The Crisis in Community Banks Continues

By Alex Parets

On Friday afternoon, just like every Friday afternoon, the FDIC announced which banks it was in the process of closing and who would be taking over the seized bank's assets. The announcement always comes on Friday afternoon after the institutions have closed so that the FDIC and the new owners have enough time over the weekend to transfer all information and accounts, keep business disruptions to a minimum and prevent panicked customers (who aren't aware of the FDIC's insurance policy) from running to the bank to try to withdraw their funds. So far this year, every Friday has been met with an FDIC announcement and 106 banks have been closed, the most since 181 were closed in 1992.

Earlier on Friday evening the dubious honor of the 100th failure went to Partners Bank, of Naples, Fla., which had $65.5 million in assets, according to the Federal Deposit Insurance Corp. The 101st failure was American United Bank, of Lawrenceville, Ga., which had $111 million in assets. The 102nd failure was another Naples, Fla., institution: Hillcrest Bank Florida, which had $83 million in assets. The 103rd closure was Bradenton, Fla.-based Flagship National Bank, with $190 million in assets. The 104th was Bank of Elmwood, based in Racine, Wis., which had $327.4 million in assets. The 105th failure was Riverview Community Bank of Otsego, Minn., with $108 million in assets. The 106th failure was First Dupage Bank in Westmont, Ill., which had $279 million in assets.

An average of 10 banks have failed per month this year, and the federal coffer is thinning under the massive strain. The fund now stands at $7.5 billion, down significantly from $45 billion a year ago.

When the FDIC factors in expected closures, the agency says the fund is in the red and will likely remain there through 2012. Bank failure costs are expected to total $100 billion over the next four years, leaving regulators strapped for cash.

The news cycle and the attention of politicians and citizens alike are always fixated on the troubles at major national and international banks during recessions. However, the most overlooked aspect of the recession has been the effect of the crisis on community banking. Most people rely on state-chartered community banks for most of their borrowing needs, whether it be small business loans to cover payroll or expansion, car loans, or construction loans for commercial and residential properties.

To say that the community banks in this country are struggling is a severe understatement.

While larger financial institutions received aid from the federal government, smaller banks have found themselves left adrift. Like their larger counterparts, many of these banks made risky loans to individuals and real estate developers during the boom years and are now facing large numbers of defaults as the recession drags on.

Rising unemployment has made it difficult for many individuals to keep up with expenses, and businesses are feeling the crunch of consumers' reduced spending power. As a result, regional banks are left holding loans their customers can't repay.

Florida's community banks have been some of the hardest hit as real estate prices have nosedived and the bubble in the local housing markets popped. Many of these community banks got involved in investments that haven't performed very well and were lending to customers that had no business getting approved for loans. Driving around Miami this week it's incredible how many construction projects were started last year and are now just sitting and waiting to be finished. Also shocking are the dozens of high-rise condos built in the downtown area from 2003-2008 that now sit mostly empty, many funded by community banks.

Many more community banks will go under over the next 6-12 months, especially considering that unemployment rates will continue to rise making it harder for people to keep up with their loan payments and the fact that the FDIC's list of "problem banks" now stands at over 400, the highest level in 15 years. Times are tough for local bankers and just as hard for those locals trying to secure a loan from their community banks.

Comments

[Jasper M:]

"So far this year, every Friday has been met with an FDIC announcement . . ."
Um, didn't they skip one, recently, right at the change of the quarter?

Also, I wonder how much of this is a generalization that is not geographically justified. A recent map of bank failures since start of, I think it was 2008 showed pretty profound concentration, and none at all in big chunks of the country.
While I grant that things are apt to get Much worse before they get better, and the fact that the FDIC keeps its "problem list" as something of a secret compels prudent folk to err on the side of caution, I imagine more conservatively run community banks are going to do relatively well. And there appear to be whole regions of the country where such conservative stewardship is the norm. I live in one - my state has not had one failure yet.

Oct 26 02:57 AM

[Michael Clark:]

I wonder if even the most conservative banks can withstand economy-related contraction. It depends how deep the deep-recession is. A lot of housing loans were based on two-income families; if one of those incomes is lost, the conservative loan begins to look toxic.


On Oct 26 02:57 AM Jasper M wrote:

> "So far this year, every Friday has been met with an FDIC announcement
> . . ."
> Um, didn't they skip one, recently, right at the change of the quarter?
>
>
> Also, I wonder how much of this is a generalization that is not geographically
> justified. A recent map of bank failures since start of, I think
> it was 2008 showed pretty profound concentration, and none at all
> in big chunks of the country.
> While I grant that things are apt to get Much worse before they get
> better, and the fact that the FDIC keeps its "problem list" as something
> of a secret compels prudent folk to err on the side of caution, I
> imagine more conservatively run community banks are going to do relatively
> well. And there appear to be whole regions of the country where such
> conservative stewardship is the norm. I live in one - my state has
> not had one failure yet.

Oct 26 03:24 AM

[ctjaeger:]

Michael, it is true that the broader economic collapse will bring some conservatively run institutions to their knees. While this may bring some disruption to certain, heretofore, unblemished areas, the breadth of failures should be less than in other "go-go" markets. Many of the more conservatively run institutions are located in fairly conservative regions of the US. Thus, the likelihood of massive portfolio deterioration is lessened as borrowers tended to take on a reasonable amount of debt and lenders tended to make only a reasonable amount of credit available.

There will be defaults and problems, however, they should be much lower than in other areas of the country.

Oct 26 10:05 AM