Regional banks hang in during crisis

National upheaval leads to question ‘Is my money safe?’


Walker Evans, senior vice president and regional manager for The Bank of the Pacific, is optimistic about the ability of local banks to survive the current economic crisis. “Banks that maintain responsible banking practices can survive better in tough times.”


With so much recent news about Wall Street and government bailouts, it can be hard to determine exactly what is happening in the nation’s economy, let alone the local economy.

Companies thought to be too large to fail have now faltered. The two largest holders of mortgages, Fannie Mae and Freddy Mac, have been taken over by the federal government. Washington Mutual, the nation’s largest savings and loan, was seized by federal regulators and sold last month to JPMorgan Chase.

As of press time, government leaders were still debating what to do about the nation’s sliding financial system. Congress voted down the original plan to use $700 billion in taxpayer money to buy up bad mortgages and other assets that are weighing down balance sheets, and legislators were heading back to their constituencies to try for another deal.

But how does all this affect Whatcom County? And more importantly, is your money safe?

If you were to look at the stock price trends for several banks in Whatcom County, you might be inclined to start storing cash under your mattress.

Most bank stocks hit their lowest price of the new millennium during the summer — Horizon Bank stock, for example, fell 77 percent in the past year — but that does not mean that these institutions are not doing well, said Rich Jacobson, CEO of Horizon Bank.

“A lot of people equate stock price to the health of a bank, which is not necessarily the case,” Jacobson said. “They need to look at other factors. What is more important for the health of a bank is to look at their capital levels and look at how they are managed.”

For example, most regional banks were not involved in sub-prime loans and have very minimal, if any, exposure to firms that were involved in sub-prime lending, said Walker Evans, senior vice president and regional manager for The Bank of the Pacific.

“Banks that maintain responsible banking practices can survive better in tough times,” Evans said.

One quick way to judge a bank’s practices is to look at its capitalization, which compares a bank’s capital to its assets. Most banks prefer to operate as “well capitalized” or “adequately capitalized” because there are significant federal restrictions for being in one of the three “undercapitalized” categories.

For Jacobson, being a “wellcapitalized” bank allows him to sleep better at night “knowing we have the extra capital.”

“Being wellcapitalized is a very important part of our strategy,” he said.

But even well capitalized banks are not immune to the downturn in the economy.

“Many of the community banks did lend to builders and developers, and part of their demand is from buyers (with sub-prime mortgages) who were fueling that high housing demand back in 2005,” Jacobson said. “So even though we as community bankers didn’t do the sub-prime loans, we were very much impacted when the market came to a halt.”


The uptick rule

Another reason Jacobson recommends looking at more than the stock price to judge the quality of a bank is that stock prices rise and fall based on supply and demand. And as shown during the last year, supply and demand can be manipulated.

In July 2007, the U.S. Securities and Exchange Commission (SEC) eliminated the uptick rule, which regulated the short selling of stocks.

Short selling is the practice of borrowing a stock and selling it in the hopes that you will be able to repurchase the same amount of stock a few months down the road at a lower price and return it to the original owner, with a little interest to make it worth their while. This form of investment can be risky, but allows a person to make a profit based on falling stock prices.

The uptick rule stated that a short sale could only be sold at price higher than the previous sale, thus ensuring an uptick on the stock price.

Once the rule was removed though, short sellers didn’t have to find a buyer willing to pay more than the previous sale price.

Since stocks in financial companies were already starting to sink after being hit by the housing market, these stocks were easy money-makers for short sellers. The lower the price goes, the more money there stands to be gained. And if prices drop, more investors are likely to think about selling.

“If there are more sellers than buyers, that’s going to push prices down,” Jacobson said. “They (short sellers) are selling knowing that they can keep putting the pressure on to sell. That’s an inappropriate way for market participants to manipulate a stock and push the price down. Huge profits have been made doing this.”

According to a NASDAQ report, financial stocks saw the largest increase in short sales, rising 227.7 percent from July 2007 — when the uptick rule was eliminated — to July 2008. The consumer discretionary sector was second, with a much lower 41.3 percent increase in short sales.

Last month, however, the SEC placed a temporary ban on short selling financial stocks.

“Many market participants are looking for that ban to be extended or be a permanent change to the rule,” Jacobson said. “But I’m a big proponent of reinstating the uptick rule, that way there is the opportunity for short selling because it does have a place in the market. The uptick rule is one of those controls that helps keep the market in check, especially in a sector that is so susceptible to the perception of the market.”


‘It could get bumpy’

So where does that leave regional banks?

Not all banks were affected by short selling because that practice doesn’t work well with stocks that trade in small volumes. In general, smaller banks with less stock did not see prices drop dramatically.

“In fact, many bank stocks are not widely traded,” said Evans from The Bank of the Pacific. “By definition they are not a popular stock to hold on to.”

However, Jacobson said he is seeing some investors returning to the market after prices hit a low point over the summer.

“Those folks getting back into the market probably have a longer-term view on the stock because it could get bumpy in the short run,” Jacobson said.

The relatively strong local economy is also helping banks keep steady earnings, said Rick Wirthlin, regional president for Key Bank.

Wirthlin said that although Key Bank is a national bank, it divides its operations into four regions, and currently the two strongest regions are Pacific Northwest and Rocky Mountain, Wirthlin said.

“They are out-performing the rest of the bank,” he said, adding that the local district will be adding 15 new branches in the next three to five years, including the new Key Bank building on West Holly and North State streets.

Part of that growth is coming from an increase in mortgage lending, he said.

“We’re a little contrarian because we have chosen to strengthen and increase our mortgage business across the country,” Wirthlin said. “We’re doubling our number of mortgage originators. People still need to buy and sell houses.”

As for assets, Evans estimates that banks with bad mortgages on the books will take awhile longer to balance out because the housing market is so slow.

“These problems will not have washed out of balance sheets within the year,” Evans said. “It will take some time for this to be resolved.”



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