Without Massive Fed Funds, Small Banks Feel the Heat

By Antonio Perez
Antonio Perez
Antonio Perez
February 18, 2009 Updated: February 18, 2009

NEW YORK—Amidst massive financial bailouts for global banks deemed by the U.S. government to be “too large to fail,” analysts believe a group of mid-size and local banks may ultimately take the fall.

Lost among the discussions for the Troubled Asset Relief Program (TARP) have been smaller regional banks, which provide lending for small businesses and individuals in communities across the country.

These banks are not headquartered on Wall Street, and don’t hand out billions of dollars annually in bonuses.

“My 25th highest paid person makes $62,000,” C.R. “Rusty” Cloutier, President and CEO of Midsouth Bank based in Lafayette, La., said during an interview with Bloomberg Television. Unlike the global banking giants, “we don’t have a seat at the table in the White House,” he continued.

Without billions in federal assistance to support its lending, smaller U.S. banks like Midsouth could soon find themselves in a difficult financial situation. So far in 2009, thirteen banks have failed and were taken over by the Federal Deposit Insurance Corporation. All of them were local or regional banks.

Last month, regional banks SunTrust, Fifth Third Bancorp, and Capital One Financial all reported fourth-quarter losses. If left unaddressed, analysts believe many regional and local banks could go out of business or be forced to consolidate.

The Cincinnati, Ohio-based Fifth Third is a regional bank serving the U.S. Midwest, with locations across Ohio, Kentucky, Indiana, Illinois, and Michigan. Last week the bank reported a staggering $2.1 billion loss, leaving investors and customers wondering if the bank can stay independent for much longer.

"Economic conditions have deteriorated across our footprint and have placed both our consumer and commercial loan portfolios under significant stress, as evident in our bottom line results for the year," said Kevin T. Kabat, Chairman, President and CEO of Fifth Third in a company statement.

Most of Fifth Third’s fourth-quarter loss relates to loan losses and higher borrowing costs due to the company’s deteriorating credit rating. The company has taken measures to sell off or transfer some of its commercial real estate loans in distressed areas of Michigan and Florida.

Fifth Third received around $3 billion from TARP, which is available for mid-size and smaller U.S. banks. However, additional TARP money will be given to smaller banks with the understanding that the banks make a good faith effort to sell itself to a larger competitor. PNC Financial received $7.6 billion in federal money last year to take over smaller rival National City Corp.

Another Ohio-based bank, Huntington Bancshares Inc., announced that it would cut 500 jobs and suspend all company 401(k) matching programs. Huntington lost almost $500 million in the fourth-quarter.

Regional and local banks were never large players in the subprime or credit default swap market, but many are saddled by commercial real estate loans. Without more financial help, they may be forced to sell themselves to bigger competitors.

But some small banks have steered clear of the subprime crisis by making sound decisions and taking less risk. They never made billions of dollars on risky bets, but they’re still standing today.

North Jersey Community Bank, a local bank based in New Jersey, has had zero bad loans and no past dues from customers. They meet their borrowers individually and perform thorough due diligence, Frank Serrentino, President of North Jersey Community Bank, said in a Bloomberg Television interview.

“If you make bad business decisions, you should pay the price,” he said.