It was only a few months ago that Kirk Bailey, chairman, president and CEO of Memphis-based Magna Bank, told shareholders the previous year had been nothing short of cataclysmic for the financial industry.

At Magna Bank, however, that outlook now seems mostly confined to the rearview mirror.

The bank’s net income in the third quarter saw a big improvement compared to the same period last year, and the bank is socking away less money to cover problems in its loan portfolio. Magna’s results for the quarter also show an improvement in its number of loans that are in default or close to it.

Magna’s net income for the period between July and September was $1.3 million compared to a loss of $1.9 million during the same period last year. Year to date, the bank’s net income is almost $3 million compared to a net loss of $1.6 million in 2008.

Repositioning in tight spots

Selling off its one bank branch outside Memphis plucked $35 million in loans off the company’s books, allowing Magna to build a smaller cushion to protect against soured loans. Magna sold its Brentwood branch to Brentwood, Tenn.-based Reliant Bank, a transaction that closed in the third quarter for an undisclosed sum.

Magna built a $46,211 provision for loan losses in the third quarter, a sharp decrease from the nearly $516,000 loan loss provision in Q3 2008. Year to date, the bank’s loan loss provision is just shy of $861,000, compared to $1.4 million for all of 2008.That pattern has been the exception rather than the rule of late, at least as far as local financial institutions are concerned.

At Mississippi-based banks Cadence and Renasant, which have a handful of branches in the Memphis area, loan loss provisions more than doubled in the third quarter compared to the same period last year.

When those provisions are on the rise, it eats into a bank’s earnings, which in turn postpones the return of stability to the industry. Building a larger buffer also says something about how a bank regards the continued ability of its customers to keep from buckling under pressure from the lingering recession.

“The recession, which began in the first quarter of 2008, continued into the third quarter of 2009, making it one of the longest and deepest recessions since the Great Depression of 1929,” Magna wrote in its Form 10-Q, a regulatory filing released this month summarizing its earnings for the quarter. “Unemployment reached 9.8 percent of the work force for the month ended September 2009, and exceeded 10 percent in October 2009. Economists estimate the actual unemployment rate could be as high as 17 percent.

“Consensus forecasts of leading economists indicate the economic recovery will be slow to materialize. Bank failures totaled 98 for the year-to-date period, and the number of ‘problem’ institutions on the FDIC’s unpublished watch list reached 416, meaning many more failures are likely before conditions improve.”

A swim upstream

Magna, the third-largest bank based in Memphis, turned 10 years old this year, and its executives talk often about building the organization into one of the area’s dominant community banks. Bailey was not immediately available for comment to discuss the most recent earnings results.

At Magna’s annual shareholders meeting this summer, Bailey told an audience of shareholders and bank executives that 2008 unfolded into the most difficult operating environment he’s seen in 30 years. He said the bank has noticed three groups of borrowers appearing to struggle more than others: homeowners, homebuilders and land developers.

One Magna executive told The Daily News in January her assessment of what the general mood of the industry is can be summed up by the phrase “Thank God it’s over,” referring to the just-ended 2008.

Government assist

Magna’s residential banking segment has seen a strong 2009 so far, including a healthy third quarter. Production totals for the quarter were up 5.3 percent compared to Q3 2008, and year-over-year volume from 2008 to 2009 is up 31.1 percent.

Bank officials expect that trend to continue because of the relatively favorable mortgage rate environment and the extension and expansion of federal homebuyer tax credits.

Magna’s commercial real estate mortgage banking group had no origination activity in the third quarter and $10.5 million for 2009 through Sept. 30. In 2008, the commercial group likewise had no originations in the third quarter and $74.8 million in the same year-to-date period, according to the banks’ 10-Q.