Another community bank bites the dust

“It's very sad to see that a big bank is taking over a little bank…It just makes me feel sick.”<br />
That’s how one disappointed customer reacted to the closure of the Sonoma, CA-based Sonoma Valley Bank last Friday.

Sonoma Valley was one of 8 US banks closed by the Federal Deposit Insurance Corporation last week, bringing the total number of banks that have closed down this year to 118.

Sonoma Valley was not a large financial institution – it had a total of three branches, at the time of its shuttering by the Federal Deposit Insurance Corporation (FDIC). It was the only locally-owned community bank in the Sonoma Valley.

Its closure and absorption by rival Westamerica Bank will not register nationally.
No Wall Street number-crunchers are going to revise their projections for the national economy based on the closure of this small community bank.

Secretary Treasury Tim Geithner will not call a news conference in Washington to express his sadness and regret that Sonoma Valley Bank could not be kept open. And Larry Summers, President Obama’s chief economic advisor, may not even know that the bank closed.

And yet, Sonoma Valley Bank’s closure is nonetheless important. It may not matter to Wall Street, but as that quote above from a former customer makes clear, the closing of the bank certainly matters to people living in the Sonoma Valley. It matters as well to the bank’s employees, and their families. And it also matters to the local investors who held the bank’s stock in their portfolios.

The story of Sonoma Valley Bank’s closure, as told in the Saturday edition of the Santa Rosa Press Democrat, a local paper that serves the Sonoma Valley community, might be the story of every small community bank that has had to close in the last few years.

The bank’s balance sheet, as the article notes, had been hurt due to losses resulting from risky loans made to real estate developers in recent years. One particularly damaging deal described in the article “involved an $11 million loan to develop a self-storage facility south of Santa Rosa. The bank was forced to foreclosure and the losses were steep…”

(Note to financial reporters – these are the details about bank closures that readers need to see. Please  – no more simply re-writing those Friday-evening FDIC news releases following a bank closure.)

Compounding these losses from bad loans, a former Sonoma Valley Bank board member says in the article, was a management culture under which the bank’s executives had “’enriched themselves at the expense of shareholders.’”

The same former board member also concedes that the bank’s loan committee should have done a better job of vetting loan applications. Perhaps with greater vigilance, the bank could have avoided bad deals like the self-storage facility loan.

Risky loans to real estate developers that went bad. Bank executives intent on their own gain, rather than on protecting the health of the bank’s balance sheet. Board of director committees that could have been more attentive.  

This is the toxic mix that did in Sonoma Valley Bank.

How many more times in 2010 will the same poisonous combination force additional small community banks to close?

More importantly – when will Congress and the White House agree that more needs to be done to keep troubled small community banks open?

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