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Local Banks Feeling Pinched
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"What happens is when the real estate market implodes, those appraisal values start going down," Linhart said. "To me, it's just a period of time where you hunker down and weather it, but it will certainly impact bank earnings in the short term."
Even those banks that have largely avoided losses from loans related to the real estate downturn are getting hit by a compression of their net interest margins -- the difference between what they earn on loans and pay out on deposits -- because of the central bank's rate-cut campaign.
The Fed has cut the federal funds rate to 2.25 percent, from 5.25 percent, since September.
"In January alone, the Fed cut 125 [basis] points in eight days -- which is huge," said Muth of FTN Midwest. A basis point is 0.01 of a percentage point. "There is no way that banks can keep up with that kind of decrease."
Competition for deposits has also kept the interest rates banks pay to their customers higher.
Local banks' troubles have not been exclusive to Northern Virginia, nor strictly tied to that region's real estate market. Sandy Spring Bancorp, headquartered in Olney, has seen its nonperforming loan portfolio surge to $34.4 million at the end of 2007 from $3.7 million a year earlier. The company attributes a sizable portion of that increase to a troubled development loan in Delaware, analysts said.
Chevy Chase Bank, of Bethesda, the area's largest locally headquartered bank, announced late last year that it was laying off about 300 employees as it reduced banking hours and mortgage operations. Chevy Chase underwrites billions of dollars in home loans throughout the country, many in California.
Cardinal Financial has weathered the turbulent credit markets and had essentially no nonperforming loans on its books at year's end. The McLean company's mortgage-banking subsidiary, George Mason, also remained profitable last year, though profits declined.
Bernard H. Clineburg, chief executive of the company, said Northern Virginia will remain a difficult place for community banks for at least the rest of the year.
"I think there is a bomb waiting to blow," Clineburg said. "I can feel it. I can smell it. I just don't know where it is going to be."
