As big banks falter, community banks do fine

“What troubles the community banks is that the whole banking industry is being painted with this broad brush as the bad guys, and they aren’t: They didn’t make those risky investments. They’re out there playing by the rules,” says Karen Tyson, a spokeswoman for the Independent Community Bankers of America in Washington, D.C.

The health of smaller banks has allowed many communities to continue with business as usual despite the national credit crunch. Jeanne Morrissey is a builder in South Burlington, Vt., who uses the Merchants Bank, a statewide bank.

“You wouldn’t know at all there’s an economic crisis at my bank,” she says. “We have not seen a shred of difference in terms of available money.... All of my lines of credit have held. In fact, the bank has even offered to do more.”

But as the recession continues, these community banks are also coming under some pressure. Although more than a third of community banks reported profits during the fourth quarter of 2008, according to the FDIC, just under a third reported net losses.

Several small banks in states like California and Florida that were hit particularly hard by the real estate crash have also been forced to close. But in general, community banks still have healthy balance sheets.

In Vermont, the Merchants Bank was founded in 1849, and its motto is “Vermont Matters.” For the past 12 years, it’s tried to prove that by keeping most of its assets in state. “Every single loan that we make we hold in our own book. That makes us much more risk averse,” says Mike Tuttle, president and CEO.

As a result, the bank’s “No. 1 priority” is to make sure the loans they make are appropriate for their customers.

“We want to make sure that our customers can repay them because it doesn’t do either of us any good to put them in something that they may have difficulty with,” he says. “We want them to succeed.”

Of the thousands of mortgage loans on their books, only four are in foreclosure.

Many small banks do sell mortgages on the secondary market to the Federal Home Loan Mortgage Corp., known as Freddie Mac. But most, like the Union Bank & Trust Co. in Evansville, Wis., also retain the servicing of those loans.

“So if a customer has a problem or question about their mortgage, we can answer that question from right here at our desks,” says Chris Eager, president and CEO.

Like many other community bankers, Mr. Eager is “adamantly opposed” to the bailout of the big banks. “This ‘too big to fail’ is absolutely ridiculous,” he says. “We know that if we lose money and manage our business irresponsibly, we have to close.... So it tends to make you watch the expenses and be a little more careful than you otherwise would.”

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