TimesLeader.com

October 19, 2008
Area’s banks are saying no to bailout cash

Community banks didn’t get into exotic investments that hurt larger banks.

By Ron Bartizek rbartizek@timesleader.com
Business & Consumer Editor

Trying to stem a worsening financial crisis, federal officials have doled out $125 billion in exchange for ownership stakes in the nation’s largest banks and brokerage houses. A similar amount is available to smaller banks, but there are likely to be few takers in Northeastern Pennsylvania.

While nine large institutions were given no choice but to accept the money, community banks and credit unions can choose whether to trade part of their equity for injections of capital; for most of them in this region it’s an easy decision.

“We’d have no need of that whatsoever,” said Luzerne Bank President Robert Snyder on Thursday, acknowledging he hadn’t looked at details of the plan. Smaller banks have until Nov. 14 to apply for the program.

“We have very, very strong capitalization,” the bank is growing and profitable, “our delinquencies are very low and there’s no need of a bailout,” Snyder said.

At Landmark Bank in Pittston, President Daniel Nulton said “no thanks” to the idea of government aid. Not only do local banks not need a bailout, the government’s investment – in the form of preferred stock – comes at a price.

The costs include paying an annual dividend of 5 percent on the stock for five years and 9 percent thereafter, unless the banks are able to repurchase the shares. Nulton said that while additional deposit guarantees are part of the program, so are higher fees banks pay for the protection.

“It is pretty expensive,” Nulton said. He’s also concerned because the government would hold a superior position to a bank’s existing stockholders while diluting the value of their holdings.

Treasury Secretary Henry Paulson said the goal is to make more money available to borrowers, freeing up credit markets that have frozen because lenders are worried about being repaid, even on loans to each other. The reluctance to lend already has scuttled some large business mergers and postponed both public and private building projects.

There is no problem getting a home or mortgage loan in this region, these bankers say.

“They may not be able to get it from the large lenders, but we have money to lend,” said Mark Graziadio, vice president of Honesdale National Bank, which has an office in Kingston.

Both Graziadio and Nulton said that because community banks didn’t dabble in the kinds of exotic investments that got the likes of Lehman Brothers and Wachovia in trouble, nothing has changed for their customers.

“We’re using the same underwriting criteria that we always have,” Nulton said, which is designed to protect the lender and the consumer, for example by requiring a 20 percent down payment.

“Many of the issues that are plaguing other institutions, we’re not seeing those,” Graziadio agreed.

Scott Fainor, chief executive of National Penn Bancshares, parent of KNBT, which has eight offices in Luzerne County, said his bank is taking a long look at the federal program for its potential to provide additional lending capability.

“We continue to lend money to our current customers,” he said. “But we’re once again looking for new customers.” Fainor differs with Nulton’s assessment of the price of the government program: “That cost of capital (5 percent) is very inexpensive,” he said.

While not directly hurt by the meltdown in credit markets and on Wall Street, Nulton thinks local banks will feel some effect.

“I don’t see it affecting the way we do business, but it probably affects the type of business that is available,” Nulton said. Businesses may delay expansion plans and families are being cautious about new borrowing, he believes.

“Anyone who is prudent would probably pull back a bit.”

Ironically, big institutions’ problems have given a boost to local banks, which are seen as less exposed to risky investments.

“It was good for us for a while,” Snyder said, as worried depositors in large institutions switched some accounts into Luzerne Bank. But the pace has slowed since the government program that includes added deposit insurance came out, he said.

Ron Bartizek, Times Leader business editor, may be reached at 970-7157.