One community bank president has taken to having coffee and pastry with his more jittery customers. Another local banker can’t forget the woman who turned up at one of his branches with $90,000 in cash, terrified the major national bank she had her money in might collapse.
Such are some of the stories told by local community bank presidents, who are seeing first-hand the impact on Main Street of the global financial turmoil that erupted last month. And while the impact of the crisis on the nation’s top commercial banks and investment houses have dominated the headlines, the state’s diverse array of hundreds of neighborhood and community banks are seeing far-reaching changes in their own sector.
“It’s a wild ride and a fast moving story,” said John Heerwagen, chief executive of Middlesex Savings Bank in Natick.
While they played little if any role in the subprime mess that sparked the current crisis, local bank chiefs complain they are facing a big spike in their Federal Deposit Insurance Corp. premiums. They are also debating whether to take some of the hundreds of billions in capital now being offered by the federal government to thousands of financial institutions, large and small, across the country. And all have had to work long hours to reassure anxious customers during low points in the current crisis when the whole financial system appeared to be buckling.
Deep Pockets
But the turmoil has also opened up some new business opportunities as well.
Most local bank presidents have seen their deposits increase over the past few months, a trend driven in by concerns over the health of the nation’s largest banks. And the collapse of major Wall Street institutions like Lehman Bros. and a bevy of big mortgage companies have opened up new lending opportunities, both on commercial projects and residential mortgages, local bankers say.
“They were extremely aggressive in real estate lending,” said Richard Chapman, chief executive of Brookline Bancorp, of Lehman. “They deserved to get their heads handed to them.”
While community banks mostly avoided the risky subprime lending that has caused so many problems, local banks will end up paying a steep price for the sins of their mortgage company cousins. The collapse of IndyMac under a crush of bad mortgage loans wiped out a good chunk of FDIC reserves, forcing the federal regulator to increase fees on all banks.
Heerwagen, the Middlesex bank chief, estimates his FDIC premiums will double, possibly rising to $2 million a year for the $3.5 billion bank. Arthur Spears, chief executive of East Cambridge Savings Bank, estimates his bill will rise to $600,000, from $88,000 now, while Gerald Mulligan, chief executive of Lawrence Savings Bank, is bracing for the prospect of paying hundreds of thousands of dollars more to the FDIC.
“What happens is you push the healthy banks to pay for the problem banks,” Mulligan said. “That is going to weigh on bank earnings and bank stocks and the ability of banks to raise more capital.”
Hard To Resist The Temptation
Even as they face more payments to the FDIC, local bank presidents are also fielding offers from the federal government to inject capital into their institutions. All those interviewed insisted they did not need the money, but were not ready to turn out relatively cheap money either. But there is concern about the strings attached, and not just restrictions on dividend payments, but also unstated demands from the government that may kick in at some later date.
One concern is what happens when the government, at some point, decides it wants its money back.
“Who knows what it comes with,” said Kevin Bottomley, chief executive of Danversbank. “There are already some explicit strings, but who knows what it’s going to be like to have the government as a shareholder two or three years from now?”
And while stressing their institutions are sound, local bank presidents have also been forced to scramble to reassure customers at various points during the crisis.
Spears, head of East Cambridge Savings Bank, has held a trio of coffee meetings with nervous customers. The attendees were drawn from customers identified by branch managers as having called with questions.
“We have never been asked for safety like this before,” Spears said.
At Middlesex Savings, Heerwagen said the bank has sent out more than one letter reassuring major depositors and customers the bank is sound and profitable with extensive deposit coverage.
“What gets lost from time to time is the community banking industry, at least in this state, is very healthy,” Heerwagen said.
Extra Safety Net Down There
But for local banks, there has been much more deposit money coming in during the current crisis than fleeing. An attraction has been state coverage under the Depositors Insurance Fund that provides backup for all deposits with no cap, which works as an extra safeguard to the FDIC insurance.
Spears, chief executive of East Boston Savings Bank, saw deposits jump by $12 million in the third quarter, or about 3 percent – double the usual rate of growth.
And Richard Chapman, chief executive of Brookline Bancorp, saw his deposits rise by $90,000 one day in mid-September after a woman drove up from Quincy to deposit her savings in the bank after seeing it mentioned on a local newscast. She had previously been a customer of a big bank.
Deposits are up roughly $60 million for the year, he said.
“I thought, ‘Boy people are scared,'” Chapman said, reflecting in the incident.
And local community bank chiefs say the twin housing and financial crises have reopened business opportunities previously lost to Wall Street investment houses and mortgage companies.
Spears said his bank has been able to significantly boost its lending in Cambridge’s relatively stable residential real estate market. The bank’s real estate lending is up 25 percent this year, having made $153 million in mortgage loans.
Bottomley, chief executive of Danversbank, said his bank is being invited to bid on commercial loans as high as $20 million – several million more than before the shakeout.
“It’s clearly generating more of an opportunity for us,” Bottomley said.
