Thursday, February 4, 2010

Maryland Community Banks Update

Two quarters have passed. Maryland banks have fared very well compared to other states, but the clock is ticking.  The state of Maryland banks has seen a slow and steady decline. Maryland banks had a 284% decrease in net income from a positive $60 million at the end of September 2008 compared to a negative $109 million at the end September 2009.  If the tea leaves are correct, Maryland will lose at least 2 more banks in 2010.  The FDIC is putting all the regulatory agencies (OCC, OTS and State DFIs) under pressure to take action and clean up.  Sheila Bair, FDIC Chairman, wants them be proactive not reactive. 

"We are seeing the next wave of industry consolidation, either in the form of managed consolidation, encouraged by the regulators, or strategic acquisitions of banks with solid core deposits and an established franchise“  - Paul Joegriner, “Chevy Chase Bank, Citi in talks, Sale would boost New York institution's presence in state. The Business Gazette of Politics and Business, 14 Nov 2008.

The insurance fund cannot afford continued claims.  So much so that Sheila Bair wants all U.S banks prepay three years of insurance premiums to replenish the fund. 

A concern for the industry and economic growth is the decline in industry assets of 18% driven by a 22% decline in loans and leases.  Commercial and Industrial (C&I) loans declined 14% and real estate development (C&D) loans declined 38%.  A major reason for the decline in loans is the high charge-off rate of 137% compared to one year ago.   In dollar terms, Maryland Banks have charged-off $127 million. While deposits was up 12% for the state, most of those deposits went to the big banks or non-Maryland banks.  Deposits decreased 15% for Maryland banks compared to one year ago.  Community banks are in a tough position competing for deposits against big banks and larger out-of-state banks.

The credit crisis is dramatically changing the competitive landscape for bank deposit gathering. Three events, in particular, directly affect funding costs. The first is the increase in FDIC deposit insurance from $100,000 to $250,000 per depositor per institution. The second is the FDIC’s Temporary Liquidity Guarantee Program (TLGP) of which one component provides full insurance coverage for non-interest bearing transaction accounts while another guarantees new issues of senior unsecured debt. The third is the Federal Reserve’s apparent willingness to approve nonbank financial firms’ applications to become bank holding companies.  Timothy W. Koch, “The Competition for Deposits Will Pressure Community Banks.” December 1, 2008.

The big banks have benefited by the FDIC actions  more than the community banks thus creating an imbalance between the big balance and community banks.  The four universal banking giants, Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo/Wachovia now control 40% of the U.S. deposits, up 9% from one year ago.

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