Community Banking Update

As part of my annual continuing education requirements as CPA and real estate salesperson, I recently attended a seminar titled as the "Community Banking Update" offered by Kraft CPAs, LLC of Nashville, TN, a very reputable bank consulting firm.  The highlights from this seminar regarding the status of the community banking industry are very interesting:

• The FDIC is rejecting numerous banking applications right now - literally not letting any new banks in the business.
• As a majority rule, community banks are really struggling with earnings as they were not offered bailouts like the too-big-fail banks (TBF).  All the earnings you have heard lately are coming from the TBF banks not community banks.  Numerous bank failures are expected in 2011.  Outside of the expected failures, numerous other community banks are discussing mergers and consolidation to stay alive.  Some banks are looking to get out and are willing to do so at 50 cents on the dollar or less.
• Community banks are not lending.
• The accounting policy associated with the recent financial overhaul legislation is particularly unfavorable to community banks.  As a matter of fact, there is a substantial movement among the banking industry to permanently be exempted from fair value accounting.  Politically speaking, there is discussion whether the federal government really wants to maintain a community banking industry.
• Under stress tests at the community bank level, many banks cannot survive on as little as a 100 basis point increase in the interest rate on the bank's cost of money.  This is particularly troubling considering the untraditionally low interest rates.
• Banks are not in hurry to do REO (foreclosure) because they will recognize substantial losses.  Loan modifications are the soup du jour.  Appraisals are viewed as worthless and there really is no way to determine what real values are in the current economic environment.  Be cautious with anyone who can give you values right now.
• Regulators are analyzing bank loan loss reserves on a case by case basis.  Many community banks can't absorb the losses with writing down their loan portfolios to fair value.  To do so would impact capital ratios and possibly result in a FDIC takeover of the bank.  If the bank has a solid management team, regulators are giving those banks the benefit doubt, for now.
• Mortgage banks have no political capital and are largely considered a dying breed going forward in the new normal.

While I think at some level we know some of this already, I think there has been considerable public relations emphasis placed on the TBF banks and their rehabilitation over the last 18 months.  However, I think at the main street level which our community banks are greatly invested in - there is a substantial undisclosed problem.  If allowed to continue to deteriorate, community bank failures would have far-reaching effects on local economies.

My impressions from this seminar and other readily available economic news, as a business owner, landowner, and husband, I would encourage you to re-evaluate the debt levels within your business and household.  It is obvious for the foreseeable future that your local community banker is not in a position to help you through difficult times.

On the flip side for business owners, landowners, and investors, there is a tremendous opportunity to pursue creative private capital financing arrangements whether that is factoring, bridge loans, mezzanine debt, or seller-financing, or even leases.  While these arrangements are usually more expensive the capital is available and ready to be put to work and, more importantly, you can look the decision maker in the eye when you do the deal.  At the worst, these type arrangements may get through these leans times.  In the best case, you may discover a new way to attract capital for your ventures apart from the growing bureaucracy that is community banking today.

Whitney Oswalt, CPA

President

Landworth, LLC

"Serving those who make their life and living off the land"