Vermont banks weathering financial storm, but times are tough for lenders

MIDDLEBURY — No, said National Bank of Middlebury President Ken Perine in a recent interview, the economic sky isn’t falling, even if it might be prudent to break out a hardhat for the next year or so.
As the federal government continues to search for ways to prop up national financial giants like Citibank, Perine, a former director of the Federal Reserve Bank of Boston, said his and other Vermont banks are fundamentally sound.
Like many experts, Perine also believes in the underlying strength of both the state and national economies, but that it will take time for the nation to get back on track.
“We keep seeing unemployment numbers in the country rise, and until we see that level (off) or start to back off, I think people are going to be really nervous about losing their jobs, and I don’t think they’re going to make long-term commitments, like buying a car, or doing an addition on their home, or remodeling,” he said. “They’re not going to do those big-ticket things, which are really the drivers for our economy.”
While waiting for that rebound, Perine said the National Bank of Middlebury and other Vermont banks will continue the business practices that have left them in better shape than institutions elsewhere.
“I’m hopeful that we’ll start to see a turnaround by mid-year next year. Yesterday, there were some economists saying it was going to be 2011 before we see a turnaround, and that could well be,” he said. “We want to remain somewhat cautiously optimistic, and we will continue to lend money and look for good deals to do and try to make good decisions.”
Evidence shows that Vermont’s banking system is healthy. Federal regulators require banks to have a certain amount of cash on hand compared to the amount of their loans out to protect against losses; that is called a capital ratio, and the required figure is 4 percent.
Perine said at last report Vermont banks had a collective 9 percent capital ratio.
“Vermont banks have better capital ratios even than New England peers. Our profitability is better compared to our New England peers,” he said.
Perine said rural, usually “more conservative” banks also typically didn’t get as caught up in the real estate boom as did larger urban institutions, and he hopes Vermont customers don’t look at their banks in the same light as troubled firms like Citibank or Bank of America.
 “Banking, I like to say, is not that complicated,” Perine said. “The complicated part is just making sure you’re doing it day-in and day-out. The real fundamentals really aren’t that different than they’ve been in 100 years — making good loans, making sure your asset quality is good, making sure you know your customer, watching your expenses and making sure you’ve got a margin to deal with. If you pay attention to those things, there isn’t a lot of rocket science to it. The problem is some people try to make it too complicated … and start pushing the envelope.”
Envelope-pushing elsewhere has created challenges for Vermont banks. Because of the sub-prime crisis, Perine said mortgage loans have gone from perhaps too easy to get to the other end of the spectrum: Delays and difficulties in writing loans have become common.
“Some of the underwriting just doesn’t make sense to us. The underwriting is geared to a more urban setting, and the rural areas have issues. Appraisals are questioned on almost every loan that we send in to the secondary market,” he said. “It’s very frustrating for us.” 
The secondary market, which buys fixed-rate loans that local banks make, also has gotten pickier about credit ratings of even previously qualified buyers, Perine said, and at times it’s hard for Vermont banks to even quote mortgage rates. 
“The very best rate that is offered in the market can only be achieved by someone with a greater-than 800 credit score, probably low loan-to-value (on the property), debt-to-income ratio is very low, and a house that is a standard cookie-cutter house,” he said. “You don’t see that in Vermont, so it’s hard for us to get the best price for customers.”
Given the tricky economic climate, Vermont banks are taking steps to prepare for problems.
“We have beefed up our reserve,” Perine said. “We are nervous about the next couple of years. We think the economy hasn’t hit bottom. And we’re a bit nervous that the spring won’t rebound like everyone’s hoping.”
 Again, however, delinquencies and foreclosures are not hitting as hard here as elsewhere. The National Bank this year has dealt with just one potential commercial foreclosure. Meanwhile, just 0.75 percent of its loans are in delinquency, defined as more than 30 days late, compared with the New England regional rate of 2.6 percent in the third quarter of 2008, the date for which the most recent data is available. 
Still, Perine said that 0.75 percent figure is up from 0.5 percent in 2008, and bears watching.
“We think it’s an indicator of worsening conditions going forward. It just hasn’t become a crisis for us at this point,” he said.
In a recent speech to a local service club, Perine said he acknowledged there are economic problems.
“I’m not very confident in the next two years in terms of uncertainty. We built a budget for this year, and we had budgeted for a 13-percent increase in income, and January didn’t demonstrate that,” he said. “We see a weak construction industry. We see weak agriculture over the next year with low milk prices. We see some retail stress cracks, especially in the auto industry. We see manufacturing for the most part has held up.
“There are a couple weak spots, but I’m a little nervous because some of that relies on foreign business, and I think the global recession is going to start impacting on that.”
But Perine remains confident that at some point companies will start putting people back to work, and that will be the point at which people will know the turnaround has arrived and “pent-up demand” will be unleashed.
 “The major signpost for me is unemployment. When people see evidence that that has stopped rising or perhaps ratcheted back, they’ll feel more secure in their jobs. That’s going to improve consumer confidence, and I think they’ll be more willing to make those purchases they’ve put off,” he said.
In the end, Perine is confident good economic times will return.
“Why should people be optimistic?” he said. “We have the best economy in the world, despite its flaws. And I think too many times we just forget that. We’re too willing to look at what we do wrong other than what we do right. We still have a very strong economy. We just have to let the dust settle around this thing.”

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