Financial institutions are in good shape in Southern Indiana, officials say

By DANIEL SUDDEATH
Daniel.Suddeath@newsandtribune.com

July 19, 2008 04:56 pm

— The failure of IndyMac Bancorp may have played out in California, but ripples from its financial collapse have been felt in Southern Indiana over the past week.
“I would have to say we have seen an increase in concerns and questions,” said James Rickard, president and chief executive officer of New Albany-based Community Bank Shares of Indiana.
Rickard helps oversee 17 Your Community Bank locations in the Louisville-metro area, including 11 in Southern Indiana. He said the media attention to IndyMac’s situation has roused interest with local customers, considering Your Community Bank “typically doesn’t have a lot of questions” about its financial stability.
“Hopefully they understand the economy and what’s going on with IndyMac,” Rickard said.
IndyMac was taken over by federal regulators July 11, after it was deemed by the Federal Deposit Insurance Corporation to be unable to cover demands.
FDIC provides insurance — which is used by most banks including IndyMac and Your Community Bank — to cover deposits up to $100,000.
Still, IndyMac customers were reduced to waiting in long lines to recover their funds, with some unsure of what will become of their money that is beyond the insured level, the Associated Press reported.
IndyMac had approximately $1 billion of potentially uninsured deposits held by nearly 10,000 customers, according to the FDIC Web site, www.fdic.gov.
Banks have options to purchase additional insurance to cover deposits. Your Community Bank has a plan that covers accounts more than $100,000.
Rickard said there are additional ways to structure accounts that tally more than $100,000 so they will be insured, including using multiple names for accounts.

California is a long way from home
“The economy in California and the west coast is vastly different than what we’re experiencing,” Rickard said. “Some borrowers (locally) are having a more difficult time paying, but nothing compared to what they’re experiencing.”
Rickard said despite worries, Your Community Bank is fine.
“A number of (banks) in Southern Indiana and Louisville and in our entire industry have been painted with the same brush, and I think that’s unfortunate,” he said.
Failed mortgage investments helping to fuel a record-high amount of foreclosures have hurt banks and financial companies.
Alan Jay White, dean of the Indiana University Southeast School of Business, believes the subsequent investigation by the FBI into IndyMac for fraud may be a sign of things to come, with other sub-prime lenders also under the federal microscope.
A weakened economy and “the bursting housing bubble” could lead to more shutdowns, according to White.
“My personal opinion is that if the economy remains stagnant or pulls back further, then we’ll see more of these sub-prime lenders going under, even those that haven’t been involved in nefarious behavior,” White stated in an e-mail.
Making the decision to not get involved with sub-prime lending has kept Your Community Bank in good financial standing, Rickard said.
Community Bank Shares reported a revenue amount of $13.3 million for the 2008 first quarter, ending in March. That was down from a third quarter revenue for 2007 of $14.3 million, but gross profit levels were the same.
Steve and Eva Smith of Elizabeth owned Uncle Tubby’s Pizza in Jeffersonville until closing the business recently, and said they have seen the impact the slowing economy has had locally.
But they don’t think Southern Indiana is at risk the way other states are when it comes to bank failures.
“We don’t have to worry about it,” Steve Smith said. “I know that at least up to a month ago, our bank was still doing loans.”
Eva Smith said she feels “pretty safe” with her bank, but said credit cards and loans are presenting problems for spenders.
“Ninety-five percent of our customers were paying with credit cards,” she said of Uncle Tubby’s Pizza.
Interest rates on credit cards — like on home loans — can leave people in a bind when it comes to making ends meet, the couple said.
Steve Smith doesn’t “believe anything will change until the middle of next year” in terms of the economy.

Could be worse
Banks were in a far worse position in the late 1980s, according to Rickard.
“That was a little bit of a cleansing time,” Rickard said. “This may be another one in today’s times but I think much less so than in the 1980s.”
The IndyMac closure made it the fifth bank insured by FDIC to fail this year. In 1989, 534 banks were closed according to an AP report.
White believes traditional lenders are still at risk to be hurt by the sub-prime lending crisis, “but if their loan portfolios are fairly sound they should be able to weather a tough economy, or at worse be acquired by another financial institution,” he said.
Charlotte, N.C.-based Wachovia Bank recently had their bank’s rating lowered by a Wall Street analyst, but a spokeswoman for the bank told the AP customers shouldn’t worry about it going under.
“We are a diversified bank so we have different lines of business that are producing revenue versus the companies that are just mortgage lenders,” Christine Shaw said.
Wachovia Bank has boosted reserves for loan losses from 1.4 percent of loans to 2.2 percent of loans, the AP reported.
But Tennessee’s leading banking company, First Horizon National Corp., had a 25 percent-drop in stock price Thursday due to fallout from the IndyMac closure, according to an AP report.
Citigroup, Inc. — the nation’s biggest bank by assets — saw its stock fall as low as $14.01 this week, the lowest level since Oct. 8, 1998. A year ago, Citigroup stock was trading above $50.
The AP reported PNC Bank — based in Pittsburgh — disclosed a 19 percent net income increase for the second quarter of 2008 compared to the same period in 2007.
“PNC reported strong second quarter results, growing revenues faster than expenses while continuing to manage credit risk effectively,” James Rohr, PNC’s chairman and chief executive, told the AP.

Lending itself to trouble
• The federal government has pledged to provide financial aid to the nation’s two largest mortgage financiers, Fannie Mae and Freddie Mac, if needed. The House of Representatives is scheduled to vote on a housing-bill Wednesday that would provide financial assistance to the two companies. They are private, but Fannie Mae and Freddie Mac were created by Congress to encourage homeownership by buying mortgages from banks.
— Associated Press

About FDIC
• Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 8,494 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed.
— www.fdic.gov

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