Local bankers say business as usual

Local bankers say business as usual

By Terry Hanley and Rob Heidrick Friday, 07 November 2008

This fall’s nationwide financial crisis has yet to significantly disrupt the Central Texas economy, and although it may be harder for individuals and small businesses to get loans, local bankers say money is still available.

Creditors have set increasingly strict loan requirements since the decline began in August, causing uneasiness even within a region relatively isolated from the risky lending practices that caused larger banks to falter, said Paul Trylko, CEO of Amplify Federal Credit Union, which has two branches in the Round Rock/Pflugerville area.

“People are trying to understand the share insurance, the safety and soundness of different institutions,” Trylko said.

Local banks endure

Central Texas banks and credit unions have avoided fallout from the national economic crisis because many of them were not involved in the types of risky lending that caused larger banks to struggle in recent months, local banking executives reported.

Large institutions, such as Washington Mutual and Wachovia Securities, are feeling the credit crunch primarily because they relied on subprime loans that ultimately fell into default on a massive scale.

“We haven’t had any negative impact financially on our end,” said Michael Doss, president of Independent Bank in Round Rock. “The smaller local banks are most likely not dealing in any of the riskier elements that some of the bigger guys did. We’re local. We’re a little bit insulated from some of the stuff that’s going on, on the coast.”

A diversified job market has also helped shield Round Rock and Pflugerville from major fluctuations, Trylko said, and steady regional growth has sustained the housing market.

Choosing a bank

While local banks have managed to avoid the brunt of the crisis thus far, many residents have expressed growing concern about the security of their investments.

“The real conversation is about the stability of the organization,” Trylko said. “Even if an organization has insurance, you want to make sure you’re putting it [money] somewhere where you understand the stability.”

In addition to insurance standards set by the Federal Deposit Insurance Corporation, banks must meet federal guidelines requiring them to keep enough reserve funds to cover any losses from defaulted loans. A bank is considered “well capitalized” if its combined profits and stocks make up more than 5 percent of its total assets. For credit unions, the minimum is 7 percent.

“There’s probably going to be more oversight and regulation coming down from the national level” in the coming months, Doss said.

Keeping score

Lower credit card limits and increased scrutiny of credit scores are some of the factors that could limit the amount of money available to borrowers.

Credit scores, which range from 300 to 850, are indicators examined by lenders when approving and setting interest on loans. Subprime lending — the high-risk practice of loaning money at high interest rates to individuals with poor credit — played a major role in the nation’s recent spike in defaults and foreclosures, said Sally Borie, education coordinator at Consumer Credit Counseling Services, which is headquartered in Dallas and has an Austin office.

Though there is no fixed cutoff point, subprime loans are usually offered to those with credit scores below 620. A score above 700 is generally considered to be sufficient to qualify for low interest rates — but in the current economy, that standard could shift higher.

“Your credit score is basically your financial report card,” Borie said. “Because of the financial crisis we’ve had recently, the criteria may have changed a little bit. The credit score that once may have been acceptable for a prime rate may no longer be acceptable by that funding institution.”

Managing a tighter budget

Taresa Hale, senior vice president of Alamo Title Insurance Co. in Austin, said borrowers with scores in the mid- to high 600s had been considered relatively safe until last year. Today many lenders prefer scores of higher than 720 to approve a prime rate.

Hale said borrowers behind on payments should notify their creditors before the problem becomes more serious.

“The house should be the first thing you pay,” Hale said. “Do not put that in jeopardy. If you are unable to pay your other debts — your cars, your credit cards — go talk to people who counsel you in credit.”

Credit counseling agencies offer financial planning courses and help clients negotiate with creditors in developing a mutually beneficial debt management plan. These arrangements typically require borrowers to have enough up-front cash to begin payments immediately, but the terms can vary.

Lending today

Creditors examine several factors in addition to credit score before approving a loan and are now likely to raise minimum standards for equity, down payments and debt-to-income ratio, said Hollis Bone, senior vice president and business banking manager at Wells Fargo Bank in Round Rock.

Bone said the main factor in commercial and retail transactions is the borrower’s ability to consistently pay the debt over the life of the loan.

“We’re always looking for multiple sources of repayment,” he said, adding that lenders will evaluate liquid assets before taking more drastic action. “We never want to take the collateral. We never want that to happen, so it’s all about cash flow.”

Sid Lundy, vice president of business development at Austin Telco Federal Credit Union, which has an office in the Round Rock/Pflugerville area, said lenders will contact borrowers after a loan payment is 30 days past due and will make more serious inquiries after 60 days. Foreclosure proceedings are initiated as a last resort when a loan is 90 days overdue.

How a credit score is determined

Credit facts

According to FICO, it is “impossible to say exactly how important any single factor is in determining your score.” The makeup of information is different from one person to the next and can vary over a single person’s lifetime.

The Fair Isaac Corporation, or FICO, established credit risk scoring in the 1960s. FICO ratings are now considered the industry standard for lenders. A FICO score is composed of various data types in an individual’s credit report. The information is composed of five categories, each having a different weight on individual scores. FICO scores range from 300 to 850: The higher the number, the better the score.

Payment history

• Payment information on accounts (credit cards and loans)
• Adverse public records, like bankruptcy, and past-due items
• Amount past due on accounts and length of delinquency
• Number of past-due items and accounts paid as agreed

Amounts owed

• Amount owed on all accounts and on specific accounts
• Number of accounts with balances
• Amount owed compared to credit limit on certain accounts

Length of credit history

• Time since accounts opened and since last account activity

New credit

• Number and proportion of recently opened accounts
• Number of credit checks and time since credit inquiry
• Established positive credit history after payment problems

Types of credit used

• Different types of accounts including credit cards, retail accounts, installment loans and mortgages

Source: www.myfico.com

What local experts say

“It’s almost a day-to-day watch to see either what the Fed is doing or seeing what bond rates are doing … and so the volatility in the market is leading to some higher rates. At a time when there is perceived risk in the market, there is going to be a rise in rates.” Hollis Bone, Senior vice president and business banking manager, Wells Fargo, Round Rock

“We [Central Texas] are like completely opposite of what is happening elsewhere. Fortunately, we have — up until now — been fortunate enough to have growth in the local economy, jobs have continued to increase, home values continue to go up, people continue to move here and buy homes and so on, because we have high tech and oil to a certain extent. Those have done fairly well compared to the rest of the country.” Dr. A.J. Senchack, Lucy Brown Chair in international business and economics and business professor, Southwestern University

“We have seen a significant drop in loan applications, particularly in the last 60 days, as people are getting worried about the economy and the election. Even though our underwriting standards haven’t changed a bit, people are just not coming in and asking about loans right now.” Jon Sloan, President, First Texas Bank, Round Rock and Pflugerville

"Markets go through ebbs and flows, and long term, they come back. I still believe in the U.S. economy, and I think it'll come back." Michael Doss, President, Independent Bank, Round Rock

"We’re doing what we’ve always done. The thing that may be challenging moving forward is being able to have the proper amount of deposits or funding so we have enough money to lend out." Paul Trylko, CEO, Amplify Federal Credit Union, Round Rock and Pflugerville

FDIC and NCUA

The Federal Deposit Insurance Corporation protects individuals against loss of deposits if an FDIC-insured bank or savings association fails.

Federal credit unions are supervised by the National Credit Union Administration and the National Credit Union Share Insurance Fund insures members’ deposits in credit unions up to the federal limit.

On Oct. 3, the Emergency Economic Stabilization Act of 2008 increased the FDIC and NCUSIF protection on accounts from $100,000 to $250,000. The limit will be returned to $100,000 Jan. 1, 2009. The increases did not affect retirement accounts that already had the $250,000 insurance cap.

If a bank or credit union is closed, the FDIC and NCUA are required to pay account holders as soon as possible.

Source: www.fdic.gov and www.ncua.gov

Credit unions versus banks

Credit unions are non-market based financial institutions in which members pool their assets to provide loans and other financial services to each other.

Bank profits are affected by severe stock market swings, whereas credit unions raise capital through member deposits.

Credit unions are:

• Not-for-profit cooperatives
• Owned by members
• Controlled by volunteer boards
• Insured by the National Credit Union Administration

Banks are:

• Profit-driven entities
• Owned by stockholders
• Controlled by paid boards
• Insured by the Federal Deposit Insurance Corporation

Source: Texas Credit Union League