Community Ties

Community banks are a critical building block in the foundation of local economies, providing about one-fifth of all small-business loans and half of small-business loans under $100,000. They lend where their depositors live and work, and provide loans and lines of credit often unattainable from larger and more complex institutions. Helping community banks grow their deposits, strengthen their lending capacity and maintain their capital levels will help Washington maintain its rightful place of leadership.

Community banks are strong because of low-risk lending strategies, sometimes known as “boring lending,” which is based on prudent underwriting, measured growth and profitability. The damage done by subprime mortgage transactions and risky securitization deals is well-documented, and for good reason. By avoiding these deals, for the most part, community banks kept the percentage of their non-performing loans low.

But community banks are facing an intensified wave of regulatory strain. Caught between the pressures to lend cautiously and rising calls to support small-business borrowers and the economic value they contribute, community banks and the small businesses they serve find themselves wondering which way to go.

According to Edward H. Sibbald, director of the Center for Excellence in Financial Services at Georgia Southern University, 140 banks failed in 2009. In Washington state, Horizon Bank, Evergreen Bank and American Marine Bank were all seized within the first month of 2010. Experts expect more closures and consolidation in the industry, with fewer banks likely to be owned and operated in Washington by Washingtonians. This is not business as usual; no United States banks failed between June 26, 2004, and February 1, 2007.

Troubled banks should be closed but the industry as a whole is strong. Banks with less than several billion dollars’ worth of assets are actually outperforming larger banks in return on assets, charge-offs for bad loans and net profit margins.

In both Washingtons, lawmakers are hinting that community banks may be the victim of, in the words of U.S. Representatives Barney Frank and Walt Minnick, “overzealous regulatory actions” and “arbitrary decisions in the field.” And, in a recent letter to Sheila Bair, chair of the Federal Deposit Insurance Corp., Governor Christine Gregoire wrote, “I hear directly from community bankers, small businesses and consumers who are concerned about what are seen to be mixed policy and regulatory messages and disparate treatment coming from the other Washington.’ … At a minimum, they suggest a belief that our regulatory systems are unfairly weighted against Main Street’ in favor of Wall Street.'”

Many Washington business owners are customers of community banks. Chances are, so are the lawyers and accountants who keep businesses compliant; the restaurants and caterers that feed their staff; the architects who design their offices, apartments and condos; and the property managers who maintain them.

Banks are highly regulated, and should remain so, but business needs the flexibility to work through its own challenges in order to come out stronger. It is important to note that many community banks currently under regulatory orders continue to operate successfully to meet the needs of the communities in which they operate.

We strongly believe that community banks and small businesses working together can do as much to lift the struggling American economy as any financial reform. This recuperation will only occur, however, with a mutual commitment from both banks and businesses to remain responsible, stay accountable, and keep their operating approach and business models simple and transparent.

Gerald Grinstein, CEO emeritus of Delta Air Lines and a strategic director of Madrona Venture Group, is a member of the board of directors at Foundation Bancorp in Bellevue. Diane Dewbrey is president and CEO of Foundation Bank.