Community Banks Insulated From Financial Crisis

Many community banks are largely insulated from the financial crisis. They take deposits and lend them to local businesses and home buyers. That model is looking quite stable right now.

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In American business, people often think bigger is better. But in the current banking crisis, the opposite is proving true. While there seems to be no end of bad news for the nation's banking giants, most smaller community banks are doing OK, as NPR's Frank Langfitt explains.

FRANK LANGFITT: The headquarters of the Easton Bank and Trust is a small red brick building just off Route 50 on Maryland's eastern shore. Outside is a sign for the times. We are a safe haven for your money, it reads. And local people here seem to believe it.

Mr. MICHAEL MENZIES (CEO, Easton Bank and Trust): We're blessed. We're still very profitable.

LANGFITT: This is Michael Menzies, the CEO of Easton. He says his bank has avoided the problems plaguing bigger ones.

Mr. MENZIES: We have more challenges this year than we had last year or the year before, but those challenges are nowhere near life threatening, and I'm not going to need to go to Paulson and ask for $700 billion to get out of this mess.

LANGFITT: The reason is pretty simple. Easton Bank and Trust is a traditional small town bank. It doesn't borrow lots of money from other banks, so it's not reliant on a credit system that's now freezing up. Instead, it uses money from local depositors. Of course, that means lower profits, but Menzies says it also brings more stability.

Mr. MENZIES: We don't expect a 30 percent return on equity. We don't take wild, exotic risks.

LANGFITT: In an era of financial confusion, this old fashioned approach has a certain appeal, and Menzies says he's been able to calm the fears of depositors because they know him, and they know where to find him.

Mr. MENZIES: If this company gets in trouble, I'm not taking a $100 million golden parachute and moving to the French Riviera. Believe me. You know, I'm hung by the community.

LANGFITT: Menzies is chairman elect of the Independent Community Bankers of America. He says most of its 5,000 members are weathering the storm. But economics is often local, and small banks in parts of California, Nevada, and South Florida are struggling. They may be insulated from Wall Street, but many are tied to local real estate, and it's brutal.

Mr. JOHN MCKILLOP (CEO, Independent Bankers' Bank of Florida): Bankers are very nervous.

LANGFITT: Jim McKillop runs the Independent Bankers' Bank of Florida, which helps smaller banks. He says those that got caught up in the real estate boom are now paying for it. In August, state regulators shut down First Priority Bank in Bradenton.

Mr. MCKILLOP: They ended up having too many large loans to builders and developers who were going bankrupt and couldn't pay.

LANGFITT: When developers go under, their employees lose their jobs, and then those workers can't pay their loans either. Steven Andrews runs the Bank of Alameda in northern California. He says many banks in the state's central valley face this problem.

Mr. STEVEN ANDREWS (CEO, Bank of Alameda): Say they lent to the guy who made the windows, or they lent to the guy who did the paving, all those folks are stopping dead in their tracks, too. They're not employed. They have very little income. Those are the ones that are defaulting on their small business loans. Anybody tied to the trades has been crushed.

LANGFITT: And then there are community banks in America that seem as if they're on a different planet. Chris Osborne runs one of them.

Mr. CHRIS OSBORNE (CEO, Iowa Trust and Savings Bank): Business at Iowa Trust is very, very good.

LANGFITT: Iowa Trust and Savings Bank in Emmitsburg makes most of its loans to farming operations. And the price of corn has been so high, Osborne's customers are flushed with cash. In fact, he says most are paying their loans off, get this, early.

Mr. OSBORNE: When the agri-business customer comes in and borrows for, say, a piece of machine, it's usually a five-year note. And what we're seeing is, for example, if it was a five-year loan, they're actually able to pay that often in three to four years.

LANGFITT: Osborne says he does not expect the boom to last. He says, if the world heads into recession, demand for corn will probably fall. And then, banking in Emmitsburg might start to look a little more like some other parts of the country. Frank Langfitt, NPR News, Washington.

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