Financial Meltdown Alters Local Lending Behavior

By Beacon Staff

The crisis roiling the U.S. financial sector has riveted the nation’s nervous attention for nearly two weeks as Congress scrambled to negotiate a bailout plan and the stock market took more ups and downs than the Going-to-the-Sun Road. The implosion late last week of Washington Mutual Inc., the largest bank failure in U.S. history, only exacerbated public anxiety, particularly in the West.

In Northwest Montana, the effects of the market downturn are not as pronounced, but several presidents and lending officers of the Flathead’s major banks and credit unions have seen marked differences in the behavior of their customers, including a large influx of cash deposits, a veritable drought in secondary market financing for bigger home loans, and less business lending, particularly for construction ventures.

“Is it business as usual? Yeah, but we’re definitely seeing a slowdown,” Bob Schneider, commercial market president for Northwest Montana branches of First Interstate Bank, said. “Will it be as severe as other places? I don’t know.”

These presidents describe the Flathead’s lending institutions as highly conservative, and many touted the fact that their capital rates remain relatively high as credit requirements for loans have remained largely unchanged for decades, dealing primarily in fixed rate mortgages and requiring substantial down payments.

“Our underwriting policies have remained consistent,” said Ron Rosenberg, president of Valley Bank in Kalispell. “We didn’t spike up with the crazy mortgages that were out on the market.”

As a result, the Flathead has stayed mostly immune to negative fallout from the issuance of the now infamous, so-called subprime mortgages – but that doesn’t mean consumers here aren’t spooked.

“There’s tension out there,” Jeremy Presta, president and CEO of Park Side Federal Credit Union, said. “And whenever there’s tension everybody pays attention to the news.”

Many banks say they have seen a big influx of deposits as consumers pull their money out of stocks and mutual funds and move toward cash or short-term individual retirement accounts (IRAs).

“Right after announcements came out last week we noticed a lot of money flowing into the banks,” Schneider said. “We noticed it flowing in from the brokerage companies.”

This rapid trend of moving assets into safer, more accessible forms is most pronounced among those nearing retirement who may not be able to wait several years for the market to fully recover, John King, president and CEO of Three Rivers Bank, said.

“They’re getting up in that late-fifties age and they’re saying, ‘I don’t want any risk here,’” King added.

All the banks have been deluged with calls from depositors inquiring about whether the Federal Deposit Insurance Corporation (FDIC) is maintaining its coverage of deposits up to $100,000 – which it is. That assurance has some depositors breaking up their savings into increments under $100,000 and putting the cash in multiple banks throughout the valley. But the bankers interviewed said going to such extremes is unnecessary, since most Flathead banks offer services, or can structure accounts, to cover more than $100,000 with FDIC insurance.

“People are much more cognizant of FDIC insurance than they used to be,” Bob Nystuen, president of Glacier Bank, said. “Each time there’s a bank failure, that certainly makes the news and that causes the consumer to say: ‘Where are my deposit dollars? I’ll trade off a higher return for more assurance that my money is safe and secure.’”

While many banks have seen an increase in deposits, Nystuen has also noticed that more people have less money in their accounts, likely due to the rise in costs for fuel, energy and food.

“We have seen the average balance in our business and personal checking accounts drop in this last year, which indicates, I think, people are using their money harder,” Nystuen added.

There are also factors contributing to the lending climate in the Flathead that took effect long before the volatility of the last few weeks. The market for “jumbo loans,” mortgages for more than $417,000, “disappeared sometime last spring,” according to Schneider, of First Interstate. While these loans aren’t widespread in the Flathead, they are often necessary when the buyer of a multi-million dollar home wants to finance part of the sale. But the housing market collapse in California, Arizona and Nevada has made secondary market financing for these loans hard to find everywhere.

“We have to keep it in-house to satisfy that borrower,” Schneider said. “We don’t want to take the rate risk with a whole bunch of those loans.”

The slowdown in residential and commercial construction in the Flathead, which has set in over the last year, has few investors interested in financing such ventures. As for developers and builders, they also seem to be sitting on the sidelines, waiting until spring, at the earliest, to begin constructing approved projects.

“Would we be looking at new subdivisions? No. Looking to finance a spec house? No,” Schneider said. “That type of lending, I think, is being slowed down all over the valley.”

Amid all the volatility, however, bankers said a silver lining exists for the adroit homeowner who has had the opportunity, over the last several weeks, to refinance their mortgages at times when the interest rate has dipped below 6 percent.

“The consumer should keep an eye on what interest rates are doing on the home mortgage side,” Nystuen, of Glacier Bank, said.

But while the bank presidents interviewed feel that they have kept a steady hand steering their financial institutions through the current morass, many said that in a business based almost entirely on trust, they were dismayed that the image of all bankers has been tarnished by the Wall Street fallout.

Executives at Bear Stearns were able to walk away from their bank’s collapse with tidy compensation packages, said King, of Three Rivers. Presiding over the collapse of a bank in a community like the Flathead, on the other hand, would result in social ostracism, jail time, and other punishment, King added.

Schneider also felt indignant that media coverage of the complicated financial crisis tends to group all banks together, when the investment entities collapsing on Wall Street and the local commercial banks are very different types of institutions, operating under different standards of government regulation.

“The community banks are still in good shape; to throw us into the bucket and say we’re all banks, to me, is a comparison that is unfair,” Schneider said. “We’re not under regulated.”