As Larger Banks Crumble, Local Firms See Rush

By Brigid Schulte
Washington Post Staff Writer
Sunday, October 12, 2008

Joann Gaskins panicked. After absorbing a steady drumbeat of bad news about bank runs, bank collapses and bankruptcies, she arrived at a Manassas branch of faltering Wachovia Bank minutes before it opened Sept. 17, demanded her savings in cash and walked out the door. For eight days, she toted a metal box stuffed with $19,000 in a five-inch stack of $100 and $50 bills back and forth from work to home, while she tried to figure out what to do with it.

She picked Burke & Herbert, a family-owned Alexandria bank that takes pride not only in how boring its name sounds, but that the boring, conservative way it does business has kept it chugging steadily along since long before the Civil War. A few days later, Gaskins switched $23,000 -- in a cashier's check this time -- from her trucking business account to Burke & Herbert. Now she's just waiting for $200,000 in CDs to mature before she moves the rest.

"I feel a whole lot safer," Gaskins said. Plus, she gets to meet the bank president this week.

She knows, on some level, that her money would have been safe at Wachovia. FDIC insurance covers deposits up to $100,000, and Congress raised the limit to $250,000 because of the crisis. But her instinct was to flee. To seek comfort.

If anything, what the market meltdown has shown in sharp relief is that the global financial system runs as much on trust as on anything else. And now that that trust is shaken, the anxious and the nervous are draining bank and money market accounts by the millions from what they perceive to be unstable institutions and turning to something that feels more familiar.

Although exact numbers tracking the flow of this panic won't be available for a few more weeks, Chris Cole, spokesman and regulatory counsel for the Independent Community Bankers of America, said many of the 7,000 community banks in the country are reporting an influx of deposits. Indeed, Burke & Herbert, with $1.6 billion in assets, has seen a staggering $45 million in new deposits in the past two weeks. The draw of community banks, Cole said, is the relationship. "At times like this, people may feel it's time to shift to a bank that's nearby, where their neighbor may bank, where they may know the loan officer," he said, "a place that they know is safe."

Tellers at the Burke & Herbert main branch on King Street in Old Town Alexandria are poised behind a curving, polished, mahogany-and-green marble counter to greet depositors by name and offer bowls of lollipops for the kids and dog treats for the pets. They've been known to give a quick courtesy call to depositors who are about to overdraw their accounts. And the bank's mascot, a parrot, dates back to the days when a former bank president did business with a cranky one perched on his shoulder.

President E. Hunt Burke sports a bushy moustache, much like men did around the turn of the last century. He has been known to paint walls on weekends and mop up when the floor is wet to show "nobody's too good to do anything." And although they now offer such newfangled services as online banking, Burke runs the bank in much the same way that his great-great-grandfather did when he founded it in 1852. The board of directors meets every Thursday at 4 p.m. sharp, because it always has. Advertising, until recently, meant waiting until people found them. Residential loans require at least a 20 percent down payment. Loan officers sometimes show up at houses to make sure the appraisal isn't overblown. And no one even considered one of the "nutty" subprime loans that have taken Wall Street and global markets down.

"We do what we understand, and no one understood those," Burke explained. "We look dull and plodding."

"Because we are dull and plodding," said his brother, C.S. Taylor Burke III, senior executive vice president.

At times like these, dull and plodding looks pretty good.

Nervous investors also have been flocking to McLean-based Cardinal Bank, another community bank.

"It's crazy. We have people coming in with checks from other institutions to our bank and saying: 'I want to open an account. I want to open it today.' And you look at the check and it's for $1.5 million," said Bernard H. Clineburg, Cardinal's chairman and chief executive. "It's stunning. Those are things you did not see before this crisis."

Daniel Schrider, president of Sandy Spring Bank, a $3.2 billion community bank in Maryland, said they too have seen a jump in people looking for a "safe harbor."

"I think it's because we've been here 140 years. We've weathered the ups and downs," he said. "And because what we do with their money is tangible and easy to explain. We do plain vanilla investments in the community. We didn't get involved in the kind of sexy products that hurt Wall Street. So there's a comfort level there."

They may feel more comfortable, but are community banks really safer? Most of the 15 banks that have failed so far this year were small. Giants Washington Mutual and IndyMac were the exceptions.

"When you take a look at the banks that failed in 2008, they were all outlier banks. Burke & Herbert's about as mainstream as you can get," said Bert Ely, a banking and monetary policy analyst. The failed banks tended to make land and construction loans out of their local markets, he said, and relied heavily on "brokered deposits," or depositors from outside their area.

"We call that hot money because it's money coming in from out of the area. It's usually people just chasing rates, and they don't care who the bank is, so at the first hint of trouble, they will bail on you," said David Danielson, a local bank consultant. Burke & Herbert's brokered accounts are "minimal for its size," Danielson said, and they have virtually no risky construction loans. The cushion of capital on hand, Ely added, far exceeds industry standards.

"I do feel community banks are safer in general, because they do local lending and get their funding from local sources," Danielson said. "The money is not just going to regional and small banks, but the ones that are perceived as strong. That's why Burke & Herbert is benefiting now."

That's the kind of local bank Michael Sutherland wanted when he opened an account with what was then a small community bank in Annandale years ago. Then that bank got bought by another bank, which was then bought by Wachovia. (A wave of bank mergers over the years have left three monster banks, JP Morgan Chase, Citibank and Bank of America controlling 40 percent of all deposits in the country.)

A Wachovia customer, almost by default, Sutherland didn't begin to panic until he heard the bank was bankrupt and in discussions to be taken over by Citibank. "I felt uncomfortable leaving an excess of $100,000 at Wachovia," he said. He went to his local Franconia branch and said he wanted to withdraw $100,000 in cash out of the $300,000 in the account he uses to run his business.

"The branch manager there was trying to tell me to weather it out," he said. "I wanted to be protected." When Sutherland insisted on withdrawing his money, "they told me they had a limit of $5,000 in cash. A response like that is the reason people are nervous." He got his $5,000 and a $95,000 cashier's check.

He took it all to Burke & Herbert.

"Burke & Herbert, having been established for 100-plus years, makes me feel a little bit more comfortable," he said. "They say biggest isn't always best, and I really do believe that. A solid, community bank is not going to go anywhere."

Or spend lavishly. Hunt Burke drives a Mini Cooper. (His late father sometimes commuted in an airboat, like the ones used in the Florida Everglades.) They also don't pay themselves exorbitant salaries. "I've seen the pay scale of bank executives," Burke said. "And we're not very high on that scale." There are no bonuses or stock options.

Nor do they live in opulent mansions. All the Burkes still live in the Alexandria area. "I lived for 12 years in a house that cost $200,000," Burke said. "Four years ago, I sold it and sold some stock to purchase a bigger house. I have a big mortgage, and I'm waiting for interest rates to come down just like everyone else." They make money, he said, by being cheap and staying real. They've got to be able to look people in the eye, Burke explained. "The difference is, we are in this for the long run," he said. "And I really mean long run."

Just before last week's board meeting, Burke's cousin, David Burke, 83, chairman emeritus, leaned back in his high-back leather chair and shook his head. This is a collapse they all saw coming. Hunt and Taylor Burke say that times now feel a lot like when they play the computer game "Rome." "It's a wonderful thing to be standing safely on the shore watching your opponents' ships on fire out on the ocean," Taylor Burke said.

David Burke has seen this cycle of panic and flight to safety occasionally since 1933, when, as an 8-year-old, he watched his father steer the bank through the Great Depression by doing what they always did: making prudent loans and winning the trust of the community.

"People trust us," he said. "We grow at times like this."

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