National crisis disorients regional banks

The crises in the national financial market - from the purchase of Washington Mutual to the bankruptcy of Lehman Brothers and its subsequent purchase by British bank Barclays - are rattling local banks.

"The reality is there is a significant indirect impact on local banks and local markets from what a lot of people deem a Wall Street problem," said Shaun Burke, president and CEO of Guaranty Bank. "It's slowed down the local real estate market, and that means fewer opportunities for our bank to make loans. Unemployment is increasing at the same time, so if people aren't working, they're not buying cars or houses, which is fewer opportunities for us."

Adding insult to injury, loan write-offs are rising due to the number of customers unable to pay back their debts. Guaranty reported $5.68 million in second-quarter provisions for loan losses, up from just $210,000 in the same quarter in 2007, while Great Southern Bank, the largest bank in the Springfield metropolitan statistical area by deposits, reported $4.95 million in loan losses in the second quarter, up from $1.43 million last year.

Local deposits

Despite loan losses, the banks' leaders say they're in a much better situation than national banks dominating the headlines. The reason: deposits.

"Historically, there's not been a safer place for individuals to have their liquidity than in community banks," said Burke, who noted that Guaranty's core deposits have been up about 10 percent year-over-year for the last 12 months. "(Community banks are) very closely regulated and mandated to have strong capitalization."

Banks must carry capital on hand of at least 10 percent of total assets, called the total risk-based ratio.

Doug Marrs, chief operating officer at Great Southern, said that while he didn't have specific numbers to offer, anecdotally he has noted that deposits are up at his institution as well. The bank reported $1.86 billion in deposits in the second quarter, up 5.6 percent from Dec. 31, according to a Securities and Exchange Commission filing.

"There is a lot of common sense among people, and they can differentiate between a Wall Street investment bank and a Main Street community bank," Marrs said. "If nothing else, I think the national news drives that (difference) home a little bit."

Both Marrs and Burke noted that they have seen an increase in the number of customers expressing concern about the safety of their deposits - but both said coverage from the Federal Deposit Insurance Corp. completely protects the vast majority of customers.

"The FDIC has roughly $1.3 trillion in combined capital from all the nation's banks behind it," Burke said. "Not only do they have the combined strength of the banks, but they have the full faith and strength of the federal government and the Treasury. ... People's money in the banks is absolutely safe."

The limit for FDIC coverage is $100,000 per account, though that could soon increase. The proposed bailout of national institutions that passed the U.S. Senate on Oct. 1 would increase the FDIC cap to $250,000 per account. That revised bill was awaiting House consideration at press time.

And for customers who can't stretch their traditional FDIC coverage far enough, there is the Certificate of Deposit Account Registry Service, or CDARS, which provides up to $50 million in coverage by letting one bank spread customer deposits throughout multiple participating banks.

"When a customer deposits a large amount with us, we can divide that into increments less than $100,000, so that both their principal and interest are eligible for full and complete FDIC coverage," said Dana Montgomery, Guaranty's vice president and director of corporate services.

Banks in the Springfield-Branson area participating in CDARS are Arvest, Empire, Great Southern, Guaranty, OakStar and Ozark Mountain Bank.

Fannie/Freddie fallout

Another aspect of the subprime mortgage crisis having a local impact is the federal takeover of publicly traded lending giants Fannie Mae and Freddie Mac, which own more than $5 trillion in home loans.

A less obvious, but still costly, effect of that takeover is the value of the two companies' stock, which has dropped by 99 percent in the last 12 months.

Independent Community Bankers of America President Camden Fine told the Wall Street Journal that up to 200 of his organization's 5,000 members will have to raise capital to cover losses associated with that stock.

Great Southern Bank had stock in the two companies valued at more than $5.8 million, though spokeswoman Kelly Polonus said it's unclear how much the company will have to claim as a loss.

"How that will be treated for taxing purposes is still up in the air," she said, adding that the bank will not have to raise capital; if the entire amount is a loss, it would still leave Great Southern's total risk-based ratio at 11.03 percent, well above the federal requirement of 10 percent.

But Burke said the takeover will be positive in the long run for regional banks.

"That indirect commitment from the government to support the mortgage market and make capital and liquidity available for banks to make mortgage loans is something we have to have to improve the real estate economy," said Burke, who noted that Guaranty did not have any holdings in Fannie or Freddie. "Without those two entities, there's no way local banks can originate 30-year mortgages. We can't keep those on our balance sheets. In the long haul, I think ... it will allow banks to get back in the mortgage market and provide credit to those people who really deserve it and qualify."[[In-content Ad]]