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Are Community Banks In Major Trouble?

By Marc Tracy

No one--but no one--is a bigger booster of the community banks than BizBox. (Look at all we've written up about them!) These small (under $1 billion in assets), locally focused financial institutions tend to understand their, well, communities better than the big banks do; they also tended to be wiser over the past several years while the big banks got drunk on toxic securities. Consequently, they are the ones who are doing their best to extend credit to deserving small businesses, and they are probably the ones you should look to. Plus, they themselves are frequently small businesses! For us, these guys are the home team.

We welcome all further confirmations of our beliefs, and Inc.com provided a solid one recently, pointing out that fully half of all small business loans under $100,000 are made by small banks, and quoting the National Federation of Independent Business's chief economist thusly: "If you're borrowing from a mega-bank, you probably can't get the loan, because they have a cookie-cutter model."

So imagine our shock--and sort of terror--upon reading, via The New Entrepreneur, that many community banks may be up to their necks in failed commercial real estate loans, and are in danger of going under.

Now, as we reported months ago, it has been long and widely known that many community banks were unusually loaded up on Fannie Mae and Freddie Mac preferred shares--which, needless to say, did not do so well after those two government-sponsored entities were renationalized. However, as a part of the broader bank bailout, the government decided to allow losses on such shares to count as business rather than capital losses, thereby theoretically saving the banks (and other shareholders) a whole bundle.

But this news about the commercial real estate loans is new to us, and it is indeed disheartening--an estimated 200 to 300 community banks may close as a result of this phenomenon, according to ProPublica.

Additionally, Small Business Trends reports on a new study that found a long-term trend towards fewer small banks, and small banks that are smaller. Specifically: over the past fifteen years, the number of banks with under $100 million in assets shrank from over 8,000 to under 3,000. And the remaining small banks' deposits are going away fast, with the country's top five banks now holding nearly 40% of total deposits.

The other reason to believe community banks may shrink further is the way the bank bailout has--somewhat perversely, we'd add--shifted even more capital and power to the country's biggest banks. The community bank, well, community has been veritably traumatized by what happened in October, when large bank PNC, flush with $7.7 billion in newly acquired taxpayer money, bought Cleveland's small National City for a cool $5 billion. That will likely not prove to be the last such instance.

We're going to refrain from totally freaking out. We just hope that as the government continues its bank rescue--because that stuff is far from over by all accounts--that it keeps the community banks, and their importance to small businesses, very much in mind.

Comments (1)

February 5, 2009 9:27 AM

Comments (1)

Dan Ford:

I am the CEO of a $170 million rural bank in Colorado. I have been in this business for almost 40 years. I remember in the 70s when they predicted that by the turn of the century there would be only 10 banks. What happened to that prediction? Every time one of the big banks (Wells Fargo in our area) buys out a small, local community bank, we benefit. People in our rural environment still prefer looking their banker in the eye before trusting him/her with life savings. de novos open up frequently to fill the void caused by a small bank being gobbled up. I disagree with the presumption that the FnMa Fdmc stock crisis is killing small banks. I don't know any banks in our area owning suck stock.

Posted by Dan Ford | February 5, 2009 4:11 PM

Posted on February 5, 2009 16:11