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Banks perhaps seeing a return to 'normal'

June 6, 2012 |

This story is being co-published with

Bank profits are rising and lending is growing as the battered industry struggles to regain a semblance of normality, new government figures show.

Among the signs:

Banks' troubled assets declining

After reaching a historic peak in early 2010, the amount of nonperforming loans and foreclosed real estate at the nation’s banks has fallen steadily, though it remains well above the levels seen prior to the onset of the financial crisis in 2008.

Source: Investigative Reporting Workshop research based on Federal Deposit Insurance Corp. data
Graphic by Madeline Beard, Investigative Reporting Workshop

  • Profits are up . Banks made $35.6 billion in the first quarter, according to the Federal Deposit Insurance Corp. That’s the best quarter since the middle of 2007.
  • Lending is growing , despite a small downturn in the first three months of the year. Business lending is up by 14 percent in the past year, an indication that demand finally is showing up after four years of being recession-depressed, as well as an indicator that banks are feeling comfortable enough to start taking on more lending risk.
  • Troubled assets are down. The amount of troubled assets — a combination of nonperforming loans and the value of foreclosed property — continues to tumble, according to an analysis of FDIC quarterly financial reports by the Investigative Reporting Workshop. At the end of March, the nation’s banks were carrying more than $240 billion in troubled assets, but that’s the lowest level since December 2008, when the scope of the financial crisis was beginning to be understood.

“Normal” certainly isn’t what it would have been five years ago before the financial crisis threatened not only the banks, but also the whole economy.

For example, it likely will be a very long time before banks extend as much credit to housing. Lending to developers, a major source of loan losses, continues to plummet, down 23 percent in the past year.

And “normal” isn’t the same for the small and medium community banks as it is for the gigantic Wall Street institutions that dominate the field, even more than they did when the crisis came to a head in the fall of 2008.

Meanwhile, bank regulators are trying to figure out how to exercise the powers Congress gave them in the Dodd-Frank financial reform law.

On the one hand, they want to curb some of the excesses that led to the crisis. The recent revelations that JPMorgan Chase, the nation’s biggest bank, just lost $3 billion or more trading credit default swaps, which sounds very 2008-ish, has renewed pressure to force government insured-banks to stop risky trading practices. On the other hand, regulators don't want to limit lending and other risk-taking, particularly by community banks, in ways that might lead to an even more sluggish recovery.

Certainly, “normal” will never again mean that banks can operate under the so-called “3-6-3” rule, which meant: Pay 3 percent on deposits, charge 6 percent on loans and be on the golf course by 3 p.m. To be fair, it has been a long time since most banks operated with that approach.

Herbert Marth Jr., president of the $390 million-asset Central Virginia Bank in Powhatan, Va., laughs at the question of whether banking is back to normal: “Oh, man. No.”

For one thing he says, “Business people are still very cautious. Loan demand is still very, very weak. That’s probably the toughest issue right now.”

Time to 'get back to business'

At Northwest Financial Corp., which owns three banks in Iowa, President Jeff Plagge says, “I’m not sure what ‘normal’ is.”

Still he senses that people, though wary because of events like last week’s stock price tumble caused by worry over European financial issues, think it is “just time to get back to business.” Unlike Marth, he sees some rekindling of loan demand.

Plagge says, “In our three banks, we are seeing people kind of back to what I call ‘normal.’ ” Strong grain and livestock prices over the past few years have helped many banks in the agricultural heartland get through the crisis in better shape than banks elsewhere. Only two Iowa banks have failed since the beginning of 2007.

He also is vice-chair of the American Bankers Association, and he says that “even in the most troubled places,” his colleagues around the country “at least think it’s found the bottom.”

You couldn’t blame bankers for being a bit cautious about saying they are out of the woods. The industry has been traumatized by its experiences of the past five years, and for many banks, there still is a mountain of troubled debt and a long line of foreclosures to work through.

Part of the trauma is that the number of banks has been shrinking. One out of seven banks in existence at the end of 2007 no longer is in business. Since the end of 2007, 438 banks have failed. The rate of failures has slowed, peaking at 157 in 2010, down to 92 last year and 24 so far this year. Another 788 have merged into other institutions, meaning that, on average, banks have gotten larger, and few expect any slowing of the trend toward consolidation.

Government's role grows with TARP, new rules

Banking also has had to adjust to greater government scrutiny and participation,  though there are many who believe that regulators haven’t gone far enough to enforce tighter rules passed as part of  Dodd-Frank. Regulators and industry lobbyists are fighting over the so-called 'Volcker Rule,' which would limit securities trading by insured banks.

Between September 2008 and December 2008, the federal government handed out $204.9 billion in capital assistance to more than 800 banks through the Troubled Asset Relief Program (TARP). All but about $11.6 billion of that has been repaid, according to the Treasury Department. Workshop records show that 393 banks still had not repaid their TARP investments by the end of May. (Note: The Workshop links TARP investments to individual banks, not just to the holding companies that own them. The Treasury Department says it invested in 707 institutions.)

By its accounting, Treasury has lost about $2.7 billion of TARP funds in banks and related financial institutions that failed, including $2.3 billion to CIT Group Inc., which declared bankruptcy in 2009, less than a year after getting the TARP money. The company’s bank subsidiary, CIT Bank, did not fail and continues to operate. Treasury also has accepted less than its full investments in some cases where TARP-backed banks merged into other institutions.

Since TARP began in 2008, Treasury has collected nearly $21.5 billion in interest and dividends on its investments. Of the active banks that still owe money, 197 are behind on their dividend payments, owing a total of more than $305 million at the end of April, according to the Treasury Department. In order to better oversee the activities of the banks, the Treasury Department has installed government observers in 51 TARP banks.

Smaller banks find leaving TARP difficult

It may be awhile before the government sees much of the money it is still owed. While the nation’s largest banks lobbied for and got quick permission to pay back their government funds (in part because they wanted out from under restraints on executive pay), smaller regional and community banks have had a harder time getting out of the program.

The Inspector General for the TARP program reported to Congress in late April that the banks still in TARP are generally smaller community banks and that they are institutions that “have an uphill battle to exit TARP because they cannot find new capital to replace TARP funds.”

The Central Virginia Bank , where Marth is president, is an example of the issues smaller banks face trying to exit TARP. Marth says having TARP money, “definitely helped us out and continues to help us out.” The $390 million-asset bank got an $11.4 million infusion from TARP in January 2009.

Marth says the bank mostly needed the money because it lost $18 million overnight in September 2008 when the government took over mortgage companies Fannie Mae and Freddie Mac, wiping out the bank’s investment in their preferred stock. “If we had that money today, we wouldn’t have needed TARP,” he says.

Central Virginia has had a difficult time keeping up its payments because of heavy loan losses in 2009 and 2010. At the end of April, it owed the Treasury about $1.3 million in dividends on TARP. The bank worked its way back to profitability in 2011.

Marth says that when the economy and capital markets improve, “We ought to be able to raise additional capital.” But, he adds, given the uncertainty around the financial situation in Europe, “Right now is not the time.”

The largest outstanding TARP advance went to Synovus Financial Corp . of Columbus, Ga., which received $967.9 million in December 2008. Synovus is current on its dividends and has never missed a payment, according to Treasury Department reports.

Snyovus told the Workshop it is working to determine when and how to exit TARP.  "We remain in conversation with Treasury and our regulators and continue to model and plan for our TARP exit. To date (as of March 31, 2012), we have paid over $152 million in dividends related to our TARP obligation, and the program has certainly been beneficial for our industry, for our company, and for the treasury; but we do want to get out, and we will get out in a manner and in a timeframe that is prudent, efficient and acceptable for all of our constituencies, including the Treasury," the company said in a statement.

The smallest remaining TARP investment is $301,000 owed by tiny The Freeport State Bank , Harper, Kan. , which also is current on its dividend payments.

In its statements on TARP, Treasury is generally upbeat. It highlights the fact that between repayments and dividends, the bank investment program is in the black.

TARP IG critical of Treasury

But the Inspector General’s report   (very large PDF) in April takes a much tougher tack.

The IG says, “TARP’s costs and legacies involve far more than just dollars and cents. Using a microscope to narrowly focus on the profit or loss of TARP risks losing sight of the bigger picture of whether TARP has been successful in meeting its goals and whether lessons learned from the financial crisis have been adequately implemented so that Treasury, banking regulators, and Congress do not find themselves in the position of rushing out another massive bailout of the financial industry, i.e., TARP 2.0.”

For example, the IG says, “A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed ‘too big to fail.’ ”

In other words, the government came to the rescue to prevent imperiled big banks from failing, even though there was widespread agreement that it was the banks’ own actions that put them and the whole financial system in jeopardy. The lesson to the banks: “It doesn’t matter what we do, the government will save us if we are big enough.” Since the advent of TARP in September 2008, the biggest banks have gotten bigger and claimed a larger share of banking assets and deposits.

The inspector general’s report also notes, as the Workshop has reported previously , that TARP did not stimulate bank lending, even though that was a stated goal of the program. “This may be in part due to Treasury’s failure to require…increased lending in exchange for TARP funds,” the report says.

In fact, the IG says, “Treasury did not even require TARP recipients to report on how they used TARP funds, providing an opaque cover for those institutions that continued to cut lending.”



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