Weathering the Storm

Buzz Around the Block

By Jim Jannotti

Staff Writer

Regional banking professionals are unanimous in their assessment of the area's prospects for getting through the current economic downturn. To a person, the bankers I interviewed believe the region's existing strength and economic diversity will see it through a tough season.

"Banks like us are still in the market," says Fred Reim, Regional President of Harleysville National Bank. Reim maintains that while current economic woes such as the sub-prime lending crisis have caused difficulty for larger national banks, many regional and community banks like Harleysville are still relatively strong. "We've all heard about the sub prime mortgage crisis but that mostly involves the very large national banks who have had to write off billions and billions of dollars. Harleysville doesn't play in that world. We never thought it was prudent to be involved in those types of loans."

Joe Faust, CEO of Diamond Credit Union says that even in the midst of this tough season, his organization saw growth through the first part of this year. "We fared extremely well. Coming off of last year we had very strong performance in virtually every key category, whether that was membership growth, growth in assets, loans or deposit growth. We've seen those trends continuing over the first 5 months of 2008."

Crisis? What Crisis?

Other local bankers are saying the same thing. In fact, according to Joe Major, CEO and one of the principal organizers of Victory Bank, "There is no lending crisis. If you're a big company needing to borrow something like half a billion dollars maybe there's a crisis. If you're a borrower with lousy credit and want to by a half million dollar house, you have a problem. For small borrowers, there's no lending crisis at all."

According to Major, it's all about being smart. "Every bank still needs to make good decisions. That hasn't changed in a thousand years, but the rates do change." Victory Bank is new to the region, having opened in the fall off 2007. Major says that being smart in these times means managing growth. "It's important to get our bank to profitability as quickly as we can rather than grow just for growth's sake." He says that for the time being, "On the cost side, we intend to be pretty conservative."

For some local banks, now is actually a good time to be in the market. Dick Kunsch, President of Phoenixville Federal Bank and Trust says, "The blessing of being a mutual bank and trust is there is not a lot of pressure because we don't have shareholders. As a result we're not involved in any sub prime lending. In fact, our collections are better than they've ever been. And we have not foreclosed on a property in several years."

Pat Ward, Chairman and CEO of Penn Liberty Bank agrees that our region has been less affected than most others by the current downturn. "There's definitely been a slowdown but it's not nearly as dramatic as in other parts of the country. We never had the boom in real estate pricing and the sub prime problem never got as bad here as it did elsewhere."

In addition to this, smaller lenders are often not hit as hard when the economy cycles down, according Continental Bank President Wayne Griest. "All banks are now more conservative but community banks like Continental are sill lending." He says that during the current economic bump people have turned more to community banks. "Our deposit levels are actually increasing. People think of community banks as safe havens." He adds, "Having deposits that are FDIC insured gives people more of a comfortable edge for investing."

This is not to say that everything's coming up roses. Spiraling energy and food costs coupled with a downturn in the housing market have had their effect. "A precipitous drop in the prime rate put pressure on our net interest margins," says Jim McKeighan, President of New Century Bank. He cites particular industries that have been hit hard by the combination of these pressures. "The trucking industry has been affected, and although New Century doesn't lend to trucking companies, there are community banks that do. Fuel oil companies have also been dealing with the cost of fuel and we've deliberately reduced our exposure in that area," he says.

McKeighan thinks that our concept of normal may require adjustment going forward. "It may be a long while before we see a net interest margin in the four percent range heading toward five percent, which used to be normal. Inflation and energy prices could push us into an actual recession. Many people are concerned about the real state of the economy. So it's possible we may have to change the way we do business as a country."

Also, of course, the housing industry, including any business related to housing, is struggling at present. But as Harleysville's Fred Reim puts it, "we make sure that we take a hard look at potential transactions in the housing market. We have to be a little more conservative but we're still lending and we're still looking for loans. Homes that are moderately priced are still selling but the so-called McMansions are not moving."

"We try to be proactive especially with our commercial borrowers to help them get through these cycles," he adds.

Furthermore, even though there are signs that the worst of this current cycle may be behind us, it isn’t over yet and the region may still experience discomfort in the coming months. Penn Liberty’s Pat Ward says, "My view is that some of the issues affecting the economy are going to take a while to work through. It think we'll see a continued slow down for twelve to eighteen months."

Relationships

According to Scott Fainor, President of CEO of National Penn Bank, navigating such heavy financial seas is a matter of relationships. "Because we do not have a single transaction focus at National Penn, our customers rely on us for a variety of products and services: banking, insurance, investments, and trusts. This allows them to keep coming back to National Penn to get advice and counsel in all of those areas. This helps us develop relationship with our customers, even in down times."

The relationship model helps diversify the business, he says. "My personal belief is when a bank is relationship focused, then if one product slows down, another picks up. That's our business model, and it's built into our strategic plan," says Fainor.

Mr. Fainor maintains, as do the other bankers that during times like these, strong relationships with customers are important in both the retail and commercial banking sectors. "Things will probably continue to be slow through '08 and maybe into '09. We'll be watching the price of gas and food. We continue to watch for inflationary pressures. Throughout the rest of this year National Penn will be doing a lot of listening to our customers," Fainor says.

Victory Bank's Joe Major says that the core of that customer relationship is found in the principles that drive the bank's operations. Now is the time for banks to stick to their knitting, he says. "If you go to our website www.thevictorybank.com, look at our values. What we're really going to do is stay consistent with our belief system. It's about service, about excellence. Everybody says it but we started the company on that bedrock and whatever problems come our way we intend to stay true to our value system, now and forever."

Diamond Credit Union’s Joe Faust adds, "We're solely owned by those whom we serve so I think we're very much in tune with how they're enduring these times. I think we've demonstrated that because of those relationships, we've been successful."

Optimism

If it sounds like these banking professionals are optimistic, it's because they are. Certainly the economic downturn remains at the forefront of their thinking, but each of them believes our region is in good shape.

"Demographically Chester and Montgomery counties are strong areas," says Harleysville's Fred Reim, "These areas will weather the storm better than some parts of the country. We are continuing to open two-three branches per year." This isn't the only type of growth the bank is experiencing. Harleysville recently announced the acquisition of Willow Financial Bancorp. "That will make us a 5.5 billion dollar bank. But we still want to know our customers by name," Reim says.

New Century's Jim McKeighan and Dick Kunsch of Phoenixville Federal expect to see more mergers going forward. "I have a feeling that we're entering an era we're there are just so many banks that we're reaching a point where there will be consolidation," says Kunsch.

For McKeighan, the current situation was not unexpected. "There are always going to be these corrections in the economy. Things are always going to be in flux. I think this region will have pain like any other but not nearly as bad as some areas."

This sentiment is shared by the other bankers, many of whom use nearly identical language in speaking about the prospects for our region. "We will weather the storm. We're not going to feel the effects that other parts of the country have already experienced," says Kunsch.

"My sense is that the woes of the economy haven't affected this region as adversely as has been the case in other regions of the country," says Diamond Credit Union’s Joe Faust. "There's a tremendous foundation here in the region and we've been able to weather this better than some other places."

"The region is really weathering the storm well," says National Penn's Scott Fainor.

Continental's Wayne Griest says, "Our region is a pretty stable region economically. As a whole we're going to come through this better than some other areas." He says that thanks to a diverse economy with a wide base of employment, "Around here we don't have the highs and lows that some of the other regions have."

"I'm relatively optimistic that we can ride this out," says Fred Reim. Harleysville will soon celebrate 100 years in business and Mr. Reim is encouraged enough by the region's relative health to make a confident prediction. "We're very committed to the communities we serve. We're looking forward to the next 100 years!"