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Small Banks See More Deposits
January 6, 2009
The financial downfall of some of Wall Street's biggest players have given community banks a boost, as depositors see them as safer havens, some community bankers said. Castle Bank & Trust Co. of Meriden has seen its deposits increase in recent weeks as customers caught on that the national financial markets were starting to wobble, bank President Lawrence McGoldrick said. Neither Castle Bank nor Apple Valley Bank & Trust Co. of Cheshire had stock in Freddie Mac or Fannie Mae, gobbled by the federal government and its stock turned to dust. Nor did they dally in the subprime loan market that turned toxic and ate a hole in the wholesale credit market that now threatens the U.S. economy. "We had a lot of people who kept money at the big banks, and big was equated with strong," McGoldrick said. "And now things have turned, so that little, and close to home, is good. Big and far away is bad. People are nervous. They want to know about insurance. They want to put their money in a place where they know the president of the bank and where he lives." Banks in the state may be more judicial with their lending and while they may see some late payments in construction loans, they are well capitalized to ride out the current financial storm, bankers said. "By and large, banks in Connecticut are in sound financial shape," said Gerald Noonan, president of the Connecticut Bankers Association. "In most cases, they are extremely well capitalized." The state ranks third in the nation for having the most banks invested in Freddie Mac and Fannie Mae. Webster Bank wrote off $8 million in Freddie Mac and Fannie Mae stock that may only dent its capital, but will effect lending. "Every dollar in capital is multiplied 10 times," Noonan said. "If you take $8 million out of capital, that's $80 million you can't lend. Borrowers suffer." Those restrictions lead to less borrowing for new homes and businesses, which lowers confidence in the overall economy, said Peter Gioia, a senior economist for the Connecticut Business and Industry Association. "Community banks are not in terrible shape," Gioia said. "They do have the capacity to lend right now. But there needs to be a re-entering of Wall Street for financing. Wall Street needs to get better again to be part of the picture." Maureen Frank, president of Apple Valley, said the bank is more careful in its lending but, as with Castle Bank, is still lending money. Construction borrowers are taking longer to make payments than other sectors. But construction loans make up only a small part of the bank's lending portfolio. "It's relatively insignificant," Frank said. "We're not a big bank." While enjoying something of a growth period, McGoldrick said Castle Bank is also careful with construction or speculative loans. "We are lending more money than we have in the past couple of years, but it's lending locally and prudently. That's why we're in a strong position," he said. Construction loans overall have tightened because of the slowdown in the housing market that has spilled into commercial building. "You don't want to lend to build a house that there is no buyer for," McGoldrick said. "When there are buyers, we will work with builders." The public is hearing about the negatives of the big institutions that were sophisticated and took more risks. "But the community banks stuck to its knitting," McGoldrick said. "Now old fashioned is coming back into fashion." But that doesn't mean McGoldrick doesn't have concerns. He doesn't know what the final bailout plan will look like. One fear is that the big banks that can no longer go to the wholesale capital markets for capital will turn to pricing up deposits, and offering good rates on certificates of deposit, the products marketed by community banks. "We have to be competitive," McGoldrick said. "My world has gone from national to local. One of the advantages of being small is that we have more control of our local environment."
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