Central View: Another Tough Year for Community Banks: What Lies Ahead?

Julie L. Stackhouse

About this time last year, banking conditions in the Eighth District were very weak. September 2009 call report data showed a return on average assets for District banks under $10 billion in assets of just 0.38 percent. Nonperforming loans and other real estate owned (OREO) to total loans approached 3.46 percent. It appeared that 2010 would be a year of significant challenges and many bank failures. But we also hoped it would be a watershed year, with a strengthening economy serving to lessen some of the challenges.

As we approach the end of 2010, we now know that the rate of economic growth has been disappointing. Construction remains the economy’s soft spot. In a typical economic recovery, housing construction is a key driver pulling the economy out of the recession. This time, however, there is a sizable inventory overhang of houses. In addition, vacancy rates on commercial and industrial properties are quite high.

So, what does this portend for 2011? For the 829 banks on the FDIC’s watch list (as of the second quarter of 2010), much could depend on the pace of economic growth and recovery in real estate sectors. Bank failures will continue (2010 failures surpassed the 2009 total in early November), with the pace dependent on the ability of distressed banks to find merger partners or other forms of capital. And all banks will closely watch the growth in regulatory costs resulting from the new regulations issued as a result of the Dodd-Frank Act.

The challenges will also bring opportunity to some banking organizations as they grow through acquisitions. But with so much uncertainty still ahead, I expect that 2011 will be another year of transition for the banking industry as we begin to understand the full impact of the regulatory changes and adjust to the structural changes that continue to take place in the U.S. economy.

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