Status check

In its 175th anniversary year, the Savings Bank of Maine got an unwelcome present: a cease-and-desist order from the federal Office of Thrift Supervision. The 36-page order laid out shortcomings of the bank and directives to improve internal operations, from tightening loan guidelines to improving security of electronic transactions to adopting more stringent real estate lending rules. More than three months after the order was issued, the bank’s president, Arthur Markos, sat down with Mainebiz to talk about how the bank is doing, and what landed them in hot water with regulators to begin with. The following is an edited transcript.

Mainebiz: So how are dealing with the cease-and-desist order, and can you tell me how you got into the jam to begin with?

Markos: It’s been kind of crazy times these last 15-18 months. We’ve been around an awfully long time and have a high market share in the places where we are. We have the reputation as a bank that people come to when they need a bank to help them out. When they start struggling, we start struggling a little bit. But the story is going to be positive very soon. We expect a very good fourth quarter and have been working very closely with our regulators. We’re right on track. I think in a lot of ways, as a bank we’re not much different than our customers. Things don’t look that great on paper, but what you do is you deal with the adversity, you adjust and you move forward.

This isn’t a capital rich state – you’ve got a lot of people here for the quality of life. In good times you have a little bit of extra. And in the tough times, it’s a little less than what you need. You just find a way to tough your way through it.

Can you tell me about the specifics that got you into this situation? You’ve had some pretty recent expansions; did that contribute?

We did expand, we did grow over the years. But the growth areas aren’t suffering more than other areas. We’ve been around a long time in our core market and we have a significant percentage of businesses in that area. It’d be easy to say growth is where the problem stems from, but that’s not true. Growth hasn’t been an issue. If anything growth makes the problem less severe. The financial environment, the banking industry — this is not just a Savings Bank of Maine issue or a Maine issue. If you go to other states, it’s much worse than here. So it’s as national, maybe global, problem and it creates challenges.

When I looked through the order, it seems the area that most concerned the regulators was problem assets.

That’s really the story. Yes, there were internal control things as well. But the real story is the finances and trouble our customers are having right now. We’ve changed our underwriting standards like everybody has, and we’ve changed some procedures, added some key positions. It’s nice to be hiring in this tough economy. We’ve taken the steps we had to do. And we’ve shifted emphasis. There aren’t many new things happening on the commercial side of things. It’s a stagnant economy at best. So we re-engineered and refocused our people. If you’re not doing new lending on the business front, then those business lenders need to be here helping out people who are having troubles, give them new ideas. Find out exactly what kind of shape they’re in. There are a lot of people who, on paper, don’t look good. On the other side, we continue to be extremely busy — I think the government has been terrific at reducing interest rates – with home loans. We’ve closed three times the number of home mortgages this year over 2008 [originating $100 million more in mortgages than in 2008]. We feel we have saved $25 million through refinancing if you measure the reduction of the interest rate over the life of the loan.

So there’s extra paperwork, and we have the extra difficulty of working with commercial customers who are having a tough time, at the same time we have additional extra work through mortgage lending. It’s a balancing act. We’re no different than everybody else – we’re working a lot harder and maybe making a little less.

You’ve said you’re a primary lender for small businesses in your core area. Is that where a lot of the troubled assets are?

Yes, they were mostly business loans. Unemployment is high, people aren’t getting big raises. So on the consumer end, people are dealing with that. We do have a big percentage of commercial business in our core area. And that’s where things are harder these days. They’re the ones who have to cut back on help and they don’t want to do that. Everything costs more. Regulations are harder. But people aren’t giving up. It’s amazing to me that a lot of people on paper can’t make payments, but they’re making payments. They’re finding a way. Our core earnings are still strong in spite of all of this and you wouldn’t expect that. People are finding a way.

So when you talk about shifting emphasis, were you talking about staff, about recasting some commercial lenders into doing sort of intervention work, helping people with problem loans or whatever?

Yes, it goes back to having a higher percentage of the commercial business. We’ve been around so long and we’re actually good at what we do. We will listen and help people. So if you look at that when there’s normal activity, we’re very busy with a good core staff.

We knew we needed to keep these jobs. Maybe we need to lower our standards for the bottom line and re-engineer those people to move over here and help customers. So really it has nothing to do with new lending, but helping people out.

How about your overhead costs, which compared with other banks are significantly higher.

We’ve had an increase in jobs and we have higher expenses. We have consultants coming in because we couldn’t possibly have the expertise to do this ourselves. Our FDIC insurance premiums, oh my God, it’s huge – a 600% increase. We believe in that because it protects the consumer from the industry’s ups and downs. But we expect it will be $1.5 million this year; it was a couple hundred (thousand) last year. Appraisals now require more paperwork. It used to be you could talk to a customer and everything was going good and it was short conversation. Now when people come in there are so many problems … everything is harder and that takes more time. Complying with the regulators takes more time. Files are bigger rather than smaller. And all of that takes more time, energy and money.

Were you surprised when you got the order?

We see regulators every single year and we have a good relationship with them. We knew the financial world was starting to crash in the last quarter of last year and troubles were starting to surface. We were prepared for some difficulties. But we were surprised at the first quarter of this year to see the extent, the depth of this recession. I’ve been around long enough to see some recessions in my time and this is way worse than normal.

Based on …?

The number of people having difficulty, the external forces that impact them are greater. Unemployment is higher. People are late paying their loans. And again when you start looking at the external influences, there’s the drop in valuation of people’s property — there’s tremendous impact from that. All together, they take away a little bit of the cushion somebody might have had. I don’t know if you’d call it a perfect storm, but the elements of this recession have been relentless.

There are roughly 37 Maine-based banks and many of them are in the same situation. How is it you landed in regulatory hot water before anybody else?

As I said before, we were a bank you could come in and talk to, we’d go the extra mile to help you do something, to help the community, the business climate of the state and create jobs. We went to bat for people and at the end, we have a bigger share of the market.

So your willingness to assume more risk on behalf of your customers is what makes you different? On the upside, it generates loyalty, but on the downside, that greater exposure means when times are tough, you really get pinched?

That’s a fair way of putting it. We’ve always been a high-performance bank and we’ve always had a few more losses than other banks, but that’s OK, because we make up for it in our productivity. [Regarding loyalty], we gave away our entire earnings in 2007. We rebated interest to our home equity customers, to our commercial accounts, to all different kinds of loan categories. That was a pretty neat thing to do to help customers. We did a similar thing in the last recession, paid off big dividends, it was nice.

Was that a decision of the board of directors to help customers?

Absolutely. We were having a great year, the expansions were paying off terrifically. But we noticed the economy was starting to slip a little bit. So like the government this year, we tried to generate some good things by [funneling money into the local economy.] We did it in 1997 and in 2007. It was a terrific thing, and another reason for the loyalty of our customers.

Sounds like you had your own stimulus fund going.

Yes, you could call it that.

If you hadn’t done that, if you had kept some of those earnings or decided not to rebate that interest, would that have changed your portfolio? Do you think you might not have drawn the attention of the regulators, since capital reserves was part of their concern?

No. What would have been helpful — hindsight being 20/20 – is that we’re going to take a loss this year, even though our core earnings are strong. We’re expecting a large provision for our loan loss, and expect to be prepared for any problems. You’re allowed to take that loss and carry it back for a tax benefit. We didn’t have that tax benefit back in 2007, so we passed that on to our customer. That’s the only downside, it would be nice to pass that back to our customers.

The order contained many Sept. 30 compliance deadlines. Did you meet them?

Yes, we met them. We’re working very closely with the regulators and they’re happy with our progress.

So you changed your underwriting and shifted people into other roles. What about internal operations around how you handle loans. Can you still be as accommodating to riskier loan requests?

Well, not today (chuckles.) We’re not any different than anyone else. It’s a tough environment and that’s reflected in the underwriting guidelines and everything else.

They’ve become tighter?

They’ve become tighter; that’s a nationwide trend. I’m very pleased to say regulators are thinking differently now than they were a year ago. And I’m not just talking about just us now. You know, just because somebody looks lousy on paper today, well, maybe now’s the time you have to give them more of a break to let them persevere and come back next year. Not everybody has a great year every single year. I think that’s helpful. We’ve made all those changes, we’re doing all that we can and I really feel that we have a bright future.

When do the OTS regulators review your situation? What’s the timeframe?

There’s nothing concrete on that. They just spent some time with us, that’s how I know we got a favorable response.

And you’re expecting the fourth quarter to be pretty good?

Earnings have been good all year. We took some write-offs to reconcile potential problems earlier in the year and so far, the fourth quarter has been really excellent. We can’t wait to get to 2010.

Carol Coultas, Mainebiz editor, can be reached at ccoultas@mainebiz.biz.

Savings Bank of Maine
190 Water St., Gardiner
President and CEO: Arthur Markos
Founded: 1834
Employees: 282 full time
Assets: $916 million
Branches: 32
Recent acquisitions: Augusta Federal Savings Bank in 2001; First Citizens Bank (Presque Isle) in 2007; Calais Federal Savings Bank in 2007; and Rivergreen Bank (Kennebunk) in 2008
Contact: 582-5550
www.savingsbankofmaine.com