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While some of the nation’s largest financial institutions are crumbling from the credit crunch and subprime mortgage meltdown, community banks are seeing deposit increases, their managers say.
They say consumers are withdrawing money from national, commercial banks and socking away their money locally.
“We have people who are bringing in checks from bigger banks. In recent weeks, we’ve had significant increases,” said Harold Slatcher, president and CEO of County Bank.
He said deposits are up at his nine Sussex County banks, although he could not say by what percent.
“A lot of people are taking money out of the stock market and putting it into CDs [certificates of deposit] too,” Slatcher said.
Depositing more money with local banks also means community banks can continue to provide car and home loans – at least for now.
But, bankers also say liquidity problems, including cash shortages, are trickling down from failures on Wall Street, and, if not alleviated, will affect local banks. As the nation awaits a decision on the $700 billion package that has not yet passed the U.S. House of Representatives, on Thursday, Oct. 2, the Dow Jones Industrial Average plunged 348 points and jobless claims reached a seven-year high.
At the same time, community bank managers say they see fewer loan defaults because – unlike large financial institutions that made aggressive, high-risk loans – community banks relied on more conservative, traditional loans.
“Some newspapers say credit is drying up and banks aren’t willing to make car or home loans. That is simply not true. We’re still making all the loans we’ve ever made,” Slatcher said.
“It’s not affected us. In fact, our loan volume has gone up,” Slatcher said.
The Federal Deposit Insurance Corporation insures deposits up to $100,000 – the same amount insured for all banks – but market fears are causing some consumers to move assets locally, he said.
“If you’re in a bank that is rumored to be going under, you would take out $100,000 to a community bank to spread the risk out,” Slatcher said.
He said the bank has avoided loan defaults because of careful loan consideration. “We’ve always based our loans on the ability of the person to repay the loan,” Slatcher said.
But, even though his banks are faring well, he said, all banks are affected by bank closures.
“When the FDIC closes a bank, all the banks have to pony up with increased premiums. The FDIC has reserves, but at some point when the federal reserves go below a minimum set by Congress, we’ll have to absorb that,” Slatcher said. He said FDIC officials told him weeks ago to expect higher insurance premiums in January.
“Even though my bank is not in trouble, I’m going to have to help pay for that,” Slatcher said. He said the banks will incur the costs and they will not be passed onto customers.
County Bank employs about 100 people and has $350 million in assets.
Delaware National Bank President Randy Taylor said he, too, has noticed an increase of deposits over the past two months “from the Wachovias and other national banks.”
“We don’t have a huge market share, so, deposit-wise, we’re really benefiting from this,” Taylor said. “People are obviously worried about large banks.” He said in Delaware National Bank’s New Castle and Sussex branches, deposits have been made in the tens of millions since August.
Loans remain steady too, he said. Taylor said his lenders continue to issue loans only for those considered acceptable risks.
“We look at an individual’s ability to repay loans, beginning with income. I think the big banks with subprime lending, well, they were lending to people who couldn’t repay the loan – that’s what really started this whole mess. They had no documentation of their loans,” Taylor said.
Despite dismal financial forecasts, including real estate downturns and some delinquent loans, he said community banks face a solid future.
“I really do think the banks like Delaware National and Wilmington Trust are going to be fine and maybe prosper. The well-run community banks that are large enough to withstand economic cycles – but not large enough to have made high-risk loans – will be fine,” Taylor said. “I don’t think it’s going to affect the community banks in Delaware, especially like it has with larger ones.”
Bringing it into focus: Wall Street to Main Street
Steve Verdier is senior vice president and director of congressional affairs for the Independent Community Bankers of America, a Washington, D.C.–based advocacy association that lobbies on behalf of community banks that range in assets from $2 million to $7 billion.
Verdier said about 10 percent of all U.S. banks control about 90 percent of assets, including such banks as Bank of America, JP Morgan and Wachovia Corp.
Risky loans are interlinked, as loans have been spread out among hundreds of loan holders – but, so far, Delaware banks have been largely shielded from such risks.
“Community banks are somewhat insulated from Wall Street problems, but eventually that insulation will wear thin,” Verdier said.
He said local banks will encounter cash shortages if Congress does not pass a $700 billion package.
“The question in front of Congress is whether to increase the deposit insurance coverage. We also think, in many instances, there’s not enough regulation on the mortgage-lending side,” Verdier said.
He said while community bank deposits may be up and loan default rates may be lower on a local level, borrowing, in general, is likely to become a problem, unless Congress acts.
In 1913, the government established 12 federal banks – for banks, not the public – that lend to regional banks. Delaware banks borrow from the Federal Home Bank of Pittsburgh.
When community banks make mortgages, they use mortgages to borrow more money from the federal bank system. Advances are also loaned from regional to community banks.
The problem is that federal banks get their money from Wall Street – the link between Main Street and the national financial failures.
The federal regional bank stocks – traded on Wall Street – are owned and controlled by the member banks’ boards, privately owned bank corporations.
If money is not available at federal banks, it won’t be funneled down locally. “That’s one mechanism this crisis gets right down to the hometowns,” Verdier said.
He said in the short term, community banks’ reserves are adequate to allow small businesses to borrow to meet payroll and cover small personal and commercial loans.
Community banks have been so far largely immune to the national credit crunch and subprime mortgage failures, he said.
But, he added, it won’t last for long. “It was true, until this crisis got to be so massive,” Verdier said.
Local developer supports quick intervention
Schell Brothers co-owner Chris Schell addressed about 50 employees – including many Ocean Atlantic real estate agents and brokers – on Wednesday, Oct. 1. The 2008 Economic Update was intended to dispel myths about the economic downturn, including the credit crunch and subprime mortgage defaults. Schell said the media has portrayed government intervention and aid to the crisis as a bailout, which may have caused the measure to fail.
“The House voted down the bill because they believe the public was against this. It was very frustrating to me. I can at least do my part to educate all the people in the company,” Schell said. He said today’s housing meltdown grew out of the American dream of home ownership entitlement. “Almost all banking crises are caused by housing downturns,” Schell said. Unregulated mortgage brokers issued too many risky loans. Those loans were consolidated, but then owners defaulted.
As the number of foreclosures grew, an overabundant housing inventory resulted. Schell also said the mortgage industry needs to be better regulated. Delaware is better off than other states such as California, Nevada and Florida, where the economic crisis and nonconforming loans have saturated community banks, he said. The government is the only entity with enough cash reserves to prevent a national market and credit freeze, Schell said. What has been called a bailout “is definitely something that’s going to help the banks, but the reason has to do with not just helping the banks, but it has to do with saving the economy,” he said.
Lehman Brothers
The Sept. 14 Lehman Brothers bankruptcy filing does not seem to directly affect employment numbers in the state, says Robert Glen, state bank commissioner. Glen said Lehman Brothers employs about 20 people in Delaware in its federal savings bank and asset management division. Glen said the bankruptcy filing applies to Lehman Brothers top-tier holding companies – not its asset-management division, which employs about 10 people in Wilmington.
Lehman Brothers Federal Savings Bank is the bank’s other Delaware division – employing another 10 people – that is regulated by the Feds. “There isn’t going to be a big impact of employment with Lehman Brothers,” Glen said. “They’re not a big employer in the state.”
Taxes paid
In 1999, Lehman Brothers bought a small bank in Delaware to operate part of its mortgage business. The operation fought a $10 million tax bill from Delaware because Lehman Brothers argued since only 2 percent of the bank’s income was earned in the state; they should pay only 2 percent of its taxes. In April, the Supreme Court ordered Lehman Brothers to pay the state $10.5 million in taxes from fiscal years 2000 to 2003, Glen said.
Lower franchise taxes
Bank franchise taxes in Delaware are down, however, Glen said. For the 2009 fiscal years, officials estimated in June to take in about $145 million. At a Sept. 15 meeting, the Delaware Economic and Financial Advisory Council estimated to raise only $129 in bank franchise taxes, Glen said.
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