The Vineyard’s three local banks remain confident of riding out the storm now buffeting world financial markets, thanks to conservative lending practices which largely avoided involvement in the subprime mortgage market.

However, the heads of all three banks this week expressed concern about the effects of the financial crisis on the broader Island economy, given its heavy reliance on seasonal residents and visitors, many of whom will likely have less to spend in the coming year.

And one of the three, the Bank of Martha’s Vineyard, endured a roller coaster week as shares in its parent bank, Sovereign, dived and then revived due to the global panic.

Sovereign’s stock price stood at $8.37 at the close of trading on Friday, but by Monday’s close had fallen more than 70 per cent to $2.33. As of midday yesterday, it was back up to $5.74.

“It looked pretty bleak for a while,” said Paul Watts, the senior vice president at the Bank of Martha’s Vineyard, who described the plunge as an aberration caused by the sudden decision of two overseas stock holders — Norway’s Norges Bank and London’s Toscafund Asset management, both of which held about five per cent of Sovereign – to dump their holdings.

Mr. Watts said the two European institutions also had held large stakes in two other lenders, Washington Mutual and Wachovia, which had collapsed.

“So these [foreign] institutions had huge positions in our stock and also Wachovia and WaMu, and decided two banks going down was enough and they weren’t getting stuck with a third,” he said.

“In reality we are just fine, but when somebody dumps almost 40 million shares on the market, it has its effect.”

He said Sovereign had acted early to increase its capital and unload some troubled securities.

“We had some exposure in Fannie Mae, and we’ve written that off and hopefully the government is going to give some sort of tax break in this bill they have before them so we can recover some of that,” Mr. Watts said.

“Sovereign has right now over $12 billion in liquidity, and is in a solid position to deal with any issues. Our reserves are higher than required by the federal government. We’re a strong, liquid regional bank and we were painted with a brush that all banks were bad.”

Mr. Watts said the Island division of Sovereign is traveling well.

“On the Island we’ve had no foreclosures; we’ve had little or no delinquencies. Our margins are holding up. My retail clients say business is okay — not a stellar year, but sales are okay.”

But he noted a decline in the property sector; construction is down and so are loan applications.

Fielding Moore, the chief executive officer of the Edgartown National Bank, said his institution had no exposure at all to the so-called toxic loans which have driven the financial crisis.

“We never got into any of the subprime underwriting at all. We didn’t get involved in Fannie Mae or Freddie Mac. We didn’t compromise our underwriting standards,” he said.

“Our investments are all . . . U.S. government guaranteed, short-term, highly liquid. We don’t have any losses in our investment portfolio. We’re not complicated here. We just go with the basics.”

He suggested the “very plain vanilla” lending and investment strategies of his bank and other community banks could actually see them benefit from the crisis.

“I think people that before might have talked to mortgage companies or bigger money center banks are coming to a community bank, because they know these are by and large in good condition.

“We’re seeing some of that; we’ll probably see more,” he said.

Mr. Moore summarized his bank’s position as “unaffected, but concerned.

“Right now, our numbers of past-due borrowers are negligible, delinquency is almost nonexistent and people are paying on time,” he said.

“For our commercial customers, things seem to be going almost as well as last year; the comments I’m getting are that people are a little more cautious about how they spend, but they’re still spending.

“Everything looks good right now, but we’re concerned about the Island for next summer,” he said.

If Congress fails to pass its bailout measures, or if they do not succeed in instilling confidence in the market, he said it will have a negative effect here.

“People put money in banks, but a lot also put money in mutual funds. So if the market continues to decline, that will have an effect on people’s savings. And that will make them less inclined to spend money and buy second homes and so on. I think that could have an impact.

“The other issue is the contraction in credit. Those money center banks that leveraged up their balance sheets are now trying to conserve capital by reducing assets and shrinking their balance sheets, so they’re not lending. That contraction could also have an impact.”

A particular concern for the Vineyard is that a substantial number of Vineyard summer people are linked in various ways with the financial sector, a factor noted by Chris Wells, president and chief executive officer of the Martha’s Vineyard Savings Bank.

“A lot of Island visitors and seasonal homeowners are very heavily connected to the results in the financial sector. There’s no way we can’t be affected,” he said.

“I wish I could quantify it exactly, but maybe 20 per cent of our visitors and nonresidents could be affected,” he added.

Mr. Wells said that already there is significant contraction in the construction sector of the economy here.

“Last year at this time, contractors of any sort, plumbing, heating, construction, were probably pricing one, two or three jobs,” he said. “This year, across those same categories, I’ve seen a lot pricing into one job or no jobs. The backlog is not there. People who had projects in mind have put them aside,” he said.

For now, though, he said, most Islanders are coping. He said loan delinquency rates are low, and deposits are consistent.