50 Small to Midsize Banks Could Fail Next Year

Analysts estimate that 50 out of the nation’s 7,500 small and midsize banks will fail in the next 12 to 18 month, due to defaults on commercial real estate loans. The best quote in this NYT article comes from Timothy W. Long, head of supervision for midsize and community banks at the office of the comptroller, “I would tell you a lot of bankers out there have never had a loan charged off…The last time we went through this, the loan officers were in junior high.”

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  1. elijah_dukes_mayonnaise says:

    Whee doggy…. Where’s Milburn Drysdale when you need him?

  2. azntg says:

    Those who don’t learn from history… are doomed to repeat it! Nobody’s exempt from this, unfortunately.

  3. ratnerstar says:

    Small banks, huh? Good thing I use Bank of America! Wait … what?

  4. I smell a Bank Run.

  5. Snorbert says:

    I heard Bailey Building and Loan is in trouble.

  6. Steve Trachsel, Ace says:

    @CreativeLinks: We are gonna see the big boys swallow up the assets and accounts of the smaller banks. We already saw this with the smaller non-FSB lenders.

  7. mac-phisto says:

    that’s a high projection – 50 banks? i doubt it. i would imagine that’s a worst-case scenario. a few bad commercial loans won’t tank a bank, but they can strain a bank’s profitability.

    the bean counters are primarily concerned with proportions – if a bank’s ROI drops significantly over a year (a few million in charge-offs can do that), all kinds of bells go off at the banking department, but it doesn’t mean the bank is insolvent.

  8. ellis-wyatt says:

    About 25 years ago, banks decided to move away from the fundamentals of banking: functional, practical products and services that met the needs of their customers; quality customer service provided by knowledgeable bank employees; credit analysis and risk assessment of loan applications of all kinds done by qualified loan officers and credit managers; sound management provided by seasoned senior managers and qualified directors who had worked in the business their entire careers.

    Banks lost touch with the fact that they are a customer service oriented “people” business. Instead, they have become a “retail” business; they decided to become sales-driven and fee income-based retailers. It shows in the products and services they offer and the mediums by which they offer them, their credit decisions, their commission-based employee compensation structures, their centralized back room operations and so on. Whether they suffer enough pain in the coming years to recognize that and make the necessary changes remains to be seen.

  9. kinamoto says:

    Old man Potter’s giving fifty cents on the dollar.

  10. ShortBus says:

    @ellis-wyatt: I wholeheartedly agree with you; I’ve seen it first hand.

    I was recently part of a team that was charged with completely reimplementing the website of a large credit union. The goal was to “realign” their website to coincide with their new way of running their business. I was part of meetings with executive management who explained pretty much what you just said–the banking industry has changed significantly in the past decade or so.

    I almost laughed out loud when I read your comment because time and time again, they wanted to be certain they were perceived as a friendly “people place”. That stodgy office, mahogany-desk, three-piece suit image is *so* last century. I have a feeling that air feel out of favor right about the time that people started to forget about the S&L debacle and “stability” stopped being something people cared much about in a bank.

  11. NoWin says:

    @ellis-wyatt: ..”It shows in the products and services they offer and the mediums by which they offer them, their credit decisions, their commission-based employee compensation structures, their centralized back room operations and so on.”

    I agree with you “in general”. Here’s the problem, the average consumer WANTS us (I work for a mid-size bank) to do everything for them (offer this, gimmee that, loan for this, loan me that) and yet still except the bank to do if for free. As the perception of what our product (aka money) is changes, and what customers want to do with that product in the marketplace, banks merely adapted to reflect the needs and wants of the customer. (And don’t ask about the levels check fraud….)

    I long for the days of customers that wanted a safe and secure bank, and not “how many ATMs can I use for free” and “I need a branch at every corner open 28 hours each day”.

    It’s a 2 way street; the consumers do bear a bit of responsibility too.

    Some banks changed more liberally than others. Larger banks can offer more frills and services, all the while cutting out the local banks from fairly competing for the depositor dollar.

    Smaller banks that had a captive market in small towns where the big-boys didn’t want to invest probably have better portfolios, as they never re-sold their loans. This is why the BofA’s are getting hammered as they bought so much real-estate paper in the unregulated “mortgage broker” and “independant lender” market.

  12. NoWin says:

    @NoWin: bad grammer day:

    (And don’t ask about the levels check fraud….) should be

    (And don’t ask about the levels of check fraud….)

  13. StevieD says:

    Can you say bank consolidation?

  14. StevieD says:

    I bank with a midsized bank. My business mortgage is with the bank. The bank handles all of my corporate accounts, so I am a sizable customer.

    I have had a scheduled meeting with bank officers last year and during the meeting they updated me on an stockholder lawsuit that had been filed to force the bank to invest excessive reserves into high profit (riskier) investments. The judge finally dismissed the lawsuit. Good thing. Because then the housing mortgage crisis hit the news. The bank issued a press release about their exposure (lack there of) with those types of loans. A bit of haha we told you so.

    There is the problem. Stockholders want big returns. The pressure is on the banking officials to deliver. And then shitzky hits the fan. Smart banks are going to be safe. Banks that failed to practice safe banking (a bit like not practicing safe sex) are going to be exposed and have to pay for the next 18 years for their mistakes.

    The is a very small local bank that has a safe banking risk issue. The results of the pregnancy test are not in yet but the local newspaper says the bank is already buying baby clothes (seeking out a buyer).

  15. stinerman says:

    @ellis-wyatt:
    Take a look at your local credit union for those things. While some have went the same way as those banks, others are still working to put the member/owner first.

  16. picantel says:

    I blame this entire thing on the greed of gas companies. If they were not gouging everything and everybody the economy would be in a hell of alot better shape than it is now. It has trickled down from food prices to airline tickets to even mortgage rates. I hope that 9th mansion was worth it.

  17. AD8BC says:

    I have used two banks over the years that have offered me fee-free checking (ok, so it was interest-free too), with fee-free ATMs (and they eat the cost of foreign ATM fees).

    And I highly recommend them: Macatawa Bank in West Michigan, and Bank of Texas in Texas (owned by Bank of Oklahoma in, well, Oklahoma).

    I hope their excellent customer service hasn’t eaten into their profits that much… I hope they are still around in a few years and don’t sell out. Bank of Texas just bought Worth National Bank, so they must be doing OK.

  18. ellis-wyatt says:

    @stinerman:
    I realize that many credit unions still provide some “old fashioned” banking services but they are a small part of the banking industry, using the term “banking” generically. I was trying to make the point that banks as a whole lost their way when they became sales-oriented and that’s why they’re in the mess today that they are in. Also, credit unions are tax exempt entities so they get to play by different rules – they can offer higher deposit rates, lower loan rates, better staffed and trained offices, etc. because of the money they save in taxes. Banks hate them because of that and have been trying for years in DC to get that tax-exempt status stripped from the credit unions. There are also regulatory differences.

    @NoWin:
    In my view, banks created the monster of customer demands. Banks wanted customers out of their “brick and mortar” buildings to reduce their overhead costs and improve their bottom line so they introduced the ATM and the concept of 24 hour/day banking. Then they gave us the 800 number and said not only can you bank 24 hours/day but you can do so from home on your phone. Then they gave us on-line banking and said you can do even more at-home banking with a computer and an internet connection. But they didn’t allow for the fact that customers still want service and answers to questions that only knowledgeable people can provide. ATMs and on-line banking can’t do that, and 800 numbers do little besides tick people off because of hold times and when you do reach someone, they often don’t have the expertise or desire to provide the service requested by the customer. People have now come to expect the bank to be available to them for these things 24/7 as well. Banks went “retail” and people see other retailers open extended hours and open 7 days/week so they expect that from their bank as well.

  19. mac-phisto says:

    @StevieD:

    I have had a scheduled meeting with bank officers last year and during the meeting they updated me on an stockholder lawsuit that had been filed to force the bank to invest excessive reserves into high profit (riskier) investments.

    hobson’s choice. killer for small banks. they’re lucky they made the case go away. typically, a small bank with a good portfolio is chum for the sharks. it’s not unheard of for “unofficial” (read illegal) shareholder groups to force small banks into a merger at a 3 to 1 payout (or higher).

    @ellis-wyatt:

    Also, credit unions are tax exempt entities so they get to play by different rules – they can offer higher deposit rates, lower loan rates, better staffed and trained offices, etc. because of the money they save in taxes.

    get real. money saved in taxes? do you know what credit unions sacrifice for not paying taxes? generating capital. a bank can take $1 million, turn it into 3 & pay taxes on less than 30% of the profit generated from that money. a credit union can take that $1 million & invest it at a return of ~10%. you tell me who wins.

    your points are close enough that i’ll agree with most of what you have to say, but they are slightly misguided.

  20. swalve says:

    Banks fail all the time. 50 in a year is one per state. That’s pretty much average.

    That’s why we have the FDIC, so there isn’t a run on the banks. Among other things.

    Anyway, aren’t we all supposed to be maxxed out on our credit cards? We don’t have any assets to take out of the bank…

  21. Mr.Purple says:

    Does this mean Commerce Bank is going to fail?

  22. ellis-wyatt says:

    @mac-phisto: Here’s some suggested reading for you regarding credit unions, their tax exempt status and its impact. Here’s a link to the American Bankers Association web page to a report called “The Morphing of Credit Unions”. [www.aba.com] Pay particular attention the blue box on page 7 entitled “How the Tax Exemption Boosts Credit Unions’ Growth”. Page 11 of the same report says “The tax advantage also provides credit unions a very large pricing advantage …” and “…credit unions are enabled to offer a 67 basis point advantage in deposit pricing and loan pricing over banks as a direct result of the fact that credit unions do not pay state or federal taxes. In a highly competitive industry, the sixty-seven basis point government subsidy is substantial.”
    Thanks for the “lesson” but it appears it’s your understanding of the tax exempt status that credit unions enjoy that is misguided. Read “The Morphing of Credit Unions” and then tell me what you think.

  23. KJones says:

    It’s not just banks that could face a meltdown by 2010. The gold market is going to explode as well. Here’s the thing:

    Laws were written allowing banks to borrow gold and then sell the gold. That means a lot of gold only exists on paper is on the market, and when banks are in trouble, investors buy gold. Gold will either go through the roof when the fraud is discovered (US$3000+ per ounce) or owners will have to write it off and take huge losses (under US$300).

    Either way, the US’s pyramid scheme that is the US investment industry is going to erupt sooner or later.

  24. mac-phisto says:

    @ellis-wyatt: that’s some good material. entirely one-sided & it completely ignores fact, but it supports your position well (in that it’s total bullshit).

    -largest credit union in america: navy fcu with assets of $33,039,482,370.
    -largest bank in america: jp morgan chase with assets of $1,318,888,000,000.

    in fact, utilizing that second link, you can see that navy fcu would be ranked #40 among the largest banks. explain to me again how they are perceived as a threat? oh, that’s right – b/c they provide greater shareholder value by offering “…higher deposit rates, lower loan rates, better staffed and trained offices, etc…” (to use your words).

    let’s talk about the real threat to america’s hometown banks:

    here’s an frb report on bank mergers & acquisitions from 1980-1998 (sorry i couldn’t find any data more recent on such short notice). please take note of table 8 (page 18) – particularly columns 1-5. note how 6,825 of the total 7,985 acquired banks during this time period (roughly 85%) were small to mid-sized banks (assets under 200 million). now take note of table 9 which shows that 5,547 of the total acquisitions (or 69%) were by large banks (assets over 200 million).

    you can flip to the next page for more exciting news: take note of table 11 which shows that the majority of banking mergers between 1980-1998 are not of the horizontal type – they are market extensions for the acquiring bank. what does this all mean?

    LARGE BANKS ARE PREYING ON SMALL COMMUNITY BANKS TO EXTEND THEIR MARKET & INCREASE THEIR SIZE.

    THAT is why the ABA hates credit unions. you can’t buy a credit union. every community bank represents an opportunity for chase, or bank of america, or wachovia to expand their marketplace. & every credit union location represents a financial institution that they can’t own.

    but i digress. i actually agree that the feds should look into taxing credit union’s undivided earnings AND ONLY THEIR UNDIVIDED EARNINGS. this would actually increase credit unions’ shareholder value & discourage them from pocketing war chests to work towards charter conversion.

    i also think we should break the paradigm of bank vs. credit union & instead recognize the truth for what it is: small & mid-sized banks have more in common with small & mid-sized credit unions than they have in common with large-sized banks. they should be working together to secure their territory from the poaching of megabanks & working to enact laws that limit the size & scope of both large credit unions AND large banks. it’s these corporations that are the real danger – to competition, consumers & the american economy as a whole.

  25. mac-phisto says:

    @mac-phisto: sorry. crappy link for that frb report. this one should work:
    [www.federalreserve.gov]

  26. rhombopteryx says:

    @swalve:

    That’s pretty much average.

    That’s what I thought at first too, but apparently not. As TOA sez:

    During the last four years, just four United States banks have failed.

    So that’s around 50x average.
    Ooops…

  27. swalve says:

    Try over the last 10-25-50-100 years. And does that number include banks that were going to fail but were acquired before it went down?