How One Small Town Community Bank Is Weathering The Financial Crisis
Thursday, October 02, 2008SUSIE GHARIB: And finally tonight, the nation's financial crisis is rippling across the United States from large cities to small towns. Many community banks are bracing for potential loan defaults and tighter credit conditions. But in the small enclave of Galena, Illinois, customers are still getting loans to buy homes and expand businesses the old-fashioned way. Diane Eastabrook explains.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Historic Galena, Illinois, is like a postcard. Small businesses and specialty stores dot Main Street. White church steeples peep through trees. And President Ulysses S. Grant's home overlooks the town. It's the kind of quiet Midwest hamlet where banks know their customers by name.
UNIDENTIFIED FEMALE: Hi, Nancy.
UNIDENTIFIED FEMALE: Hi there.
EASTABROOK: Apple River State Bank has been a part of Galena for 60 years. It has roughly $225 million in assets, with $20 million in capital and reserves to cover losses. While much of the banking industry is in turmoil, Apple River State Bank President William Wubben thinks his losses will be minimal.
WILLIAM WUBBEN, PRESIDENT, APPLE RIVER STATE BANK: Through the years we've done a lot of lending on character, individual character of the borrowers because sometimes we maybe helped individuals get a loan because even though they maybe didn't meet all of the requirements. But we knew the family, we knew the individual, and they were -- we knew they were capable of getting us paid back.
EASTABROOK: Michael Hillard's Tri State Tours has done business with Apple River and one other local bank for decades. Hillard says both banks played a role in his firm's success.
MICHAEL HILLARD, PRESIDENT, TRI STATE TOURS: The thing about local banks that I've always felt is they know you as well as you know them. I mean, it's on a first-name basis with the bankers and they will tell you point blank that this could be something you don't want to do.
EASTABROOK: There are roughly 8,000 community banks in the U.S. in towns just like this. Most weren't involved in sub-prime mortgages and remain fairly well-capitalized. But despite that, many are still at risk from the fallout of the nation's banking crisis. Analysts say some community banks that loaned heavily to builders could face losses if their speculative properties don't sell. Howe Barnes banking analyst Daniel Cardenas says other banks that invested heavily in Fannie Mae (FNM) and Freddie Mac (FRE) preferred stock could also face potential losses.
DANIEL CARDENAS, BANK ANALYST, HOWE BARNES: And so as a result, we're going to see probably in this quarter these banks write these investments down substantially anywhere from 90 to 95 or even 100 percent write-off in the quarter. So that is going to put some pressure on the capital side of these community banks.
EASTABROOK: Apple River State Bank put lending caps on speculative home- building and didn't hold stock in either Fannie Mae or Freddie Mac. Still, Wubben thinks the mortgage mess will force all banks to tighten lending standards.
WUBBEN: It may get back to the old days where our previous bosses said, you had to have 20 percent down when you come in to the bank to get the loan, and I think that we may be headed back in that direction.
EASTABROOK: For now, though, Apple River State Bank will continue to loan money the old-fashioned way, with a handshake. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Galena, Illinois.
