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Money Flow

State-Chartered Banks Are Still Lending Despite The Credit Crunch

The credit crunch is gripping much of the nation, but Arizona banks are still lending money and most are well-capitalized to weather tough economic times. The state’s core capitalization rate of 10.31 percent is well above the national average of 7.89 percent. That means Arizona banks have a good cushion to ride out the mortgage-induced banking crisis.

Arizona has approximately 83 banks, and of those 33 are state chartered. It also has roughly 58 credit unions and 26 are state chartered. Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, which oversees all state-chartered banks and credit unions, says state-chartered banks were not involved in subprime mortgage lending, so the mortgage meltdown is not impacting them. But capital drying up and lack of funds for borrowing, which precipitated the federal government’s $700 billion Wall Street rescue package, do impact state banks and make it more difficult for them to do business. Thus, state regulators across the country are closely monitoring the policies and proposals coming out of the U.S. Department of Treasury to make sure the advantages large national banks acquire from Treasury Chief Henry Paulson’s plan have equal impact on state community banks.

“As a result of subprime mortgages, foreclosures and the drop in property values, banks are seeing a reduction in profits and asset quality,” Rotellini says. “But I believe our state-chartered banks are well-managed and well-capitalized to weather the storm. It’s a matter of good management and reserves.”

In September, National Bank of Arizona’s strong capital position enabled it to acquire the FDIC-insured deposits of Silver State Bank’s Arizona offices in Tolleson, Chandler, Sun City and Scottsdale, after federal regulators took over the Nevada-based bank.

National Bank of Arizona’s plan is to merge all Silver State offices into its own nearby branch locations. National Bank of Arizona President and CEO Keith Maio says the bank is currently lending money to small and mid-sized businesses and for commercial real estate projects. But unlike a few months ago, the bank now has a stronger pre-leasing requirement on commercial real estate and a slightly higher credit quality hurdle for small business transactions. The bank also takes into consideration whether a prolonged economic downturn will significantly affect a business and whether management has the ability to maneuver a company through a protracted economic slump. Assessing management is critical, Maio says, because good managers have a solid business plan, they don’t look for excessive leverage and they can run a business successfully through good times and bad.

“Whether you’re an individual, business or bank, you can weather the storm if you have adequate capital,” Maio says. “Our goal is to work with customers the best we can while preserving our capital for future opportunities. That doesn’t mean we’re not making loans. It means we’re going to be judicious about capital. For the last eight to 10 years, there’s been too much leverage in both the business and consumer sectors and that’s what’s caused this financial crisis in its simplest form. Credit was too easy and too cheap. Now it’s harder to get and more expensive.”

The spiraling economic downturn has been a blessing in disguise for Bankers Trust Phoenix, a wholly-owned subsidiary of the $2.5 billion Midamerica Financial Corporation. The bank opened in January with $15 million in capital and a clean balance sheet, enabling it to build relationships with local real estate professionals and lend against high-quality assets that are strategically well-positioned to ride the economic upturn early in the next cycle.

“The fact that we missed the boom of the last several years has turned out to be an advantage for us,” says Patricia Rourke, president and CEO of Bankers Trust Phoenix. “As a newcomer in the market with no troubled credit and nothing in our portfolio, we were ready and able to lend when developers and real estate professionals were being turned away from other local banks.”

Harry Mateer, president and CEO of Altier Credit Union in Tempe, says credit unions have also been affected by the country’s financial crisis, but to a lesser degree. Credit unions have strict investment policy guidelines that prohibit them from entering into many of the lending areas of banks and other financial institutions. They focus on specific areas of lending, such as auto loans, home equity and credit cards.

“We’re currently seeing some liquidity shortages in the system,” Mateer says. “And I’ve heard this from other credit unions around the state, too. Members don’t have as much to save so there’s not a lot on deposit. Nevertheless, we’re focused on helping members in light of the economy and working with them when they have difficulties. People can still get loans, but we’ve changed our loan to value requirements to be a little more conservative. We’re now doing 80 percent loan to value, not 85 to 90 percent. And I think that’s what’s being done across all banks and credit unions.”

As a result of the mortgage-induced banking crisis, Arizona legislators passed a law during the 2008 legislative session (SB-1028) requiring all loan officers of mortgage companies in the state to be licensed after 2010. The Arizona Department of Financial Institutions is developing the licensing system for the state. Arizona has approximately 8,000 to 14,000 loan originators that will need to be licensed.

“Over the past few years, there’s been a breakdown in education and training of loan originators in Arizona who explain nontraditional loan products to consumers,” Rotellini says. “A lot of borrowers got into a loan product they didn’t understand and couldn’t afford over the lifetime of the loan, and the loan originators didn’t carry out a loan transaction that was suitable for the borrower. Loan originators also made more commission on option ARM (adjustable rate mortgage) products that over time yield higher interest rates, so conventional loans and FHA loans fell out of favor.”

The Department of Financial Institutions recently investigated a case that resulted in a Phoenix man losing his home. The man was put into an option ARM product with a teaser rate he could afford, even though he would have qualified for a VA loan. In time, the loan adjusted to a higher interest rate and the man couldn’t afford to make his house payments. When the man complained, the loan officer threatened to harm him, so the Department of Financial Institutions intervened. Unfortunately, it was too late. The man had no money to refinance, his credit was destroyed and he lost his home.

“Requiring loan originators to be licensed raises the level of accountability,” Rotellini says. “It’s going to improve the whole mortgage-lending experience for consumers and provide assurance that the loans they enter into will not default and are legitimate. Of course interest-only products will still be available, but they will no longer be abused.”