Corporate Connecticut Magazine

Essex Savings Bank has been in business since 1851, founded by ship captains who needed a safe place to keep their money while they went out to sea.

Those captains of commerce started the bank with their own capital. Soon other local merchants and neighbors joined them in the venture.

By 1999, the bank had $110 million in assets.

“Ten years later we are proud to say that today the bank has grown to $275 million in assets,” said Gregory Shook, CEO and president, Essex Savings Bank (ESB). “The capital of this business went from 10 to 12 percent with that growth, which was controlled and measured.”

As a mutual savings bank, ESB is owned by the depositors and managed by the trustees. A system of checks and balances assures thoughtful oversight of the business.

“We were always thinking in the long run,” said Shook.

As CEO and bank president, Shook must be sure that the loans made are done in a responsible way.

“The assets that we built were done in the right way, with a conservative approach,” he noted. “We wanted to make sure that, if you owned a business, you were making a financially appropriate choice in qualifying for a loan that you would be able to pay back.

We also would counsel your sons or daughters the same way: Only apply for loans that you were in a position to repay.”

As part of their strategic growth plan, ESB chose not to get into buying mortgage-backed securities that were being sold to Fannie Mae and Freddie Mac.

“It was evident to me that the folks who moved here by the Connecticut River were good credit risks and actually paid a better yield on those houses than what we could get from investors in so-called mortgage-backed securities. We decided to let our investment portfolio wind down. Local folks were a good risk compared to the investment market, which put us in a good position.”

Last year, was the fourth most profitable year in the bank’s history, the year before last was the most profitable since 1851.

“We have had zero foreclosed properties for the last 9 years and no non-performing loans. We do not have the delinquencies that are in the news because we did business the old-fashioned way.”

This is the part that is sometimes frustrating to responsible community banks like Essex Savings Bank.

“As one of the 8,000 banks out there that took obligations and financial responsibility seriously, we watched as the top 19 or 20 banks that leveraged their companies and bought each other out to the point of four banks now controlling 70% of the assets in this country.

“When you add on swaps and leverage to 400 times, well - in my view, completely irresponsible, using the kindest of terms,” Shook notes

“Wall Street used to make money the old-fashioned way. Brokers would make a profit by trading a stock or taking a company public. Somewhere along the line, someone in their board room decided to risk their own capital and join in on the run away game of speculation.

“They were downloading the risk to Fannie Mae and Freddie Mac and selling it to investors all over the world to make their bonus projections. Unfortunately, all this was passed on to the American people and that is what created the crisis the markets are experiencing now.

“Being a mutual bank, we have to live with our consequences as we held the loans in our portfolio,” he added.

“The biggest part of the problem as I see it from a community bank standpoint, is that Wall Street and the Treasury of the United States for the last 30 years, has been run by someone from Wall Street not a traditional banker.”

The roots of the issue go back to 1980, when the Deregulation Institution Deposit Committee (DIDC) was headed by a person from Merrill Lynch who broke down the savings and loan industry which had for 40 years been making six percent loans, and paying 3%, the maximum on deposit rates. Deregulation allowed deposit liabilities to go to market which raised the amount they were paying on Certificates of Deposit, to yields up to 17%.

“Unfortunately those banks held 30-year fixed-rate loans on their books, on which they were only earning at 6%. The math did not work. They had to go to Wall Street to raise capital to keep from bleeding to death. They converted to public companies, later to be gobbled up by the now too-big fail conglomerates.”

The other thing which happened that year is the regulators allowed the mortgage banking industry to begin to proliferate under looser guidelines. Conventional banking has always adhered to strict truth in lending practices.

“If we offer a loan, we need to figure out the best loan for the family. It was put on our books and we did not sell it to Fannie Mae or Freddie Mac. Whereas many banks made 40% of their earnings on selling loans and unloading risk, we actually matched the funds with the Federal Home Loan Bank and funds from our depositors to make our money and manage interest rate risk.”

Essex Savings Bank continues to build on its standing as a safe financial harbor.

“We do traditional banking. Traditional banking could be what leads the world into economic recovery. Washington needs to stop writing checks with taxpayer money so the market can settle.”

People are returning to their community banks.

“The sensibility of community banking is coming back due to the economic and market uncertainty. We have customers who have known us for generations and have built relationships with us over time, but we have also found that there is a real need for safety. Today, that is synonymous with a well-capitalized bank. Our capitalization is 12%,” notes Shook.

To be considered “well capitalized” by the Federal Deposit Insurance Corporation (FDIC), a bank needs 5% capitalization, so ESB have more than double the required safety margin.

“We don’t have any toxic assets on our books and we have a balance sheet that is rock solid. Our customers know that Essex Savings Bank is also a five-star rated bank as noted by BauerFinancial, Inc.”

BauerFinancial has been analyzing and reporting on the financial condition of the nation’s banking industry since 1983, and is known as “the nation’s bank rating service”.

“People have asked me the definition of a toxic asset - that is an “asset” that is on the books but does not have any real market value, because no one will buy them. They were put together with complexity and were not rated properly in the system. Because of the marketplace, they may not have any value, so having them on your balance sheet is a risk. If it is on your balance sheet, you cannot get an accurate picture of the firm’s financial health.

Today, the U.S. Treasury forced community banks to compete against them. They are liquidizing Fannie Mae and Freddie Mac to try to remake a market that never should have become as large as it was. Wall Street is designed to run up a market, make a market, even when a market is plateauing, and then figure out when it is going the other way. The system is designed to make money on the way up, even when the economy is flat or going down.

He dislikes the recent initiative with the unfortunate name of the new “Legacy Loan Program”.

“There something of value there, but lets not call it the “legacy” loan program because, frankly, that has a negative connotation. Our children’s children are going to pay for it. The FDIC is going to back it, when its true mission has always been to protect deposits, not assets. You can be sure Wall Street has already figured out a way of making money on this plan.”

The plan is to partner with the Federal government that’s who is putting up $100 billion of taxpayer money and are going to make money on that arbitrage.

“The program to me, as an experienced banker, doesn’t make any sense at all. It should be a non-starter. You do not spend your way out of debt. However, these things have a way of happening because those in power don’t discuss the relevant issues with other professionals in the trenches who actually have to work the numbers and live with the consequences.”

Traditional banks like ESB take their responsibilities seriously. Yet they need the support of the Federal Home Loan Banks across America in order to be able to fund loans in their own communities.

“Essex Savings Bank, for the past 13 years, has given 10% of our after-tax net income to non-profit organizations in our seven town area, a dividend promote the efforts of these vital support groups. If the bank makes a dollar, then 10 cents is returned to the community. ”

For 158 years, Essex Savings Bank has been striving to build long-term trust.

“We’re not in it for the short-term. As the 17th president of a local bank, my job is to pass the baton onto the next generation with solid prospects, not to create shareholder wealth. My job is to protect 100 jobs of the people who work here. Their positions are protected, if we manage our business the right way.”

At the moment, Shook and the people who hold the trust of ESB will remain cautious until the market settles and the rules are set by Washington.

Once there are clear goal posts, Essex Savings Bank will be in position to continue to grow even more opportunities for their clients.

For more information and locations, visit www.essexsavings.com