Bloomberg has an excellentstory that explains why credit is tightening up at the regional- and small-banklevel. Essentially, banks are having a tougher time raising capital, so they’re being forced to cut bank on lendingactivity. Here’s an excerpt …
“Mountain 1st Bank & Trust Co. Chief Executive Officer Greg Gibson forecast 12 percent loan growth for his NorthCarolina bank this year. Instead, he’s spending more time handing out freshly baked cookies than extending credit.
“Gibson is “standing on the brakes” because Mountain 1st, owned by 1st Financial Services Corp. of Hendersonville,North Carolina, can no longer sell trust-preferred stock to raise capital for loans so customers can buy airplanes orbuild veterinary clinics, Gibson said in a June 20 telephone interview. The bank, with $650 million in assets, is amongmore than 8,000 across the U.S. caught for the past six months in the shutdown of the $117 billion market for thesecurities, a hybrid of debt and equity.
“The fallout from the subprime-mortgage collapse is spreading from global lenders such as Citigroup Inc. and UBS AG tolocal ones, including Lansing, Michigan-based Capitol Bancorp, FirsTier Corp. of Northglenn, Colo. and Mountain 1st,which tempts customers at log cabin-style branches with cookies and coffee. Less capital for such hometown banks maystymie Federal Reserve Chairman Ben Bernanke’s effort to prevent a credit crunch.
“There is no question there is a problem,” said Chris Cole, senior regulatory counsel for the Independent CommunityBankers of America, a Washington-based trade group for about 5,000 lenders. “Banks need the capital to lend. So thatproblem of raising capital causes a further slowdown. This inability to raise capital points to a damping of the wholeeconomy.”
“So-called community banks and larger lenders have sold trust-preferred securities, known as TruPS, for about a dozenyears. Collateralized debt obligations became the biggest buyers, generating enough demand to expand the market10-fold, according to Merrill Lynch & Co. index data. The CDOs packaged the shares and sliced them into pieces withvarying credit ratings.
“Community banks such as FirsTier were too small to attract insurance companies or mutual funds and sold the securitiesto CDOs instead, in issues of $10 million or $20 million at a time, according to Fitch Ratings analyst NathanFlanders.
“The market was upended after mortgage foreclosures reached a record high of 2.47 percent for all loans in the U.S.,starting a credit-market meltdown that sent investors fleeing to safer governmentsecurities.
“As the preferred market seized up, the Standard & Poor’s Small Cap Regional Banks Index has fallen 34 percent thisyear, leaving banks unable to sell common stock without diluting existing shareholders. Cut off from fresh capital,some lenders may file for bankruptcy, according to ICBA’s Cole.”
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