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Sacramento-area banks hail plan to increase FDIC safety
(Sacramento Bee, The (CA) Via Acquire Media NewsEdge) Oct. 3--Sacramento-area bankers, confronting a substantial increase in bad loans, are welcoming a provision in the financial markets bailout package that could calm some of the fears of their depositors.
The banks say they're healthy. But a provision in the bailout bill, which would temporarily increase the Federal Deposit Insurance Corp. protection on deposits to a maximum of $250,000, could help persuade anxious customers that their deposits are safe. The current ceiling is $100,000.
The insurance provision is part of the $700 billion rescue plan that passed the Senate Wednesday and may go to a House vote today.
"I think it's been a good idea for a long time, long before this crisis," said William Martin, chief executive of Bank of Sacramento. "It'll certainly bring a little relief to small businesses and individuals -- that more money is insured by the FDIC."
Sacramento-based banks haven't been immune to the impact of the housing market crash and the weak economy. The five largest community banks in the area earned a combined $17.6 million in the first half of this year, down 10 percent from a year earlier.
But that doesn't tell the whole story. The volume of troubled loans on their books has skyrocketed, which could translate into significant losses down the road.
For the 11 banks based in the four-county region, noncurrent loans -- generally, those on which borrowers are at least 90 days late on payments -- totaled $39 million at midyear, according to a Bee analysis of FDIC data. That's up from $1 million a year earlier.
The troubled loans come to 1.8 percent of the banks' total loan portfolio. By comparison, Wachovia Corp. and its subsidiaries' troubled loans represented 2.5 percent of the big banks' total at midyear. Wachovia this week was taken over by Citigroup in a rescue brokered by the U.S. government.
Anat Bird, a former Wells Fargo & Co. executive who runs a bank consulting business in Granite Bay, said that as a rule, it's "not good" for a bank to have more than 2 percent of its loans in noncurrent territory.
But she and other banking experts said the percentage of troubled loans isn't a black or white issue. There are other statistical benchmarks for judging a bank's safety, and analysts say community banks in California are generally weathering the financial crisis well.
Rancho Cordova's American River Bank, for instance, had $14.3 million in troubled loans at midyear, or 3.5 percent of its total loans. But the bank also had 11 cents of capital for every $1 that's been loaned out, said President and Chief Executive David Taber. By the standards of the FDIC, that makes American River "well capitalized."
About one-third of American River's troubled loans are the responsibility of a single borrower -- the owner of a mini-storage facility -- who has resumed making payments lately, Taber said. The loan could end up being rehabilitated, he said.
That said, Taber is all in favor of raising the deposit insurance limits to $250,000 as a means of comforting customers.
"Reassuring them is a great thing," Taber said. "We're fielding more questions (from customers) than we have in our entire 25-year history."
Analysts say raising the insurance limit will keep depositors from panicking unnecessarily. It will "drive home the perception ... that banks are safe," said Michael Natzic, who follows community banks for the Stone & Youngberg investment firm.
Advocates argue that the current limit of $100,000, which dates to 1980, has been rendered obsolete by inflation anyway. The legislation facing the House today would raise the limit to $250,000 until Dec. 31, 2009, but California economist Sung Won Sohn believes the increase would become permanent.
"People will get used to it and there will be tremendous political pressure to keep it at $250,000," said Sohn, who teaches at California State University, Channel Islands.
A former banker, Sohn is skeptical about the higher limit because "we want depositors to be more vigilant" about their banks. The higher limit will make customers too complacent, he said.
But proponents say it's more important to calm the waters. The fear factor is a key element in the nation's financial crisis and the legislation designed to ease it. Washington Mutual had a huge batch of bad subprime loans on its books, but its downfall was mainly triggered by a bank run; customers withdrew $16.7 billion in deposits in a 10-day frenzy that ended with federal officials arranging for a takeover by JPMorgan Chase & Co. (Depositors didn't lose any money.)
Troubled loans do more than just eat into profits and potentially destabilize the bank. They curtail the bank's ability to make new loans, according to consultant Bird. That means slower economic growth.
At Granite Community Bank in Granite Bay, where troubled loans totaled $3.3 million at midyear, loan officers spend less of their time prospecting for new business. They're mostly focused on managing the existing loans and making sure the borrowers realize "that we're all working together to make sure that we come out of the back side of this," said President and CEO David Kaiser.
Sacramento banks mostly steered clear of the subprime mess; many made few or no loans to homebuyers, regardless of credit quality. But they've been tripped up indirectly, through loans to construction contractors, subcontractors, suppliers and others connected to the housing market.
For instance, court documents say home building tycoon John Reynen owed $6 million each to two area banks, Bank of Sacramento and River City Bank, when he filed for personal bankruptcy protection earlier this year. Reynen's total debts have been pegged at $970 million, according to court records.
"We're no better or worse than what our customers are going through," said Stephen Fleming, River City's president and CEO.
About 2.1 percent of River City's loans are noncurrent. That includes about 10 percent of its construction loans. But Fleming said the bank's substantial reserve funds will enable it to weather the problems.
While Reynen struggles in bankruptcy protection, bankers say plenty of less-prominent borrowers are simply walking away from loans. The attitude for many is, "Nobody else is paying, so why should I?" said John A. DiMichele, president and CEO of Community Business Bank of West Sacramento.
Community Business was stuck with $4.3 million in troubled loans at the end of June, or 3.3 percent of its loan portfolio. A year ago, the bad loans came to a mere $72,000. DiMichele said the numbers are likely to get worse as more and more loans turn bad.
"I've been in this business 32 years. We've not had any problems like this since the 1990s," DiMichele said.
To see more of The Sacramento Bee, or to subscribe to the newspaper, go to http://www.sacbee.com/.
Copyright (c) 2008, The Sacramento Bee, Calif.
Distributed by McClatchy-Tribune Information Services.
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