Pass the Aspirin: How Is the Liquidity Crunch Affecting Your Markets?

The mortgage market troubles caused many unsettling headlines. We asked Pass the Aspirin contributors to tell us what is going on in their markets, how bankers are reacting, and whether they see opportunities buried beneath the bad press. Here's some of what we heard. You can read more at www.passtheaspirinplus.com

Remedy 1

Michael F. Hannley, president and CEO, Bank of Tucson, $182 million-assets, Ariz.

First Magnus Financial Corp., headquartered in Tucson, Ariz., as we are, and one of the nation's largest privately herd mortgage banking operations, filed Chapter 11 near the end of August, after telling everyone that the market and company were stable. The company had 7,000 employees nationwide, 750 in Tucson.

The impact has been minor given that the rear estate mortgage market rooks like the barren desert.

Buyers have evaporated overnight. The good news is that Arizona is a growth state and we will grow out of this negative real estate depression. Community banks are fine, as the mortgage brokers were the dominant force. The housecleaning will be great, long term, for the banks trying to compete with an unregulated industry.

Our bank has not had any tightening of credit, and we are still very competitive. Commercial real estate remains strong, although we do take a closer look at a developer's liquidity, and contingent liabilities. And we ensure that they do not have any residential real estate in their inventory.

We are just beginning to see the consumer real estate developers looking for the "white flag." They have come to the realization that their "first toss will be their feast toss." Homeowners trying to sell their own homes, however, have not come to that reality. They may be squeezed down to no liquidity, adding to the eventual crash, which should occur by the first quarter of 2008.

At this point, all of our bank officers are being eagle- eyed on what is happening. We have to have calm waters for the next 90 to 120 days to weather the possibility of the storm that could turn into a hurricane.

Remedy 2

Albert H. Garrett, president and CEO, Robertson Banking Co., $219.2 million-assets, Demopolis, Ala.

In our area, the news media has managed to scare people into thinking that they can't get a roan. We are trying to benefit from this by rotting out a new first mortgage aimed at consumers with better credit scores who are borrowing for their primary residence. We are paying for closing costs and extending the time that we will guarantee the rate on the loans.

Generally, we and our local competitors were not making subprime loans, so we are not seeing a reversal of credit standards. However, one fixed-rate roan competitor doing business in our market (although they have no brick and mortar here) has already printed one foreclosure notice in the local paper.

In the commercial real estate area, our experience is that good loans are hard to find and, when found, demand a very competitive rate. It's been that way all summer. We expect more opportunities this fair.

Remedy 3

Patrick J. Glotzbach, president and CEO, New Washington State Bank, $212.8 million-assets, New Washington, Ind.

Things are buzzing around here in mortgage lending, though I have not seen a tick up or down in the mortgage business. I believe that some of the mortgage brokers will be going out of business, and that will help us. I also believe that the fallout in the "subprime" area will drive some customers back to the bank from the secondary market lenders.

Regarding credit underwriting in general, there is no question that it has changed. I believe that all banks are tightening their standards. We have changed some of our own underwriting guidelines.

The commercial rear estate market has changed, as the "A" borrower can demand the best rate. Competition is fierce from other banks, credit unions, and others. "B paper" is being underwritten better, with more attention to cash flows.

The battle on keeping roans and deposits is ongoing. Larger banks are hitting us hard. Our strategy is to review the full relationship before we Let a customer leave. If they have enough money with us, we do what we have to. We are backing off "hot" money or customers who only have CDs. Pricing of loans is competitive and we have had to adjust rates to keep customers.

Remedy 4

Matt Packard, chairman, president, and CEO, Central Bank, $562.7 million-assets, Springville, Utah.

The recent upheaval in the mortgage market has created some financial concern for customers. Most people don't have the ability to separate banking and mortgage lending. If the mortgage lending sector of the economy is struggling, we find that customers will ask about the health of our bank and the effect the crisis will have on us.

We see a new wave of regulation coming, due to the mortgage crisis. It is a tragedy that elected officials are not able to pinpoint the cause of the mortgage crisis. Those of us who are in the business know that a large amount of the problem came from unregulated mortgage brokers. Nearly anyone could hung out a shingle and put together mortgages in the past few years. Their liberal standards and questionable approaches helped create the crisis.

Overall, our bank has historically not changed its standards and guidelines in commercial lending during good time or bad. We have tried to be consistent, year over year. While values have begun to soften in our market, our conservative approach to lending will be a great help to us as we go through the next year or so.

Nevertheless we expect that examiners will center their attention on the commercial real estate portfolio even more than they have in the past. For example, we recently received a Letter from our state supervisor asking us to review our tong-term commitments on pre-sold homes and to see if those commitments are still valid.

Remedy 5

J. Kimbrough Davis, executive vice-president and CFO, Capital City Bank Group, Inc., $2.5 billion-assets, Tallahassee, Fla.

We have not experienced any significant change in our local operating environments as a direct result of the liquidity crunch and subprime issues. In Florida, we have been more impacted by the slowdown in housing and rear estate in general.

Our decisionmaking on the Loan side is relatively unchanged, as most community banks were not participating in the mortgage products which are experiencing problems. In addition, our funding sources are predominantly focal deposits, not wholesale funding. Investors for our secondary mortgage market operations are solid, and clear flow has not been interrupted.

My biggest concern is that all of the turmoil in the markets will cause the consumer to Lose confidence and reduce spending. At that point turmoil in the financial markets transforms into a broader impact on the overall economy.

Remedy 6

Kathleen C. Marcum, president, Millbury National Bank, $62.4 million-assets, Millbury, Mass.

We are finding that there are prime borrowers in our market who wound up in subprime products. They were originally placed in those product for various reasons, and are not ready to refinance, primarily due to interest rate adjustments. We are trying to find a product to accommodate this group, to bring them into mainstream banking, but without assuming an uncomfortable Level of risk.

In general, we have not seen tightening of credit, only isolated incidents. Commercial real estate tending has been strong in the first half with monthly totals exceeding the previous year numbers consistently.