EL PASO — As the U.S. economy sank into the worst recession since the Great Depression, customers fled nationally owned financial institutions and came home, shifting their money from Wall Street to Mesa Street.

Customers fled to the perceived safety of smaller community banks as larger banks swirling in the eye of the controversy and threatening to fail were forced to receive federal bailout money. As the economic situation worsened and financial fat cats continued to collect huge bonuses, El Paso banks experienced a boom in business.

“We have seen significant growth in deposits and loans year over year, with deposits increasing $90 million, or 16 percent, and loans growing $98 million, or 22 percent,” Said Larry Patton, president and chief executive officer of Bank of the West.  “The national economy and, more recently, our local economy experienced a slowing of economic activity. The multi-national and regional banks in our market have experience significant to strained financial conditions, [and] it has allowed us to grow our market share.”

The problems that nationally owned banks currently face surfaced when excessive numbers of bad loans failed. These losses forced the Federal Deposit Insurance Corporation (FDIC) to close some banks and other financial institutions were forced to seek bailout money from the federal government.

“[Big banks] ended up having to, in one way, shape or form, large portfolios of really bad loans.  The moment the real estate market went down last year, they found out they had all these loans that were really bad that they were thinking they were going to get money from,” said  Dr. Erik Devos, assistant professor of finance in the Department of Economics and Finance at the University of Texas at El Paso. “Basically they had all these loans that were worthless all of a sudden. [Both the banks and the] stock market realized it, and people realized that these big banks were going to go belly up.”

Now that the public has become aware of the issues facing national banks, customers are straying from their former banks and are looking to local banks as harbors for their money.“ Larger banks are risk takers, and unfortunately, with all the risky loans and investments, [at] times serious problems evolve, as a result. Customers do not want to invest in Wall Street or with large banks that have received Troubled Asset Relief Program money,” former Bank of America Branch Manager Patricia Fierro said.

While customers and investors wonder why larger banks took so many risks with their loans, some believe they had prior knowledge of the fact that they would be bailed out if they got into serious trouble. “Larger banks have had the incentive for quite some time to lend to more risky borrowers because they knew that they were ‘too big to fail.’ Therefore, they did not demonstrate as much diligence in verifying the creditworthiness and borrowers’ ability to pay,” said Nathan Ashby, assistant professor of the Department of Economics and Finance at UTEP.

There are other reasons why customers and business firms are changing to community banks. Customers looking for security and businesses finding that they are limited on the amount and type of lending they can receive are switching to banks that offer more options.

“Deposit customers are looking for safety beyond FDIC insurance limits, and business owners have been experiencing a reduction in access to credit from their existing banks, due to a change in lending policy being driven by regulatory concerns over their nationwide or regional lending practices,” Patton said.

In the past, nationally owned banks have bought and sold risky loan packages without fully evaluating the risks. Community banks mainly deal with local customers, which helps them judge whether a person is a good risk.  “If you think about how the crisis started, having loans that are very risky turned out much more risky than anticipated.  Smaller banks seem to be able to evaluate potential borrowers much better. Maybe [it’s] because they’re local and they know the area or they may even know the customer already very well so they can figure out how risky someone is, and then decide whether they want to take on a loan or not,” Devos said.

Community banks offer the same selection of services that national banks do, but emphasize their quality of service.  “We are a full-service bank offering deposit, loan, electronic banking, trust and investment brokerage services. However, we pride ourselves in offering face-to-face customer service that cannot be duplicated by these banks due to their centralization of decision makers and due to their employees not being empowered to make decisions in a timely manner,” Patton said.

With so much attention on the problems national banks have gotten into, community banks, especially the lending departments, must be cautious about who they do business with. “The lending department at Bank of the West has to be very careful today so that we do not make bad loans. We also have to take the time to help customers that are not doing so well,” David Osborn, Senior Vice President for Commercial Lending at Bank of the West, said.

While the big banks strive to surface from the economic tsunami, community banks are thriving and ready to expand services. “Our board, management and staff are all El Pasoans that live and work here and understand the local economy and future of El Paso,” Patton said.

“Our economy has never been stronger in the 31 years that I have been a banker in El Paso. That is why we are willing to grow our market share and continue to lend money into our community when all of the competition is pulling in their horns and cutting staff and services.”

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