Local Banks Can be Harbors of Safety

August 26th, 2008 by Rick Haynes

It is no surprise to most Americans that the economy is struggling and pulling down the banking industry into a cyclone of recession. As several financial institutions have failed requiring government seizure and oversight, a pool of local banks has wisely navigated the nasty financial muck and created islands of stability.

Last year, the failing sub-prime market was exposed and quickly deteriorated as more homeowners struggled with bad loans and increasingly depressed real estate values. A massive wave of foreclosures swept through the country and rippled into foreign markets, wreaking havoc around the world. Revenue for financial institutions plummeted due to loan defaults; debt burdens swelled. The weakening global economy, particularly the soaring price of oil and commodities, has only increased the anxiety of taxpayers and investors. This uncertainty has stifled any new revenue the banking industry hopes to raise in the immediate future.

Realizing the private sector’s difficulty in controlling the spiraling damage, the government has taken dramatic action to build confidence and cease the losses.

First, all credit extended to banks by the Fed will be increased from 28 to 84 days. This step is expected to alleviate the current pressure on banks. In coordination with this move, the Fed will adjust the primary-dealer loan program by extending it several months to January.

Secondly, Treasury Secretary Henry Paulson announced the creation of a covered bonds market in the United States, a market developed and widely used in Europe. Under this system, financial lenders provide funds to borrowers, yet maintain such mortgages on their balance sheets, and revenue earned from these is passed onto investors. This provides a higher level of security than the current mortgage-backed system since bond owners have a strong right to the bank’s assets instead of packaged securities. This new protection is believed to be precisely what investors are wanting before placing their money in the financial markets.

Despite the choppy financial waters drowning the U.S. banking industry, the current has not greatly affected some local financial institutions. HarVest Bank of Maryland is actually expanding, opening a fourth branch in the next few weeks in Frederick, Maryland. In the past year, assets have nearly doubled to $205 million. When I recently talked with Jack Hollerbach, president and CEO of HarVest, about the crisis, he said, “The banking industry tends to trip over itself. A lot of banks create confusion in the marketplace.” This is not the case with HarVest Bank. Mr. Hollerbach added, “Investing in the community is good business. We know our community better…” This approach has enabled this stellar community bank to form solid relationships and maintain a mission that helps build the area, while avoiding risky investments plaguing national institutions. At HarVest Bank of Maryland, executives are actively involved in community service organizations and events, a reflection of the bank’s culture of knowing people and companies in the region beyond a mere balance sheet. “We know all the local leaders,” Mr. Hollerbach said.

According to many, the large national financial institutions presently failing have encountered significant problems by pursuing a business mentality that is detached from the lives of customers. In the drive for higher profits, some of these banking executives and loan officers have largely relegated practices to pure numbers, only part of the banking picture. As we have seen, this approach is one aspect among many for the corrupt and failed lending practices that have cooled the economy. Often, with local banks, the ‘human’ element is a vital component that must be factored into any investment package. By looking beyond numbers, most local banks can achieve a holistic picture that reduces risky actions.

At the successfully growing First Virginia Community Bank, Chairman and C.E.O., David Pijor, agrees. “We are a relationship bank, not a transaction bank,” he said recently. “When you deal with people you know, risk is minimized.” Mr. Pijor also feels that most local banks have less fees and hassles, and better service than the enormous institutions. In terms of the larger credit crisis, Mr. Pijor says, “Whenever you have an underwriting system that is weak, people will find a way to manipulate it.” At First Virginian Community Bank, a stringent underwriting criterion is the norm, a practice that should have been in place for those now failing banks.

As the economy straightens out, perhaps Americans should choose a bank that has a proper business strategy focused on their needs and the community, rather than just the bottom line. In your search for a safe bank to call home, remember that there are gems right in our own back yard.

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One Response to “Local Banks Can be Harbors of Safety”

  1. Jim Jones said on August 28th, 2008 at 12:41 pm

    Haynes says in his Intro that “It is no surprise to most Americans that the economy is struggling and pulling down the banking industry into a cyclone of recession.”

    Based on what the banking industry has done in terms of irresponsibly issuing mortages which cannot possibly be repaid to people unlikely to repay them, I would rephrase that: “The banking industry is struggling, and pulling down the economy into a cyclone of recession.”

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