Vermont banks fair well as interest rates remain low

Vermont Business Magazine, Sep 01, 2002 by Kelley, Kevin

It's no surprise, obviously, that the performance of the banking industry reflects overall economic conditions when times are good for American business, they're good for banks too; and when a recession hits, banks feel the pain as much as other sectors do.

Currently, however, an exception to that rule appears to be in force in Vermont and other parts of the country. Small and mid-sized banks - the ones untouched by corporate collapses or looming loan defaults in Latin America - are continuing to post strong results even as Wall Street flounders and as the growth rate lags.

The apparent disconnect between banks and the larger economy is especially evident in Vermont. Here, all banks are small or mid-site, and many are still reporting double-digit jumps in earnings despite compelling evidence that the state' has fallen into recession.

Some exceptional circumstances are working in the banks' favor.

Deposits are up substantially at most institutions, providing them with ample funds to meet the heavy demand for mortgage lending and refinancing. Low interest rates are the key factor on both the supply and demand sides.

Banks now pay only about 2 percent on certificates of deposit and even less on savings accounts. At the same time, home owners and buyers are eager to take advantage of unusually low loan rates, which nonetheless are substantially higher than what banks are paying to their depositors. In addition, the sputtering economy has yet to produce any significant rise in loan delinquencies, so banks are being repaid in full and on time.

Vermont's experience is broadly consistent with the national picture for the banking industry. Throughout the country, money is moving out of the shaky stock markets and into more secure investments. And in the current context, banks are seen as particularly safe harbors. They may not be paying much to their depositors, but at least the money left in their safekeeping will be available when customers come calling.

Reforms put into place following the savings and loans debacles of the 1980s have instilled confidence that banks are

now effectively prevented from engaging in accounting swindles.

Among the leading out-of-state banks with a big presence in Vermont, Banknorth, based in Maine, reports deposits are up 16 percent since the start of the year. The increases for Key Bank and Charter One, the other members of which are both based in Cleveland, are not as sharp but are still impressive.

Vermont's community banks, too, have generally been raking in deposits. While cautioning that figures are incomplete, Vermont Deputy Banking Commissioner Tom Candon estimates that deposits have grown an average of about 10 percent at state banking institutions in recent months.

Along with the flight from the stock markets, Candon suggests that the rise in bank deposits is being driven by newly conservative spending patterns on the part of Vermonters worried about their job security. The mass layoffs at IBM and the loss of a few hundred other manufacturing jobs within the past six months have inspired many still-employed Vermonters to defer major purchases and to keep their money in the bank, Candon hypothesizes. Similarly, he adds, some of the newly laid off may have put parts of their severance packages into bank accounts, further swelling deposit rates.

The bounty befalling community banks is also attributable to the superior service they offer, claims Scott Cooper, president of First Brandon National Bank.

"Money is moving from some of the larger banks to smaller community banks because of service issues," Cooper maintains. Knowing the face behind the tellers window or being a neighbor or acquaintance of a loan officer makes a big difference to many customers, according to Cooper and other heads of Vermontowned banks.

Brandon's ability to attract homebuilder borrowers is due in part to the banks willingness to allow prospective homeowners to act as their own general contractors. Such a policy is "atypical of the bigger banks," Cooper says, noting, "We've become known for doing that."

General loan demand remains strong at his bank, Cooper reports. But some of it comes from "stealing somebody else's piece of the pie" rather than as a by-product of local economic strength. "It's the service factor again; there are some real issues out there with how customers get treated," Cooper says.

Competitiveness involves more than the little guy outmaneuvering the big guy, other bankers point out. Commercial lending activity remains strong at Banknorth, for example, with spokesman Brian Arsenault agreeing that the current demand is not so much a reflection of Vermont's economic strength as it is a gauge of "the advantages in service and scope that Banknorth offers."

For Vermont banks in general, loan demand has slipped since the beginning of the year, but not precipitously, says Deputy Commissioner Candon. The persistent vigor of the residential real estate market has largely offset a weakening on the commercial lending side, Candon reports.