Small banks failing as larger firms regain health

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U.S. banks are failing at the fastest rate in two decades.

No, the financial crisis hasn't returned. Wall Street doesn't need another bailout.

But in communities around the country, 143 banks have collapsed so far this year - more than all of last year. This time, the failed banks are smaller, on average, than in 2008 and 2009. The damage to the industry has thus been milder this time. Still, the wave of closings points to the persistent struggles of many communities and states.

On Friday, regulators closed four small banks: One each in Maryland and Washington state and two in California — one of the hardest-hit states, where a dozen banks have failed this year.

As larger banks have regained their health this year, thanks in part to federal aid, smaller ones have struggled. Here's why:

— Small banks made the riskiest commercial real estate loans - those used to develop apartment buildings, malls and industrial sites. Many such loans soured this year. About 13 percent of all bank assets consist of these high-risk loans. But for banks with $10 billion or less in assets, the figure is 28 percent, according to government data.

— Smaller banks didn't receive the taxpayer aid given to Wall Street banks. The big banks recovered in 2009 with help from federal bailout money and fees on bank services. And unlike small institutions, large banks have profited from their investments in the resurgent financial markets even as they've reduced lending in distressed areas.

— The smaller banks haven't had to bolster their financial health as much as larger banks have. Regulators forced big institutions to boost their capital cushions and write off bad loans early in the financial crisis. Not so for smaller banks. And unlike larger ones, many smaller banks are supervised by state banking departments that lack the resources or expertise to monitor them closely.

— Banks must write off bad loans as more borrowers fail to pay. And they must set aside money for other loans that might sour. That drain can endanger small banks with little extra cash. They hold a smaller proportion of safer loans than larger banks do. In the April-June quarter this year, banks with $10 billion or less in assets gave up on $13.6 billion in real estate loans that went bad. They had to reserve more capital for the next wave of souring loans. That reduced their earnings.

An additional problem is that unlike larger banks, smaller ones can lend only in their communities. If a local economy is weak, large lenders can tighten credit there. They can make more loans elsewhere. Small banks lack that option.

Despite the higher number of bank closings this year, the hit to the banking system has been less than last year. The assets of this year's failed banks totaled about $89 billion. That's scarcely more than half the combined assets of the 140 banks that failed in 2009. All but one of the 143 to fail this year had under $10 billion in assets. And about three-fourths of those banks had less than $1 billion.

By contrast, Bank of America, the nation's largest bank, has assets worth about $2.3 trillion.

The smaller size of this year's failed banks has meant that the government has had to pay only about $21 billion to cover losses to depositors. That compares with $36 billion last year. The smaller losses enabled the Federal Deposit Insurance Corp.'s board to cancel a scheduled fee increase for banks.

As larger banks have scooped up the failed ones, lending hasn't been much affected by the closings. Still, the wave of closings speaks to the lingering pain of the Great Recession.

While banks have closed this year in nearly every region, some states have been struck especially hard. Illinois and Georgia have each had 16 bank closings. California has had 12, Washington state 11. All four are among the 14 states with the highest foreclosures rates.

The Peoples Bank in Winder, Ga., for instance, survived the Great Depression but fell in mid-September. It had about $447 million in assets and had been in business since 1926.

"It was the anchor of downtown," said Chip Thompson, mayor of the city of roughly 15,000 people about an hour northeast of Atlanta.

Nearly 200,000 banking jobs have been lost in the past three years - about 8.5 percent of the industry's work force. Analysts expect that number to grow over the next few years.

"Banks that are holding on by their fingernails aren't going to be able to hold on that much longer," said Bill Bartmann, whose company buys distressed bank assets.

Analysts expect more small banks will go under. Estimates are for 160-200 banks to close this year, and a similar number next year.