Bucks
Dear Friends,
Good morning. Wall Street’s melt down has affected everyone. People with pensions, 401 K’s…the small investor…haven’t experienced any thing like this crisis since the 1930’s. When historians look at President Bush’s legacy next January, it will be highlighted…I should say, laced…with a war in Iraq that shouldn’t have begun and an economic crash that could have been avoided.
A few years ago, a group of historians chose James Buchanan, Pennsylvania’s only President, as the worst past President. The Buchanan family can rest easily knowing that George W. will be taking James Buchanan’s place on January 19, 2009.
Anyway, I sat down with a few officers of QNB, the oldest bank in Quakertown, which has been a safe haven for depositors and investors since 1877. It’s a community bank with assets approximating $635 million and independent. I’ve been a member of its board of directors since 1968 and thought that Tom Bisko (QNB’s President), Rob Werner (Executive V.P.) and Bret Krevolin (Chief Financial Officer) could help explain what’s been happening to the banking industry.
For years, QNB and long time, community banks like Univest, Harleysville National and National Penn have had regulators carefully watching every financial move they make. For example, QNB is regulated by the Federal Reserve, the Pennsylvania Department of Banking, the Federal Deposit Insurance Corp (FDIC), and the Securities Exchange Commission (SEC). There is always a team of regulators reviewing how QNB operates.
“We correspond with these regulators on a quarterly basis,” Tom Bisko began.
“I’m happy to tell you that QNB is in excellent financial shape and is having one of its most profitable years ever.”
I believe that community banks that are owned and operated by local people are well run and doing just fine.
I reasoned that the sub prime residential mortgage mess occurred because huge banks like Wachovia weren’t regulated with the same zeal as smaller banks were.
But that wasn’t the case, Rob Werner told me.
“Larger banks had similar oversight,” he said, “but those banks look at things differently. They were pushing high risk, high reward mortgage products….like loans with 40 year amortizations; interest only residential loans…even negative amortization loans where monthly payments don’t cover the principal amount.
“Community banks like ours focus on products that are best for our customers,” he continued. “For example, we weren’t risking our capital with the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corp (Freddy Mac). We stopped investing in their stock.”
Both Fannie Mae and Freddy Mac are very troubled investments today.
Werner hopes that the $700 billion rescue will work. “The theory is that those bad real estate loans will increase in value in three to seven years and the treasury will be repaid,” he said. “If so, the rescue should be a wash. But the federal government is the white knight here.”
Brett Krevolin described the mess as a house of cards. He showed me a map where the price of real estate was doubling every three years. Arizona, California, Florida, and Nevada led the list.
A $300,000
house in 2000 became a $600,000 house in 2003, which became a $1.2 million house
in
“Speculators were pushing the market upward, as well,” Krevolin added.
He told me that 48 states experienced year over year increases in mortgage foreclosures. In the second quarter [June 30], foreclosures in the residential market experienced a 14 percent increase. Twenty-six percent of banks own Fanny and Freddy stock. They’ve had to write those investments down on their balance sheets resulting in huge losses. Some banks have been forced to merge. Others have failed outright.
Bisko told me that the larger the financial institution, the more likely that they’ve taken more sophisticated…hard to understand…risks. “Community banks like ours have stayed close to our knitting,” he said.
“QNB’s had a banner year,” Bisko continued. “QNB stock is still trading at about $20 per share, so we’ve weathered this storm quite well. Still, a year ago, QNB shares traded at $26.50 per share so we’ve lost 25 percent market value. Unfortunately, investment advisors have condemned the entire banking sector because of the actions of the industry giants. Small banks like QNB are painted with the same brush, regardless of how well we’re doing.”
On the other hand, when you examine the nine-month results of local banks, in comparison to the regional and national institutions, local banks have performed extremely well.
Finally, I believe that too many congressmen didn’t recognize the approaching tidal wave and insist upon more regulation, not less. As a whole, congress is very much a part of the problem...maybe THE problem. That may be one of the reasons why Americans rank congress lower than the President. But that shouldn’t surprise you faithful readers.
Sincerely,
Charles Meredith.