Risky loans not a part of banks’ portfolios
With the turmoil the U.S. economy is in, area residents may be concerned about the safety of banks in Marion County, but there is nothing to fear, bank officials say.
“We’re still lending money to credit-worthy people,” said Chris Costello, president of Tampa State Bank in Marion and Tampa.
According to Shreves Avery, president of Peabody State Bank, the banks most affected by the turmoil are investment banks, which operate differently than commercial banks operating in Marion County.
Bank officers said many factors contributed to the banking crisis, but Todd Heitschmidt, president of Central National Bank’s Marion branch, summed it up in one word
Kelly Linnens, vice president of Cottonwood Valley Bank in Florence, said politicians made home-ownership a priority and encouraged banks to make riskier loans.
“Clearly, some people took out loans they could not repay, and some lenders made loans they should not have made,” said Robert Watson of Emprise Bank of Hillsboro. “Beyond that, a lot of the loans were sold to people who did not realize what they were buying.”
Many investment banks were not doing due diligence of evaluating the risk of subprime mortgages. Investment banks were more interested in making a loan than determining if one was an acceptable risk, because they operated on commission.
“It wasn’t about the customer,” said Hillsboro State Bank President Carl Long.
One difference between investment banks and community banks is community banks evaluate if a customer can afford to take out a loan. If a customer cannot afford a loan, it is in the best interest of both the bank and the customer to say so.
It has been years since the economy has faced similar difficulties. The farm economy crisis of the 1980s was similar, but not on the same worldwide scope, Avery said.
“Nothing has been like this, probably since the 1930s,” said Kurt Spachek, president of Pilsen State Bank of Lincolnville.
Banks in Marion County are in good positions to weather the economic storm, bank officials said unanimously. A substantial part of that is the conservative lending practices the banks have maintained for years.
“Our bank did not participate in any of the subprime-type loans,” said Marion National Bank President Jim Hefley.
The subprime mortgage crisis has indirectly affected banks in Marion. The Federal Reserve system, the nation’s central bank, lowered the interest rate at which banks lend to each other on Tuesday, which is intended to lower interest rates on commercial loans.
Changes to Federal Deposit Insurance Corp. practices also affect local banks. The limit on FDIC insurance was raised from $100,000 per person per bank to $250,000. That has the effect of making more depositors’ money safe, but it also leads to increased insurance premiums for banks.
Bank officials agreed depositors’ money is safe. Even before the increase in FDIC coverage, banks in Marion County have enough capital to cover deposits, said Central National Bank Regional Director Mike Padgett.
Banks in Marion County have seen different levels of change in business. Spachek said loans for new ventures might be more scrutinized.
“But for our regular customers, it’s business as usual,” he said.
A few bankers noted a slight decrease in loan applications, but reasons were unclear.
“Loan activity probably has slowed a little recently,” Padgett said, but at least part of that decrease can be attributed to a seasonal decrease.
The economy is not out of the woods yet, bank officers said.
“It took the economy a while to get into this mess,” Padgett said, “and I think it will take the economy time to recover.”
Bank officials are optimistic that the economy will not end up in a similar situation in the future.
“I think the lessons have been learned,” Padgett said.
Crisis at a glance
Since April 1, bankruptcies, acquisitions, and bailouts have dominated national business news. Here are a few of the highlights.
- April 1: JPMorgan Chase acquires investment bank Bear Stearns.
- July 1: Bank of America acquires subprime mortgage lender Countrywide Financial.
- Sept. 7: Federal government takes over Fannie Mae and Freddie Mac.
- Sept. 14: Bank of America acquires investment bank Merrill Lynch.
- Sept. 16: Insurance company AIG receives $85 billion bailout from the federal government.
- Sept. 17: Barclays acquires investment bank Lehman Brothers.
- Sept. 26: JPMorgan Chase acquires savings and loan association Washington Mutual.
- Oct. 3: The U.S. House of Representatives, Senate, and President George W. Bush pass a $700 billion aid package to buy risky loans and mortgage-backed securities from banks.