Cold economic winds howl. Large financial institutions bend like trees coated with ice. Jobs and mortgages slide into ditches. But Vermont’s local banks have settled in with a warm pot of beans bubbling away on a wood stove: They are watchful, but they are weathering the economic storm.

“The national economy does impact on us here,” says Tom Candon, deputy commisioner of banking in Vermont’s Department of Banking, Insurance, Securities and Health Care (BISHCA). “We are well into the problem nationally, but we’re apparently better off than most are.”

Numbers back up that understatement: Vermont has the lowest rate of foreclosures and bankruptcies in the nation, and ranks about 40th in unemployment. That’s not to say the state’s residents aren’t being fiscally squeezed, but not a single Vermont-headquartered bank took federal bailout money, and they remain sound and secure. The state’s financial infrastructure may feel some drafts, but the roof will hold.

First National Bank of Orwell, the smallest bank in Vermont. Photo courtesy of Don Shall, www.flickr.com/photos/donshall

Bank Local

Fifteen banks and twenty-eight credit unions had headquarters in Vermont at the end of 2008 (see sidebar) though Chittenden Bank has since been sold out of state. Although out-of-state financial institutions also do business in Vermont—including Midwest-based Key Bank, TD Bank, otherwise known as Toronto Dominion, and Citizens Bank, owned by the Bank of Scotland, which is in turn part of the Bank of England—locally based banks and credit unions dominate Vermont’s financial landscape. “Vermont is unique in that way, with a lot of small banks, because Vermonters are a unique breed. They see the advantages to doing business with a local business and a local bank,” says Yvonne Garand, business development officer of the Vermont State Employees Credit Union (VSECU).

Those advantages are philosophical as well as fiscal. “Community banks are the best place to put your money because our capital ratios are higher; we know our customers; we lend to people we know; and our delinquency rates are very low,” says Ken Perine, president of National Bank of Middlebury. “Our entire reason for being is to serve our community, not to make our shareholders rich. There is a lot of speculation that goes on at the larger banks; it’s a very different mentality.”

“Local banks are familiar with the local economy,” agrees Candon. “If the community thrives, the community bank thrives, so they go hand-in-hand.”

Bailing on the Bailout: We Don’t Need the Money

In considering whether to participate in the Troubled Asset Relief Program— TARP, the bank bailout—Vermont-based banks fell into three camps. “The first camp said, we don’t want anything to do with the government,” Perine explains. “The second camp said, we’re so well capitalized we don’t need to bother. The third camp, as we did, initially thought it was our patriotic duty to participate–we didn’t know how bad the downturn would be and thought maybe we better be prepared for what is coming—but by the time we had to make our decision we were through first quarter 2009, we saw signs that things were getting better. And Congress had started defining what some of the strings were going to be on the money, and they were getting more and more intrusive.”

Vermont’s banks ran modeling scenarios to predict what might happen on their balance sheets with and without the federal bailout money. “Ultimately we decided we’ve been around 160 years, we’re not going anywhere, and taking federal money has a lot of potential to offend our customers. It doesn’t benefit our shareholders or customers, so we passed on it,” says Mike Tuttle, president of Merchants Bank. “It was the right thing to do.”

National Bank of Middlebury held a special shareholders meeting and the sentiment was overwhelmingly not to take the bailout money. “We couldn’t point to any evidence indicating that we would have to use it,” Perine says.

Although Vermont’s local banks did not take TARP money, several out-of-state banks doing business in Vermont did, including: New Hampshire Thrift Bancshares, which operates a number of small banks in Vermont; Berkshire Bank/Factory Point, which later returned the funds; and Key Bank, which made public statements that it took the federal money to buy up other banks.

Foregoing Foreclosures: We Can Work it Out

Vermont’s pro-consumer regulatory environment is one reason that Vermont’s foreclosure rates remain low and our local banks remain strong. But regulation is not the only factor in play. “It’s not the laws,” Perine says. “We’re rural and know our customers, and when you make a loan you know you’re going to run into that person on the street. Thirty years ago I made a mortgage loan to a couple and gave him good terms and a good product, and now he’s governor of the state. That’s the beauty of living in a small community.”

In a state of low foreclosure rates, credit unions have the lowest delinquency rates of all. VSECU, for example, has less than a half a percent delinquent, and no foreclosures. Credit unions are non-profit companies cooperatively owned by their member-depositors, factors that enhance their fit with Vermont culture and satisfy customers who want to be able to come in and talk to a familiar face.

The hankering to talk to a real person in uncertain times has created a boom for Vermont-based financial institutions that service the mortgages they write. Consumers tired of trying to figure out which distant internet lending company owns their sold-over mortgages have flooded into credit unions and banks for re-financing.

Merchants Bank is unique in not just servicing, but holding on to all the mortgages it writes. “We’re going to own the loan, so we want it to work for us and the customer,” Tuttle says. “We won’t be the cheapest rate all the time for everyone, but we have competitive rates with low closing costs. Some of these mortgage companies advertise cheap rates but they have thousands of dollars in closing costs and all kinds of other stuff tagged on.”

Local mortgage servicing also means Vermont’s banks have a margin of flexibility in handling customers’ accounts. That wiggle room is being called into play as more customers with excellent credit ratings suddenly find themselves without a job. “Here, someone will actually talk to you who knows you and knows your account,” Tuttle says. “Foreclosure will happen periodically, sometimes it has to happen, we are in business and sometimes there’s just no way around it. But it’s very rare. Usually, we can work it out.”

National Bank of Middlebury anticipates more customer-employment-related concerns. They presently have a small number of customers in bankruptcy, and expect to see more of that as time elapses after a customer loses his or her job. “Six to nine months after they’ve lost their jobs it becomes more of an issue,” Perine says. “We have been affected, but it has not been severe. We are trying to work with our customers and we’ll work through this.”

At the governor’s request last year BISHCA established a Mortgage Assistance Program to help lenders and troubled borrowers communicate. It has fielded over 800 calls. “We set that up because we thought folks with subprime mortgages would be hitting the rate hike bubble, but that’s been less than 10 percent of the calls for us,” Candon says. “The rest is people out of work. Lately people have been saying that it may well be on through next summer that job losses continue. So that’s something we’re all watching very closely. We keep track of monthly foreclosures on our web site. They are up a little this year, but still very low in real numbers.”

Silver Lining: Rainy Day Savings

BISHCA calls it a flight to safety. Merchants Bank calls it a flight to familiarity. National Bank of Middlebury calls it a flight to quality. Whatever it’s called, Vermonters are pulling their money from riskier investments or out-of-state banks and saving it in Vermont-based financial institutions. Substantial increases in deposits over the last year strengthen reserves for both wary consumers and local banks. “The days of spend or borrow are behind us. Now people realize they need some rainy day money,” Candon says.

“People are in hunker-down mode,” Garand says. “We’ve seen a huge increase in deposits.” But consumers are not exclusively pessimistic: VSECU’s nascent small business lending program is also growing steadily. “We loan to small businesses, sole proprietorships, not-for-profits. We don’t see any decline because it’s still so new to us, but it is still growing.”

Merchants Bank deposits and business loan books are growing, too. “People are drawn to the fact that they know where their money is and who we are,” Tuttle says. “All the management and directors are here in Vermont. 24/7/365 all we do is Vermont. That provides a strong identification for some number of retail clients. Our commercial business is up substantially in the last couple of years. Admittedly it has slowed down a bit in the last six months or so. It can’t not impact us, so we all just have to work harder.”

Federal Reform

While Vermont’s banks prudently work things out with their customers, Washington scrambles to close the barn door after the national economy has run away. “There is a knee-jerk reaction going on regarding regulations,” Perine says. Presently, the Office of Comptroller of the Currency oversees both consumer compliance and safety and soundness of banks. But the newly proposed Consumer Financial Protection Act would create a new agency to look at consumer issues only. “I am not in favor of this,” Perine says. “There are lots of issues and it would create havoc. Community banks have not been the source of this problem so why are we creating a new agency to regulate them? I equate small banking to small business, which is the backbone of this country. Diversification into a lot of small banks is a good thing. I would hope we’d back off the movement to consolidate.”

Credit unions are also wary of the guise of consumer protection. “It will be interesting to see what that does to the competitive landscape,” Garand says. “There seems to be a dichotomy between what the government is doing–encouraging more consolidation, imposing more hurdles on small banks–and what the public wants. Our focus groups and market research groups show that people overwhelmingly want to do business with a locally owned, in-my-backyard bank. You want to talk to someone local.”

BISHCA is also watching the proposed Consumer Financial Protection Act with caution. Although the agency favorably views the house banking committee’s proposal encouraging collaboration between state and federal regulators, taking all the consumer safety regulations away from their existing venues and putting them in one new agency raises a host of concerns.

One welcome development is a U.S. Supreme Court ruling in June 2009 holding that state attorneys general can now enforce state banking laws against federally chartered financial institutions. “It used to be that state bank examiners couldn’t even go into federally chartered banks,” Candon says. “The Supreme Court decision was extremely nice news.”

Regardless of what Washington dishes out, Vermont’s financial landscape will change. “Things are leveling off at a rate lower than where things were,” Tuttle says. “There’s very limited evidence of things picking back up. There are difficult decisions to be made. These are uncertain times. What will the new normal be? Probably will be some significant changes coming to our economy, nationally and in Vermont. But it’s necessary, we don’t want to go back to where we were, it wasn’t sustainable. We want something sustainable.”

Vermont’s banks are confident the state will ride out the economic storm to that sustainable future. “We’ve done the right things here,” Tuttle says. “We’ll get through this. We’ll be okay. Vermont will be okay.”

Cindy Ellen Hill lives in Middlebury.