Anyone
who’s tried to
finance a car, house
or business expansion
recently knows that the
recession is hitting
banks hard. Some have
folded, and the U.S.
government is doling
out billions of dollars
to help others stay afloat.
Ten of the 13 biggest
funding recipients from
the U.S. Treasury Department’s
Troubled Asset Relief
Program saw their outstanding
loan balances decline
by a total of about $46
billion, or 1.4 percent,
between the third and
fourth quarters of 2008,
according to the Wall
Street Journal.
The story’s much
the same in Central Ohio,
where the four biggest
banks all lost money
last year. Modest increases
in 2008 loan volumes
at Huntington (1.6 percent),
KeyBank (2 percent) and
Fifth Third (4.1 percent)
weren’t enough
to offset losses, and
reflect the ongoing credit
crunch. National City
saw its volume shrink
11.3 percent.
But while the Goliaths
are struggling, many
community banks are faring
much better—especially
those that managed to
dodge the subprime bullet.
Some of the largest local
institutions, including
Park National, Commerce
National and Heartland,
even managed to turn
a profit in 2008.
Still Lending
Banks today fall into
one of two categories,
says Columbus First Bank
Chairman and CEO Rhett
Huddle. First are the
banks that have been
forced to write off too
many bad loans, resulting
in a shortage of capital. “So
they’re not making
loans, and they’re
actually shrinking their
balance sheets,” Huddle
says. On the other hand
are banks with low charge-off
ratios, strong capital
and the opportunity to
grow. Huddle says most
community banks fall
into the second group.
Columbus First, which
opened its doors 18 months
ago, experienced rapid
loan volume growth in
its first full year of
operations. As of Dec.
31, the bank had a little
more than $78 million
in outstanding loans,
up from just over $30
million the year before,
Huddle says.
Columbus First’s
results aren’t
an anomaly. According
to a survey by the Independent
Community Bankers of
America, 40 percent of
community banks increased
their loan origination
volume in 2008; just
11 percent believed the
economic crisis significantly
curtailed lending capabilities.
Twenty of 29 community
banks in a 12-county
region around Central
Ohio saw at least slight
loan growth last year,
according to Harold Hanley,
managing director in
the Columbus office of
investment bank Keefe,
Bruyette & Woods.
Fifteen of those 20—all
of which have less than
$1 billion in assets—had
growth exceeding 4 percent.
Average loan growth was
18.2 percent.
While the economic climate
is more challenging this
year than last, many
institutions are faring
well, Hanley says. “I
think they have stuck
to their community bank
focus. They know their
customers, and they know
who they’re lending
to,” he says.
Three-year-old First
Bexley Bank saw loans
increase by 83.6 percent
between 2007 and 2008,
says President Dave Mallet.
He attributes the boost
to the bank’s size
($110 million in assets)
and tenacity. “We
aggressively go after
business. We knocked
on lots of doors and
tried to meet new people,” Mallet
says.
Benchmark Bank grew its
loan volume by 23.5 percent
last year. The bank will
celebrate its fourth
anniversary in August,
says Jerry Caldwell,
chairman and CEO. “As
a new organization, you
have the opportunity
to grow at a higher percentage
rate because your base
is smaller,” he
says.
Still, the increase is
encouraging, Caldwell
says: “I don’t
think you’re going
to find many banks in
America that grew their
loan portfolios to that
degree in 2008.”
Park National Bank and
Heartland Bank both saw
loan growth of about
6 percent last year. “Throughout
our history, we’ve
had years much better
and other years not quite
as good,” says
Tom Button, Park’s
senior vice president. “Part
of it is context. Six
percent in the environment
we were working in, we
feel pretty good about
that.”
Heartland President and
CEO Scott McComb agrees. “Historically,
we can profit in the
8 to 9 percent range
year-to-year. Finding
quality credit remains
a challenge,” he
says.
Community banks have
become more cautious
in light of the downturn;
some have tightened lending
standards to avoid getting
saddled with bad debt. “As
this economic problem
persists, it’s
not just the people who
caused it who get into
trouble,” Caldwell
says. Even longtime customers
who haven’t missed
a payment in 20 years
may run into trouble
if they get laid off.
Huddle says Columbus
First is scrutinizing
not only past payment
history, but also the
likelihood of future
default if the recession
persists. “We’re
looking at historical
numbers—what somebody
did over the last one
to three years—and
we’re projecting
forward asking, ‘How
will they be able to
do in a softer economy
if their revenues are
down a little bit? Are
they still strong enough
to survive?’ ”
“What we’re
trying to do is prepare
for the worst and hope
it doesn’t happen.
We’ve built up
our loan-loss reserves
dramatically, as every
bank in America has,” Caldwell
says. Benchmark doubled
its reserves during 2008.
But while lending was
up, so were charge-offs
(write-offs of assets
that are deemed unrecoverable).
After all, even the best
lenders end up with a
few bad loans in their
portfolio. Park, for
example, had a 2008 charge-off
ratio of 1.3 percent,
an increase of 140 percent
from 2007. “That
is part of the business,” Button
says. “When risk
is higher, we will absorb
losses. We haven’t
changed our approach
to the market, and we
are growing loans notwithstanding
the fact that the economy
is not great right now.”
First Bexley is also
staying the course. “We
didn’t tighten
standards. We’ve
been a fairly conservative
bank from the start,” says
Mallet, noting the bank
wrote off just one bad
loan in 2008. “So
yes, the economy did
impact us, but we didn’t
buy any of those silly
mortgage-backed securities;
we didn’t get involved
in that kind of stuff.”
Influx of Borrowers
For banks that have capital
available to lend, the
current market has presented
new growth opportunities.
Huddle says Columbus
First has seen a “migration” of
customers from troubled
banks to institutions
such as his that have
excess capital. “Not
only are [troubled banks]
not growing, in some
cases their capital has
been so damaged that
they have to shrink their
loan portfolio. So everybody
is being invited to leave,” he
says.
“In October and
November, when some of
the worst news was out
there and Lehman Brothers
was allowed to fail,
we had people who were
getting their deposits
out of the largest banks
in town and bringing
them to one of the smallest
banks in town: us,” Huddle
says. “It is something
I thought I would never
see.”
John Smiley, Columbus
First’s president,
says the bank saw an
influx of potential borrowers
soon after the economy
tanked late last year. “At
the end of the third
quarter, we had just
so much turmoil, and
that helped the fourth
quarter tremendously
in getting a lot of new
deposits over here,” he
says. The fourth quarter
was Columbus First’s
best, with loan growth
up more than 64 percent.
Park, Heartland, First
Bexley and Benchmark
are seeing similar results. “It’s
fairly well-known that
there are banks in our
market that are not as
aggressive as they were.
In some cases, we are
speaking to those borrowers,” says
Park’s Button.
“We are seeing
a lot of consumers—good,
quality borrowers—that
the large banks aren’t
able to accommodate.
So the community banks
have a wonderful opportunity
to pick up some of those
relationships,” says
Benchmark’s Caldwell.
Amid all the turmoil,
some customers want to
be seen as more than
just an account number:
They want to forge personal
relationships with their
banker to give them a
sense of security. Charles
Moon, who owns Westerville-based
Moon Rental Trust and
Moon Restoration, switched
his accounts to Benchmark
soon after the bank opened. “I
think of Benchmark as
my financial partner
in the growth of my business.
In previous associations
with larger banks, I
felt like a customer
instead of a partner,” Moon
says.
“I think more people
are re-evaluating their
banking relationship
with all that’s
happened in the past
12 months,” Smiley
says. “Most of
the clients we deal with
are business owners looking
for personal attention.”
“When you’re
dealing with a person
at a community bank,
you’re usually
dealing with a decision-maker,
so you get a quick response,” Caldwell
says. “At a larger
bank, they always to
go to Atlanta or New
York or Timbuktu, and
that lengthens the process,” he
says.
Back to Basics
Community bankers say
their institutions can
be counted on for consistency
as well as simplicity.
Underwriting stan-dards
rarely change, says Robert
Palmer, president and
CEO of the Community
Bankers Association of
Ohio. “The lending
philosophy has always
remained consistent.
That consistent underwriting
will work both in a warm
and hot economy as well
as a subdued and cold
economy,” he says.
“Community banks’ balance
sheets are very simple,” Caldwell
says. “Their investment
portfolios are very vanilla,
and they’re making
their living supporting
the community.”
“We get our deposits
from the communities
we’re in, and we
lend that out to people
in the community,” says
First Bexley’s
Mallet. “You do
what you know. Don’t
lend money if you don’t
understand the business.”
Bankers say that principle
is the reason why few
community banks became
entangled in the subprime
and mortgage-backed securities
mess. Such investments
just don’t fit
their portfolios. “Community
banks are not connected
to Wall Street,” says
Heartland’s McComb. “There
are over 8,000 community
banks that don’t
have any issues that
would be happy to take
on some of the 94 percent
market share that bigger
banks take up.”
Huddle agrees. “We
have been sticklers for
old-time principles,
like if you buy a house
you should make a down
payment. Document your
income; if you say you
make $30,000 a year,
show me tax returns that
support that,” he
says.
Beyond uncomplicated
balance sheets, customer
service is essential
to any financial institution’s
success, says Button. “We
staff our organization
with very well-rounded
bankers who have broad
skill sets. When the
economy is having difficulties,
people want to talk to
people who have experience
and know what they’re
talking about,” he
says.
Caldwell tries to keep
his staff—and accountholders—well-informed. “We’ve
spent a lot of time educating
our customers either
one-on-one or through
seminars with prospective
customers,” he
says. At a recent event,
he says, “Virtually
every one of them had
no idea that they could
have multiple accounts,
legally and properly
titled, that get a husband
and wife up to $2 million
fully insured at one
institution. The big
banks don’t train
their people to convey
that to the customer.”
Cra-Co Investments owner
Errol Kahoun borrows
from Benchmark because
of its knowledgeable
and helpful staff. “When
you call a small bank,
you talk to the people
who can make a decision
and have flexibility
to move and make your
request a viable request.
If you talk to a larger
lending institution or
bank, they really tie
your hands,” he
says. “There’s
no flexibility, whether
you’re a good customer
or not.”
Dianne Einstein, a partner
at the law firm of Einstein & Poling,
also had communication
problems with a larger,
national bank. For several
months after her bank
was involved in a merger,
$22,000 of her firm’s
money went missing. The
bank never noticed the
problem. When it was
discovered internally, “The
firm spent thousands
on a bookkeeper in order
to find the money and
put it in the right place,” Einstein
says.
Now, Einstein & Poling
is a Columbus First customer. “It’s
just one phone call and
then the result,” Einstein
says. The bank also offers
a remote capture service
for business customers,
which offsets the disadvantage
of having just one branch. “I
never have to go to the
bank. I get a check,
run it through the machine
and it goes into my computer.
It’s great for
record keeping,” Einstein
says.
Huddle says many customers
are realizing that bigger
isn’t always better. “I
tell people when they
come to us for a $350,000
loan, to put it in perspective,
that we’re a $100
million bank. That $350,000
is meaningful to us.
At that big bank, it’s
not even close to a rounding
error,” he says.
“Community banks
have strong relationships
with their customers,” Palmer
says. “Customers
are coming to community
banks because of the
upheaval that is occurring
in the larger, regional
banks. We sort of refer
to it as a safe haven.”
Michelle
Davey is an editorial
assistant for Columbus C.E.O. |