Bankers Banks Pick Up Business and Maybe Bad Loans

Bankers banks â€" banks which loan to community banks â€" are both benefiting and facing challenges from the financial crisis.

On one hand, they are enjoying the extra kick of business from community banks which benefit themselves as majors and regionals suffer or go bust. On the other hand, a couple of bankers banks are losing money because, in the process, they have inherited bad loans.

At least two of the 20 bankers banks in the country â€" Silverton Bank of Atlanta and Nexity Financial Corp. of Birmingham, Ala., are heading for losses because they have picked up bad loans from community banks.
Since the 20 bankers banks serve 6,000 community banks, there are fears that the sickness could easily spread. It could be especially hard on bankers banks because they are limited to dealing with this small pool of customers. The problem could be especially acute in states such as Florida, Georgia and California where the real estate downturn is most severe.

But there is good news. "We've doubled our loan portfolios since last year," Bill McFaddin, president of the Community Bankers Bank told Financial Services. The Midlothian, Va. bank has $190 million in assets and whose 90 other banks in Virginia, West Virginia, Maryland, North and South Carolina, as shareholders.

As his bank helps community banks but together loans that might be too big for one bank, however, he says he has to be extra cautious about the caliber of loans it is picking up. The big advantage is that "community banks and Main Street banks weren't part of this debacle. We didn't make sub prime loans," McFaddin says.

Yet bankers banks face issues with the Federal Reserve which has kept Fed funds rates higher than the actual market rates. And, the real estate market isn't likely to improve until well into 2009. "Our earnings are better than they have ever been," says McFaddin. "But my loan watch list is longer than it has ever been, too."