By Ivan Raconteur
McLEOD COUNTY, WRIGHT COUNTY, MN Independent community banks may not be flashy, but according to local bank presidents, this could be one reason they have remained stable amidst the turmoil in the global financial arena.
John Forstrom, president of Security State Bank of Howard Lake, said the way independent banks do business hasn’t changed for 100 years.
Roger Boyce, president of Flagship Bank Winsted, agreed.
What has changed, according to Boyce, is the way in which banks deliver their products, including drive-throughs, telephone, and Internet banking.
The philosophy behind independent banks hasn’t changed.
“We are traditionalists,” Boyce said. “We offer safe products.”
Kent Houston, operations officer at Citizens State Bank of Waverly, agreed.
“We’ve been telling our customers that we are a conservative operation,” Houston said. “We never promoted or encouraged people to get involved with things like adjustable rate mortgages because it could negatively impact them in the future, should things change.”
“We practice sound banking practices and recommend sound budgeting practices for a household,” he added.
It is clear that these local bankers do not like being lumped in with Wall Street investment banks, national mortgage brokers, or other large institutions, and they shared some reasons why they believe community banks are a good option for consumers.
Deposits are safe in local independent banks
The biggest concern local bankers are hearing from their customers lately has to do with security.
The most frequently asked question is, “Is my money safe?” Doug Jilek, president and CEO of First Community Bank Lester Prairie said.
Houston said he, too, has had some customers ask if their money is safe.
“We tell people we’re sound, the bank is still functioning very well. We haven’t been speculating,” Houston said.
The recent change to Federal Deposit Insurance Corporation (FDIC) insurance coverage has calmed the fears of many people, Jilek said.
On Oct. 3, the Emergency Economic Stabilization Act of 2008 temporarily increased the FDIC coverage limit from $100,000 to $250,000.
Single accounts (owned by one person) are insured up to $250,000. Joint accounts (two or more persons) are insured up to $250,000 per co-owner. IRAs, certain other retirement accounts, and trust accounts are insured up to $250,000. The legislation authorizing these changes is effective Oct. 3, 2008 through Dec. 31, 2009.
“We’ve been working on that as bankers for years,” Jilek said.
He added that there is no risk to customers who have deposits that are FDIC-insured.
This security can make local banks a good option for risk-averse customers.
Boyce said when he first went to work in the banking industry in 1970, an old banker gave him some advice that he has never forgotten.
“The return of your asset is more important than the return on your asset,” Boyce said.
“The stock market lost $8.4 trillion between October 2007 and October 2008,” he continued. “We may pay a lower rate of return, but you haven’t lost a dime.”
Earning 4 percent on a money market IRA doesn’t sound so bad, Boyce said, compared to losing 40 percent of the value of one’s IRA in the stock market.
Houston said with the recent trends in the stock market, he has seen many people coming in to ask about products such as CDs (certificates of deposit) and IRAs.
“They say, ‘I know I’m going to get at least three or four percent back,” Houston commented.
“Diversification is huge,” he added, noting that he recommends that people keep their investments in a variety of products.
Local knowledge and local decision-making
One thing that sets the local banks apart is that they are relationship-driven rather than profit-driven.
This does not mean that they don’t make a profit, but they invest in the communities they serve and know their customers by name.
“We are successful when our community is successful,” Boyce commented.
This local connection carries over into the way independent banks do business.
“We know our customers. We are not going to sell off their loans. We want them to succeed,” Boyce said.
Forstrom pointed out that this can be especially beneficial when a customer runs into problems.
“Who are you going to call? We offer local origination and local servicing,” Forstrom said.
He contrasted this with other institutions. In a local bank, the customer often deals directly with the person who made the loan. When dealing with a large company, a customer may not know who to call, especially when loans are sold and re-sold.
All of these bankers said they prefer to work with customers face-to-face and keep the lines of communication open.
“None of us wants to see empty houses,” Forstrom said. “We are much more able to keep people in their homes.”
Boyce offered some advice to customers who are experiencing difficulties.
“Come in and talk to us. Maybe we can sort it out,” he said.
Houston noted that some of the problems in the housing market resulted from people taking out the highest mortgage for which they could qualify using other institutions, on terms that his bank would not offer.
“We don’t encourage people to stretch themselves that way,” Houston said. He added that his bank advises people to live within their means.
“We work with customers to fit what they are looking for and what they can afford,” Houston commented.
He explained that his bank tries to create an environment where people can feel comfortable.
“We’re going to work with them to find answers that are right for them, not just for our profit,” Houston said.
Credit where credit is due
Another thing people are concerned about is the “credit crunch” that has been in the headlines recently.
“They (customers) talk about tight credit, and some are reluctant to ask,” Jilek said. “If you deserve a loan, you are still going to get it.”
The reason independent banks are still strong is that they did not get involved in some of the business practices that got other institutions into trouble.
“We did not make loans with no income and no assets,” Boyce said.
He said he is making loans to qualified customers.
“You have to ask conscientious questions,” he explained, noting that his concern is that customers are able to repay their loans.
“We don’t want your house or your car; we want our money back,” Boyce said.
“We require a down payment,” Jilek said, explaining that customers who have made an investment are more likely to repay the loan.
Forstrom said he is making loans, but customers must be able to demonstrate repayment ability.
“We practice the basic banking of the past,” Houston said. “We use standard percentages that have been set over time.”
He also said that when making a loan, his bank requires customers to show that they will be able to pay it back.
“The average wage earner is not going to see a noticeable change,” Boyce commented.
“There are some tremendous opportunities out there for someone with money,” Forstrom said, adding that lower prices on homes have created some bargains. “It’s not all bad news.”
Main Street, not Wall Street
The small banks did not participate in the federal bailout, Jilek said.
“A lot of the money went to nine facilities. That’s not anything to do with us,” he added.
“There should be smarter regulation, not more regulation,” Forstrom said. He added that the banking industry needs 21st century regulation to meet the needs of today.
One important distinction between independent banks and some of the companies, such as AIG, that have been involved in the bailout is that AIG is not a bank, but has been involved in “bank-like” activities.
“Bankers have always paid the cost of bank failures. Taxpayers have not paid a dime,” Forstrom said.
He explained that in the 75 years the FDIC has been in existence, banks have been required to purchase insurance, and the surviving banks have paid for those that failed.
Local investment has helped to keep independent banks stable.
“The value of our banks is up and down Main Street, not in some computer program,” Forstrom said.
“I feel a heavy responsibility for other people’s money, but I don’t have trouble sleeping at night, because I am comfortable with where we are,” Boyce said.
Forstrom added that local bankers are also employers, and feel a responsibility not only to their customers but to their employees.
Boyce said that 80 percent of the sub-prime loans were made by unregulated brokers. Local banks, he said, are closely regulated to the point where they know the regulators personally because they deal with them directly, and if there is ever any question, the bank examiner “will get right in our face,” Boyce explained.
“There are no golden parachutes in outstate banks,” Jilek said. There is more accountability, he added.
“We haven’t hedged. We haven’t bought sub-prime mortgages,” Jilek commented.
In a climate where headlines are filled with doom and gloom about the global financial picture, local independent banks have continued to quietly do business the way they have for decades, serving and working directly with the people in their communities.
More information about the FDIC is available at www.fdic.gov.