Donald Glass – Longtime industry advocate

While Sept. 11 irrevocably changed the way Americans perceive their place in today’s world, most of the trends that shaped the banking industry were already under way before the horrific attacks.

The refinancing boom, the sputtering economy, Banknorth’s substantive move into Massachusetts: All had their start well before Sept. 11.

Sept. 11 simply reinforced the banking industry’s reputation as a stable entity that could be shaken but not destroyed in a single day.

The events surrounding Sept. 11 showed the resiliency and courage of the American people, said Daniel J. Forte, president of the Massachusetts Bankers Association. In the shadow of that world-changing event emerged a positive reinforcement, said Forte, that the financial system is strong. Not only was it [the banking industry] open for business as usual but at the same time responded as many businesses did, trying to work in concert to try to provide disaster relief through the American Red Cross and other agencies.

Despite the relative calm that ensued in the banking world a month after the tragedy, Forte said the industry will most likely continue to see changes in the economy or the regulatory structure as a result of that dark September day.

We’ve seen the [U.S.A.] Patriot Act come out. We’ve seen increased scrutiny on money-laundering processes so the banking industry has had a very stringent disaster [recovery] program in place. I think those will be tightened even further after the Sept. 11 events. But the system worked, much like it worked in Y2K. That, I think, lent a lot of support to people’s confidence post-Sept. 11, he said.

Before the fall, however, the Board of Governors at the Federal Reserve were rapidly reducing interest rates in order to bail out the looming recession resulting in today’s 40-year low levels. For consumers, that meant it was time to refinance, either to consolidate debt or to simply take advantage of lower rates. According to the Mortgage Bankers Association of America, this year the industry will see $1 trillion in refinancings. That surpasses the last refinance boom in 1998. Refinances are at an all-time high. Our business is up from 1998 about 25 percent. So we did quite a bit more business than we did in 1998, said Dean C. Caso, president of Homevest Mortgage in Newton.

It has been a very long refinance cycle as well, said Cindy Merkle, senior vice president of mortgage banking at Boston-based Eastern Bank. She estimated the heightened refinance activity really started in February and has continued through to the present, making for a busy year for lenders.

From a staffing standpoint, it really caused a lot of strains on various institutions’ capacity to process the loans, she said. But those who lived through the refi boom of 1998 learned how to better handle the load. Additionally, the advancements in and availability of technology allowed more companies to incorporate it into backroom operations.

So that helped turn the volume around without causing bottlenecks and expiration of rate locks which people saw in 1998, she said.

People are using the low rates to firm up their debt and positioning themselves into a more conservative financial picture, she said, sometimes refinancing as many as three times.

Credit Union Growth
Although the year 2001 quickly degraded to a recession in March, credit unions around the state took advantage of relatively new laws and a reputation for being a safe haven for savings. Massachusetts credit unions grew 25 percent in the past five years. Deposits increased by 40 percent and loans increased by 70 percent. Since the passage of the Credit Union Parity Act in 1998, a plethora of credit unions in the state have applied for community-based charters, allowing a much broader area of potential customers to be targeted. But while the easing of legal restrictions has contributed to the growth of the industry, Robert B. Kimmett, senior vice president of public relations and marketing for the Massachusetts Credit Union League, said in an earlier interview that the real reason for the growth is the credit union philosophy.

Credit unions have remained constant in their focus on the consumer, and the competition has shifted their focus more towards short-term profits and away from establishing long-term relationships in the name of profit, he said. Additionally, credit unions benefited again when the stock market turned from bull to bear, resulting in many investors pulling money and putting it into safe, insured institutions. Credit unions experienced a record 9.7 percent increase in deposits in the first six months of the year.

The MBA wasn’t cheerful at the prospect of credit union growth and increased competition, however.

The irony of this issue is that there are probably 15 or 20 credit unions that [essentially] are [large] banks in Massachusetts, and that create an unlevel playing field for the smaller community banks that are across the street from them, said Forte, echoing the stance the MBA has long held.

The bulk of the credit union industry has maintained its common bond: grass roots, its affinity relationships with its depositors, and they should be left alone. But it’s the larger institutions that are growing into areas of the banking business and destabilizing the market in those communities, he said.

Despite the continuing debate, the MBA in 2001 did not actively pursue its long-term goal of seeing that larger credit unions are stripped of their tax-exempt status.

Banks experienced impressive growth in 2001 as well, though. Among them was Portland, Maine-based Banknorth Group. At $18.2 billion in assets, it was one of the largest community banks that did well in the current economic downturn. Because of their relative insulation from major loans in industries that experienced dramatic downshifts this year, community bankers were in a much better position to maintain profits. In June, Banknorth announced it would increase its total holdings to 40 percent in Massachusetts by acquiring Andover Bancorp and MetroWest Bank.

According to Brian Arsenault, senior vice president of corporate communications for Banknorth, the unusual move of acquiring both at once was really more coincidence. We were bringing the Andover deal close to fruition and actually the opportunity with MetroWest came up rather quickly, he said.

The other dramatic shift experienced by Banknorth in the last year was the economy. At the start of 2001, Banknorth was experiencing doubl- digit loan increases across the board, said Arsenault. Loans were growing 10, 12 percent in just about every category. By the second half of the year, you were down [to] about half of that, he said, not just for the bank but for most financial institutions in New England.

Acquisitions weren’t the only headline events in the state’s banking industry this year. Commonwealth National Bank in Worcester recently opened after a prolonged capital-raising campaign. Leader Bank, a project spearheaded by Arlington-based Leader Mortgage founder Sushil K. Tuli, recently completed its capital raising and should open by summer.

But the year was not without drawbacks. 2001 saw the demise of Lighthousebank, an Internet banking spin-off that has been folded back into Brookline Savings Bank. Many Internet-only banks died away in the last year after industry experts realized consumers want a bricks-and-clicks approach to banking, reflected by the opening of a physical branch by Directbanking.com, a spinoff of Salem Five in 2000.

The Bay State financial services industry also saw the departure of longtime industry advocate Donald Glass, president of the 110-year-old former Community Bank League of New England, who left the position after the league was folded into the MBA in May.

I think the leadership of both organizations saw the wisdom and the strength of putting everyone together to create a unified voice for the banking industry, with the particular emphasis on where community banks fit into the overall scheme of the financial services picture as well as strong products and services that will help Massachusetts banks really move forward, said Forte.