The Times Overdraws on Community Banks

I wanted to like this New York Times story today on small banks and how they’ve far outperformed their bigger brethren.

But it’s a real missed opportunity. The story is long on sentiment and short on facts.

The Times has a good premise, but it lets itself get too dewy-eyed about the aw-shucks values of small-time bankers and doesn’t really explore why they’ve done far better than the big boys. It’s all sophisticated urban Timesman takes an anthropological trip to the heartland:

One recent morning Mr. Goetz gave a tour of his (Indiana) bank, which included a bulletin board with fliers for a fire department fish fry and the Kankakee Valley Women’s Club flower sale.

There is a lot of bric-a-brac in his wood-paneled office and a Thomas Kinkade painting of a green-gabled stone house after a snow fall, titled the “Olde Porterfield Gift Shoppe.”

“There is one set of footprints, going in,” he said, pointing to the painting. “That’s how we feel as a business sometime. We’re walking alone.”

There’s lots of that kind of stuff in here.

To spend time with these Indiana community bankers is to step into an alternate universe, where everything sounds a little strange because it makes perfect sense. You hear things like, “If you don’t understand the risk you’re taking, don’t take it.” And, “We want to be around for decades, so we’re not focused on the next quarter.”

When you’re going to write a front-page article about community banks, shouldn’t you define what community banks are and why—other than bromides—they’ve been successful? The Times doesn’t. Here’s the definition of “community bank” from the Independent Community Bankers of America (emphasis mine):

Community banks are independent, locally owned and operated institutions with assets ranging from less than $10 million to multi-billion dollar institutions.

So not all community banks are just handing out loans for tractors and F-150’s. Why have they been successful? Is it because they’re local folks? The Times essentially says that here:

Forget “too big to fail.” These banks consider themselves too small to risk embarrassment. They are run by people who grew up in the towns where they work, and their main fear is getting into a financial jam that will shame them in the eyes of their neighbors.

I honestly think there’s a lot of truth to this, but it’s far too easy. Weren’t some involved in the savings-and-loan scandal of the 1980’s? And how does the Times square its thesis with the coming wave of commercial real-estate defaults? Here’s ProPublica back in January:

Next up in the financial crisis: Scores of community banks face failure after years of gorging on commercial real estate loans

What about some data to support the Times’s thesis? Don’t go looking for it—it’s not there. And, in fact, the paper implies that we haven’t heard bad things about them because they’re so small:

Though they greatly outnumber the national and regional banks, community banks have barely registered in any of the fallout from the credit crisis, in part because they hold less than 10 percent of the $13.8 trillion in bank assets nationwide.

The 50 or so bank failures have been largely clustered in a few states, like Florida, Arizona and California, where the bursting housing bubble had the greatest impact.

How many of those fifty bank failures have been community banks? The Times says there hasn’t been a failure in Indiana since 1992, but otherwise we’re not told. I know of one: Silver State Bank of Las Vegas. ProPublica again:

Tod Little could see trouble ahead for Silver State Bank when he opened the Las Vegas Review-Journal in June 2006. Five months earlier, Little had left Silver State, the institution he founded and built into a small but profitable business. Now, staring at him in the Journal was a picture of Corey Johnson, his protégé and successor, wearing a broad smile, hands on his waist in a Superman-like pose. The new CEO was vowing to transform the bank into a regional powerhouse and double its assets to $2 billion…

Silver State isn’t another casualty of the subprime flameout. The bank made its biggest bets not on home mortgages, but on loans to developers across Nevada and Arizona. Its demise highlights an aspect of the financial crisis that’s been overshadowed by the crash of Wall Street and its megabanks: How small banks are suffering from a wave of defaults on construction and development loans that could cause dozens more to succumb in the year ahead…

Cassidy has estimated that 200 to 300 more banks are in danger of being closed.

In service of its down-home story, the Times lets the narrative cloud its news judgment. As Barry Ritholtz points out, the Times really buries the lede here:

At DeMotte, Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.

Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.

Those are the third-to-last and second-to-last paragraphs, respectively. Say what?

This is the nut of the piece here:

But to the deep chagrin of Mr. Ewing and others at the conference, the public, politicians and the media have made little distinction between the stress-tested behemoths and the 7,630 community banks across the country — the vast majority of which have watched the crisis like bystanders at a 10-car pileup.

And that’s right. The behemoth banks and investment banks are the culprits (along with the mortgage companies) in this mess. There’s no question in my mind that we need to have an industry that needs to look a lot more like the community banks than the Citigroups and Bank of America’s.

But that’s another miss by the Times. It doesn’t get into the “too big to fail” problem. These guys are small enough to fail and so they’re incentivized to act more conservatively.

Could have been a really good story. Emphasis on the “could have been.”

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.