Archive for January, 2009

The banking crisis has reached the Kingdom of Id. “I think the bank might be in financial trouble,” warns The Duke in a recent The Wizard of Id comic strip. “What makes you think that?” asks The King. “Its new calendar only goes to February,” The Duke replies.

A bit of gallows humor may be one of the few ways to cope with the accelerating pace of U.S. bank failures.

Twenty-five banks had collapsed as of Dec. 18, the most since 50 went under in 1993. Banking regulators shuttered 12 in the fourth quarter, an average of one per week and nearly half of 2008’s total. Most experts predict 2009 will be even worse.

“It is quite likely that 200 to 250 will be merged out of existence in the next few quarters,” said Lutz-based bank analyst Richard X. Bove of Ladenburg Thalmann & Co.

Few expect to reach the depths of the S&L crisis, when 1,385 institutions crumbled from 1988 to 1990.

But the Federal Deposit Insurance Corp. is bracing for a wave of bank failures. This month the FDIC nearly doubled its operating budget to $2.24 billion to handle an “elevated” number of failures in the coming year. Staffing will increase 30 percent, including more than 800 new failure-related jobs.

“It is a prudent and measured response given the current banking environment,” said FDIC Chairman Sheila Bair.

The agency had coasted for quite a while. Only three banks failed in 2007. None went under from June 2004 through February 2007, the longest period without a failure since the FDIC was created in 1933.

Two Bradenton banks failed this year, First Priority Bank on Aug. 1 and Freedom Bank on Halloween night. They were the only Florida banks to succumb in 2008.

That is likely to change in 2009, as the Florida real estate crash claims more financial institutions.

Banks in the region are stuck with higher ratios of noncurrent loans to total loans than banks nationwide, while holding lower ratios

of equity capital to assets, their safety net to absorb losses.

Bottom line: Area banks are in worse shape than the rest of the country, says Sarasota banking consultant Tramm Hudson.

“Florida has been particularly hard hit with the recession, primarily because so much of our economy is dependent on tourism, retirement activities, construction and real estate,” he said. “You can’t have a drop of 30 percent or more in real estate values and not see a weakening in the bank ratios.”

As banks deal with the damage, many have tightened credit to consumers and businesses looking for loans. Borrowers with good credit and cash up front will still be able to get loans from the stable banks, Hudson says.

“The marginal borrowers will have a more difficult time getting loans, and likely will not be able to finance their businesses or lifestyles as in the past. Cash is king right now and will be for the foreseeable future,” he said.

Some local banks, especially the newer ones, are still eager to make loans. Florida Shores Bank-Southwest of Venice has originated more than $65 million in loans since opening last year, said president/CEO Jim Kuhlman.

“On top of that, we have exactly zero bad loans, and we are just under $100 million in total assets,” he said.

Profits tank

The nation’s 8,384 commercial banks and savings institutions earned a combined $1.7 billion in the third quarter, a gut-wrenching decline of $27 billion, or 94 percent, from last year.

Florida’s 311 commercial banks and thrifts were $559 million in the red, compared with a profit of $26.8 million the year before.

Some 58 percent of U.S. banks posted weaker profits in the quarter. Nearly a fourth reported a net loss.

Things were even tougher in Florida: just over half of the 275 commercial banks and two-thirds of the 36 thrifts lost money.

Nine banks, including First Priority, failed in the third quarter, the most in 15 years.

The FDIC’s secret “problem list” of troubled banks mushroomed over three months from 117 to 171 institutions, the highest total since 1995.

Both First Priority and Freedom appeared on that list before they were seized by regulators. But the list can miss — neither Washington Mutual nor Indy Mac, the nation’s two largest failures this year, made it.

Wachovia Bank, Florida’s largest bank by deposits, admitted that it was near failure when it struck a deal to sell to Citigroup. Wells Fargo then stepped in and made a sweeter offer for Wachovia.

Industry analyst BauerFinancial has 513 banks on its problem list, about 6 percent of the entire industry and up from 400 the previous quarter.

Nearly 6,000 banks, or 59 percent of the industry, earned Bauer’s top five- or four-star ratings.

“The number of recommended banks has been steadily shrinking as more and more banks are falling victim to the nation’s current financial crisis,” said Bauer President Karen Dorway.

Century Bank of Sarasota is one of 11 Florida banks rated a “zero,” the lowest grade given by Bauer. BankUnited and Riverside Bank of the Gulf Coast, which have local offices, also were rated at zero.

Bauer downgraded 7 of the 22 community banks based in Sarasota, Manatee and Charlotte counties in the third quarter. Others retained their ratings or were less than two years old and too new to rate.

Community National Bank of Sarasota County, based in Venice, was upgraded from a zero to a one star. Community continues to operate under a regulatory supervision agreement.

Paying to play

All U.S. banks, even the healthy ones, will be paying more to shore up the FDIC’s own finances. The cost of 2008’s failures have dropped the Deposit Insurance Fund — its ratio of reserves to cover insured deposits — to 0.76 percent from the required 1.15 percent.

Premiums for deposit insurance will rise by 7 basis points — 7 cents for every $100 of deposits — starting next year. Banks now pay between 5 and 43 basis points on deposits for FDIC insurance, with weaker banks paying the higher percentage.

That could affect what banks pay their customers on certificates of deposit and savings accounts. Banks may try to offset that higher cost by reducing interest rates on CDs, rates that have already been trimmed by the downward trend of all interest rates from Federal Reserve cuts.

FDIC officials continue to stress that the vast majority of the banking industry remains well-capitalized and strong enough to survive.

Banking consultant Hudson agrees, even though Florida and its banks are suffering more now than most states. People will continue to move to the fourth-largest state for its climate and business opportunities, he says.

“We need to work through the overhang of housing inventory, and I predict our economy will come roaring back, just like it did after 9/11,” he said. “The banks have enough capital for now to weather the storm. How they manage it will be the key to success.”