bank Data Institution Directory. This Institutional Directory provides a means to research complete financial and demographic data by bank and bank holding company.

The State of Tennessee Department of Financial Institutions utilizes the materials compiled by the FDIC in their regulation of the state-chartered banking entities. It compiles no information on it's own, but relies solely on the FDIC for all banking data. Only upon inspection of FDIC Call Reports will the state agency conduct an audit or investigation into banking activities. FDIC Call Reports are published and made available to state regulatory agencies on a quarterly basis.

Within the state of Tennessee, the Federal Reserve Bank of Atlanta oversees national banks and bank holding companies for central and eastern Tennessee. Advice on banking research was provided by the Nashville branch of the Federal Reserve. (Western Tennessee is served by the Federal Reserve Bank of St. Louis, through the Memphis branch of that Reserve member bank).

In looking for a correlation between population base, per capita income and the number of State-Chartered Banks within various states; we utilized the home pages for a majority of the states within the U.S., by utilizing state population and demographic studies, as well as the respective Departments of Financial Institutions. For comparisons of population and demographic data, we also referred to the 1997 Statistical Analysis of the United States, which is compiled on an annual basis.

In compiling a table of state populations, per capita income and the number of state-chartered banks within various states picked at random, we sought to determine whether a correlation, either positive or negative, existed. State-chartered banks are a more succinct indicator of wealth within local and regional markets.

As a result of efficiencies gained in the capital markets, and an increase in the availability of debt and equity capital in both the national and international investment and financing communities; nationally-chartered banks are not an accurate indicator of local, state or regional wealth. The ability of financial intermediaries, such as banks, mutual and stock savings banks, insurance companies, trust companies and investment banking firms to fund their expansions through public and private issues of equity and debt instruments; far overshadow the limited capital base through which community banks avail themselves to.

The majority of state-chartered banks are owned and managed by local investors. Institutional investment and involvement is virtually non-existent. Prominent members of the local community serve as members of the board of directors.

A brief summary of banking in the State of Tennessee Department of Financial Institutions web presents an introduction to the state's banking environment. At year-end 1998, the Department supervised and regulated 191 state-chartered banks, as well as 155 credit unions. In addition, the department has responsibility for regulating 1091 industrial loan and thrift offices, 82 insurance premium finance companies, 1089 mortgage companies, 166 check cashers, 679 deferred presentment services companies and 32 money transmitters. The department has legal responsibility for assuring the Tennessee banking system runs on a safe and sound basis. In its supervisory role, the department periodically examines financial soundness of each financial institution it regulates. In addition, consumers' complaints involving Financial Institutions are handled by the department.

After a decade of consolidating mergers and acquisitions within the banking community, Tennessee has more state-chartered banks (191) per capita than any other state in the United States. The number of state banks has decreased for the period of 1987-1997, with a reduction of 15%; from 228 to 191. We took a random sample of thirteen (13) states and ran a correlation to determine whether population or per capita income affected the number of state-chartered institutions.

While there are nine banks that operate 20 branches within Cookeville, only one bank, The Bank of Putnam County, is headquartered there. B.P.C., the bank holding company that own the Bank of Putnam County, also owns Cumberland County Bank, which is based in Crossville, the county seat of Cumberland Country, which is to the east of Putnam County. (For purposes of this report, the Bank of Putnam County will be referred to as BPC).

In reviewing the financial statements of the Bank of Putnam County, some interesting information was discovered. None of them point to blatant abuse or signify illegal activities, but they point to a strong lack of lending and portfolio management inefficiencies and underdeployment of assets. Based upon information obtained from the Tennessee Department of Financial Institutions Annual Report for 1997, BPC was compared with the statistical averages for Tennessee State-Chartered banks, and those National Banks operating within Tennessee. Return on assets is about one half of the national average for smaller banks. (By definition, smaller banks are those with assets less than $150 million in total assets. BPC Corporation has approximately $252 million in total assets within the two bank holding companies).

Profitability for banks is based upon two basic principles, leverage of assets and lending margins. Leverage of assets means that for every dollar of core capital, "x" number of dollars represents total assets. In the case of the Bank of Putnam County, leverage is 5.991:1.00; or for every dollar of equity in core capital, there is $5.991 in total assets. National banks operating within Tennessee have a leverage ratio of 11.27:1.00. As a result of this underleverage of assets, bank profitability is substantially lower. Bank profitability for the Bank of Putnam County is 32.5% lower than that of national banks, and 19.9% lower that the average for other state-chartered banks. (See Exhibit "B")

The loan to deposit ratio indicates that assets are not efficiently used. For every dollar on deposit at BPC, only 64.2 cents is in the community as an outstanding loan. Barely half of the total assets, 53.244% represent the bank's loan portfolio. This indicates that a considerable portion of the core assets are held as deposits, and not placed into service as revenue-producing loans. Net profit margins on deposits are minimized when not placed for their highest possible use. Placing these funds into commercial lending and small business lending could produce returns of nine to ten percent, as opposed to placing these interim funds into treasury and money market operations. Banks can invest in the capital markets and produce nominal returns. It appears as though this is what BPC has been doing.

This poor banking practice is akin to owning commercial property next to the Edwards' Cinema in Boise, and keeping an old small duplex for income.

Another indication of poor banking management is reflected in the schedule of Other Real Estate Owned. OREO's, as they are known, are the properties foreclosed by the bank. From 1997 to 1998, the number of foreclosed properties increased from 51 to 170. Of these properties, the number of single family homes increased from 24 to 143, an increase of 495%. This phenomenal number says that the bank made poor loans, and did not anticipate any loan problems. Loan loss provision increased by only 6.3%, meaning that the bank did not set aside funds to cover loan losses. Tax regulations allow banks to set aside a small fund (less than five percent of total income) as a safeguard to compensate for bad debts. It is clearly apparent that the bank was making poor loan decisions, and didn't prepare for the fall out of those non-performing loans. (Refer to Exhibit "B")

Based on Ms. Bennett's 12 years and Roger Sorensen's 20 years banking experience, the following is their estimate of the situation. The performance of BPC strongly indicates that this bank is not owned or operated with the basic economic goal of profitability and return on investment in mind. It appears to be a place where good old boys hold deposits for their rich friends, and clean dirty money by temporarily holding assets in CD and short term financial instruments and securities. A mere twelve percent of the securities held are being held to maturity, which indicates that investments assets are not earning what they could if held to maturity, and are not staying on the books for significant periods of time. Of the bank's securities portfolio, an amazing 87.977% is available for sale. This represents an increase of 54.32% for securities available for sale over the previous year.

In addition, of the total deposits held by the bank, slightly less than eighteen percent of the total deposits, or $26.228 million are in Certificates of Deposit of $100,000 or more. Based upon all deposits in Putnam County, there is $13,696.40 in deposits per capita for each and every one of the 59,143 residents of Putnam County, totaling approximately $810, 046,000 in verifiable deposits. Based upon the entire population of 25,224 in Cookeville, that means there is $32,114.10 on deposit for every body in town. (See Exhibit "C")

That's pretty good for a state with an average income of only $22,752! Even though it's approximately three hundred miles to either the Atlantic Ocean, or the Gulf of Mexico, something in Cookeville smells pretty fishy.

One prominent family name shows up on the records of officers and directors for the Bank of Putnam County. Serving as the Chairman of the Board and as a member of the Board of Directors is Jack Ray. Elizabeth Ray-Hitchock serves as Human Resources director and Marketing Director, and also as a member of the Board of Directors. It appears that the significant other in Elizabeth's life, Rex Hitchcock, is a Real Estate Appraiser and a member of the Board of Directors as well. And to round out the Ray family affiliation is W.T. Ray, Jr. is also a member of the Board of Directors. Members of the Ray family serve as four of the eleven members of the Board of Directors; sufficient enough to stack the deck in any direction they so choose. It would normally be questionable for four of eleven board members to be from the same family. It would also be unusual for one of the board members to be an appraiser. In most situations this would be considered a conflict of interest.

As an amazing coincidence, one of Jack Ray's sons committed suicide a number of years ago, shortly after the death of Darlene Eldridge. He was soon to become a father, and was scheduled to wed his love interest, and also inherit a substantial sum of money. Some members of the community don't believe he actually hung himself, but rather that somebody else assisted with his death.

Greatly similar to the mysterious passing of young Mister Ray, the state of banking in Cookeville is unfortunately dead on arrival. One word of advice, to quote Hetty Green, an infamous banker of the late 1800's, "don't do business with that bank, those men dress too well."

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