What's in Store for Regional Banks?

Jan. 05, 2009 7:43 AM ET6 Comments
Ira Artman profile picture
Ira Artman

As we begin a year that I hope will be more benign than ‘08, let’s look at the past and possible future of community savings banks similar to those profiled in my prior piece – How The Fed’s Rate Cut Could Hurt America’s Small Banks. Specifically, community banks located near the Big Apple, “ground zero” for the 2008 financial crisis.

This piece will:

  1. Summarize typical operating aspects of well-run community banks in the NY Metro area;
  2. Highlight specific credit metrics demonstrating that not even the best-managed community bank can sidestep local economic difficulties;
  3. Develop a simple model of these metrics; and
  4. Calculate how the credit of NY Metro area community banks could continue to deteriorate if a prominent macro forecast is realized.


Community banks tend to keep their mortgage businesses simple. Many focus their origination efforts on straightforward loans from a much simpler era. In the NY Metro region, the product of choice is the good old 30-year fixed rate fully amortizing loan, with either a conforming or a non-conforming balance.

Community banks such as those described in Washington Monthly’s "Too Small To Fail" frequently review mortgage loans by hand, ignore backward-looking FICO scores, and emphasize their personal familiarity with the borrower in their underwriting process. Many, such as the tiny (about $100 million in assets) and closely held savings bank where I obtained my mortgage, generally retain all of their loans on balance sheet rather than sell them off into the secondary market.

Due to the high home prices found throughout the NY Metro region – even today - conservative community banks in the shadow of Wall Street will find that non-conforming loans make up more than half of their portfolio. However, their delinquency and foreclosure rates are typically 50% lower than the national average.

This article was written by

Ira Artman profile picture
Ira Artman (http://www.linkedin.com/in/iraartman) has held quantitative analytical and whole loan trading positions in Mortgage and Structured Finance at JP Morgan Chase, Chase Manhattan, Security Pacific, and City Federal Savings. A graduate of Brown University and MIT’s Sloan School, Mr. Artman resides in New Jersey. He now writes the Sterling Slivers (http://mortgagenewsclips.com/category/ira-artman/) Mortgage Finance/Housing Blog at MortgageNewsClips.com. His writings focus on home prices, mortgage finance, and macro policy. Mr. Artman's views are his own. If you’d like to discuss this post with Ira Artman or contact him, his email address ibartman@inbox.com (mailto:ibartman@inbox.com) .

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