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Small town banking: Tryon Federal in ‘right position for the times’

Although during first quarter this year, a particularly bad quarter everywhere, HomeTrust&squo;s net income was down by a third from the first quarter of 2008, the company still booked $1 million.

HomeTrust had a net income of $9.2 million in 2008, down only 20 percent from the boom year profit of $11.5 million in 2007, and 12 percent from the 2006 profit of $10.5 million.

That is not to say HomeTrust has been unaffected by the &dquo;Great Recession.&dquo; The number of outstanding loans on which HomeTrust is no longer collecting interest, &dquo;non-accrual loans,&dquo; was $13.25 million March 31st this year, eight and a half times the non-accrual balance three years earlier.

The bank has more than doubled its &dquo;provision for loss&dquo; account to $20 million over the same period.

But things could certainly be worse.

&dquo;Our entire loan portfolio is in the communities in which we do business, not in troubled areas like California and Florida,&dquo; HomeTrust Banking Partnership President Dana Stonestreet said.

The HomeTrust Banking Partnership now includes Tryon Federal, which had $125 million in assets when it joined in 1996; and the other original partner, Clyde Savings, which had $290 million. The two were joined by Shelby Savings Bank, with $115 million in assets, in 1998, and Home Savings Bank, $110 million, in 2005.

HomeTrust started Rutherford County Bank in 2007.

Today, with $1.46 billion in total assets, more than double the initial assets of all the partners, HomeTrust is the largest mutual bank in North Carolina, and second largest in the southeast. The bank has 16 banking locations in Buncombe, Henderson, Haywood, Polk, Cleveland, Rockingham and Rutherford counties.

The high interest rate environment 30 years ago was difficult for all thrifts, including the HomeTrust partners. Since that time, in fact, many of their sister &dquo;thrifts&dquo; have gone away ‐ bankrupted, out of business, merged, converted to stock companies.

&squo;Survival mode&squo;

Tryon Federal only lost money one year in the 1980s ‐ &dquo;about $100,000,&dquo; according to former Tryon Federal president and current board chairman Ray Foster. Still, after the crisis, the bank went into &dquo;survival mode,&dquo; Foster recalled.

Then, in 1995, Clyde Savings Bank&squo;s CEO Ed Broadwell approached Foster and Tryon Federal vice-president Brenda Walker about forming a partnership. They all shook hands and the HomeTrust Banking Partnership was formed in 1996.

Tryon Federal Savings & Loan became Tryon Federal Bank at that time.

&dquo;We had been approached several times (about selling Tryon Federal),&dquo; said Foster, who has worked with Tryon Federal since 1962. &dquo;We knew the way things were going. We could see the writing on the wall.&dquo;

&dquo;We had so much in common with Clyde Savings,&dquo; said former Tryon Federal vice president and current board member Brenda Walker, who started with the bank in 1960.

In addition to building Polk County two new bank buildings, the new partnership they formed allowed Tryon Federal to continue offering its brand of community banking, with each partner bank continuing local management and local boards, making loan and business decisions within the geographic footprint of each bank.

&dquo;Our business model is to know our customers and know our markets,&dquo; said Jerry Johnson, Tryon Federal Bank president.

That local knowledge goes back over 100 years. HomeTrust partner Shelby Savings Bank was founded in 1905. Home Savings Bank of Eden, N.C. started up four years later, in 1909.

Clyde Savings Bank&squo;s founders ‐ &dquo;farmers and businessmen&dquo; ‐ are said to have planned their new savings association in 1926 while &dquo;gathered around a pot-bellied stove.&dquo;

Tryon Federal, the latecomer in the group, didn&squo;t open its doors until 1935.

HomeTrust Banking Partnership today is a federally chartered mutual savings bank. Mutuals are like credit unions, in that they are mutually owned by the depositors and borrowers, and mutuals are like community banks, in that they largely use deposits to provide loans in their local community.

The history of thrift operations like these was at risk in Western North Carolina, explained HomeTrust president Stonestreet, and could not have been preserved and prospered in the current competitive banking marketplace without combining forces.

Borrow short, lend long

The bind for thrifts began in the late 1970s when interest rates started to rise. In the first three years of the 1980s, rates spiked, reaching 15.5 percent for the average mortgage. The mutual bank industry sustained losses of nearly $3.3 billion in that three year period.

One problem was that the thrift industry had always &dquo;borrowed short to lend long,&dquo; paying reasonable interest on time and savings deposits and lending out the money for long term mortgages to home buyers. Adjustable rate mortgages did not begin until 1981, and up until 1982 sellers could transfer their lower-interest mortgages to new homeowners when property was sold.

Thus, mortgage lenders were stuck with low mortgage interest rates providing income, while they had to pay out higher and higher rates to get deposits.

&dquo;It took lots of figuring to keep everything right,&dquo; Foster recalled. &dquo;We were lending mortgages at 5 percent, even 4.5 percent, and we had to pay a high rate to keep deposit money. We did not have a foreclosure though.&dquo;

&dquo;We had a very good reserve,&dquo; Walker said.

Banks had operated under interest rate &dquo;ceilings&dquo; for years. They could pay no more than 3.5 percent on deposits in 1962. The ceilings were set by Regulation Q of the Banking Act of 1933, written by legislators who believed unregulated interest rates had helped to cause the Great Depression. The regulated rate ceilings hadn&squo;t mattered much, though, since rates had been stable and the commercial banks weren&squo;t much interested in competing for time and savings deposits anyhow.

However, as rates rose, the rate ceilings also were raised and banks started paying more interest on deposits. As a result, deposit growth at thrift institutions started slowing, adversely affecting the mortgage markets and the housing industry.

It was largely the thrifts which had been funding America&squo;s housing.

Mutual savings banks were started in the late 1800s to help the working class by providing a safe place where the small saver, shunned by the banks, could deposit money and earn interest. Charitable people started the savings banks to encourage workers to save, to be more &dquo;thrifty.&dquo; By 1910, there were 637 mutual savings banks, primarily located in the northeast.

Savings and loans, or &dquo;building and loans,&dquo; began in the early 1800s as not-for-profit cooperative organizations that were typically managed by the membership.

Bank mortgages in the early years were short term (three to five years) and were repaid interest only with the entire principle due at maturity. In contrast, thrift mortgages were longer term (eight to twelve years) in which the borrower repaid both the principle and interest over time. This type of loan, known as the amortizing mortgage, was commonplace by the late 1800s, and was especially beneficial to borrowers with limited resources.

50 cents on the counter

While banks offered a wide array of products to individuals and businesses, thrifts often made only home mortgages primarily to working-class men and women.

&dquo;Our bank always served ordinary working people,&dquo; Foster recalled.

&dquo;We had folks come in and lay 50 cents on the counter once a week,&dquo; Walker said.

There was also a significant difference in the liabilities of banks and thrifts. Banks held primarily short-term deposits (like checking accounts) that could be withdrawn on demand by account holders. In contrast, thrift deposits (called share accounts) were longer term, and because thrift members were also the owners of the association, building and loans often had the legal right to take up to 30 days to honor any withdrawal request, and to charge early withdrawal penalties.

After World War II, when the housing boom took off, mutual savings banks started investing more heavily in mortgage loans, and by 1975 held about 66 percent of their assets in mortgages. Savings and loans held more than 82 percent in mortgages, while commercial banks held only 14 percent of their assets in mortgages.

To protect these home mortgage lenders against the threat of rising interest rates, Congress in 1966 passed the Interest Adjustment Act extending the rate ceilings to thrift institutions, but giving the thrifts an advantage by allowing them to pay depositors rates as much as three quarters of a percent higher.

Rather than protect thrifts, however, when interest rates rose dramatically the rate ceilings caused even small savers to start moving their money out of thrifts and banks into capital markets, government securities and money market funds. Rate ceilings were phased out starting in the late 1970s, and regulations were eased. Savings banks were allowed to begin offering checking accounts, certificates of deposit and money market accounts.

In 1982, rates fell as sharply as they had risen and the majority of savings banks returned to profitability. Interest rate behavior since that time has followed a stable trend which bank analysts call &dquo;The Great Moderation.&dquo;

6,300 bank mergers

Stonestreet has his own theory as to what caused the unusual spike in interest rates in the 1980s.

&dquo;The big banks did not mind interest rates being driven up because they saw it would put a lot of competitive thrifts out of business,&dquo; he said, putting it politely.

Some historians say the rise in rates was spiked by the doubling of oil prices in 1979.

Whatever the reason, the thrift industry was damaged. Stonestreet said there were about 225 savings banks in North Carolina in the 1980s. Forty seven remain today.

Some of the national savings and loans failures were attributable to insider fraud and mismanagement, as S&L managers like Charles Keating took advantage of relaxed regulation. Taken all together, between 1980 and 1993, 1,307 savings and loans with $603 billion in assets went bankrupt, at a cost to taxpayers of nearly $500 billion.

Meanwhile, big banks in the 1980s started focusing on acquisitions. NationsBank bought 37 banks and First Union, 51, from 1980 to 1994. All told, during that period, 6,300 bank mergers took place as legal restraints on geographic expansion across state lines were removed.

In North Carolina, 63 banks were acquired.

Nationwide, the concentration of deposits in the largest banks increased substantially during this period.

With all the banking rules changing, small town thrifts like Tryon Federal found themselves competing on the same playing field as commercial banks. Just the technology challenges alone were formidable.

&dquo;Back in the 1960s, every one of our loan and deposit accounts was kept on a ledger card,&dquo; Stonestreet explained. &dquo;In the 1970s, the PC (personal computer) technology came along and banks were converting their cards and signing up with service bureaus.&dquo;

At the same time, computer automation was making possible all sorts of new complexities ‐ daily balance changes, variable interest rates, sweep accounts, payroll accounts, money markets, CDs, IRAs and other new financial products.

&dquo;We got to thinking. Where is all this going?&dquo; Stonestreet recalled. &dquo;To remain relevant and competitive, we have to do what none of us can do on our own. We have to combine resources.&dquo;

Starting a &squo;movement&squo;

Having now preserved that legacy of small town banking in Western North Carolina, however, Stonestreet said he believes all the HomeTrust Partnership banks are in the right position for the times.

&dquo;HomeTrust will come out of this current economic crisis stronger,&dquo; said Stonestreet. &dquo;More and more, people want to go with a hometown bank. &squo;Too big to fail&squo; is not good. We think we&squo;re at the start of a movement ‐ a movement back to hometown banking because people are caring more about long-term personal relationships with their hometown bank more than doing business with big, out-of-town banks that are taking TARP funds. (HomeTrust said &squo;no&squo; to TARP.) We&squo;ve been reinforcing our strong capital position with our customers; reassuring them that we are strong, balanced and better than big ‐ right here at home.&dquo;

The movement idea is not new. At the outset of the industry, thrift leaders believed they were part of a broader social reform effort and not a financial industry. According to thrift leaders, building and loans not only helped people become better citizens by making it easier to buy a home, they also taught the habits of systematic savings and mutual cooperation which strengthened personal morals.

This attitude of social uplift was so pervasive that the official motto of the national thrift trade association was, &dquo;The American Home. Safeguard of American Liberties,&dquo; and its leaders consistently referred to their businesses as being part of a &dquo;movement&dquo; as late as the 1930s.

The back-to-hometown &dquo;movement&dquo; Stonestreet sees today is incorporated into the &dquo;Freducation&dquo; of HomeTrust Partnership employees, a training program based on a book, &dquo;The Fred Factor,&dquo; (Doubleday, 2004) which HomeTrust bank managers give to every employee.

Fred was a mailman who gave his neighborhood routes exceptional, over-and-above, customer service. The author uses Fred&squo;s story to teach that &dquo;its all about relationship&dquo; and &dquo;everyone makes a difference,&dquo; so you need to &dquo;keep growing&dquo; in order &dquo;to create value for others.&dquo;

The underlying belief is that it takes broad, public-spirited goals to really motivate employees and that a company with such a mission can become great. For Stonestreet, old-time, community banking is that motivating mission. Teach that, he said, and then let employees do the rest. Customers will respond.

&dquo;We&squo;re just simple people,&dquo; Stonestreet said. &dquo;Nothing fancy.&dquo;

While thrifts now largely look the same as commercial banks, there remain distinct differences, according to Stonestreet. He cited the bank&squo;s cultural heritage as one.

&dquo;We have added new people, community bankers tired of the mergers and acquisitions, who just want to get to the last bank they&squo;ll work for before retirement,&dquo; Stonestreet said.

He pointed to Tryon Federal Bank President Jerry Johnson, a former commercial banker, as an example. Johnson worked with Northwestern Bank in Iredell and Rutherford counties, and served in Tryon in 1974 and again in 1982. Northwestern merged with First Union in March, 1985.

Johnson joined BB&T in Forest City in 1998. He came back to Tryon to run Tryon Federal Bank in 2000.

&dquo;We have been training people in our culture for decades,&dquo; Stonestreet said.

Stonestreet cites HomeTrust&squo;s mutual bank charter as another distinction. For Stonestreet, the fact that mutuals have no stockholders allows them &dquo;to focus on serving customers,&dquo; taking a long term view rather than managing for quarterly returns.

&dquo;Serving Main Street and not Wall Street is a major point of differentiation for us,&dquo; Stonestreet said.

20 percent down

Looking ahead, Stonestreet said he believes the tectonic shifts taking place in banking today favor the HomeTrust model of legacy hometown banking.

&dquo;In the past 18 months, people have begun to stop and think about where they bank. Are they going to be here? People are thinking buy local, bank local,&dquo; Stonestreet said.

Over the past year, HomeTrust&squo;s deposits have grown 30 percent, or $214 million, to nearly $1 billion, a fact Stonestreet attributes mostly to people shifting deposits from other institutions and to the addition of new HomeTrust offices last year in South Asheville and Reidsville.

Customers of Wachovia Corp. alone moved billions of dollars in deposits to other banks last year before Citigroup Inc. offered to buy its banking operations and again later after Citi attempted to block a competing bid by Wells Fargo Corp.

HomeTrust Bank had no such scares.

The partnership remains strong according to the Office of Thrift Supervision (OTS), which considers a typical thrift &dquo;well-capitalized&dquo; if its core capital ratio exceeds 5 percent. HomeTrust&squo;s core capital ratio, down a bit from prior years, was still 9.54 percent at year end 2008.

OTS considers a &dquo;risk-based capital&dquo; ratio, one weighted for risk in the bank&squo;s loan portfolio, to be good if it exceeds 10 percent. HomeTrust&squo;s risk-based capital ratio was 12.13 percent at year end 2008.

The current crisis was never part of the old time, small town banking method of doing business, HomeTrust&squo;s leaders say.

&dquo;We make loans to people who can afford to pay them back,&dquo; Johnson said. Foster said when he was president he would counsel young couples to go slow, and to be prepared for a rainy day.

&dquo;The housing bubble was easy money,&dquo; Stonestreet said. &dquo;Mortgage brokers working with Wall Street would loan on anything, and so it drove up prices. Community banking saw it happening.&dquo;

&dquo;Home loans were better when they were 20 percent down,&dquo; Walker said, recalling more sensible times. &dquo;People were committed then.&dquo;