Lending is alive at First Independent

Do you keep hearing that banks aren’t lending right now? Or that they’re being hyper-conservative with their lending?

With the overall economic challenges out there, it might be true that the banks are maybe looking a little closer at their deals. And it’s more likely a result of having their hands slapped too often with customers who can’t pay and are having their collateral (homes) foreclosed upon.

Banks also have to be a little more careful because they have federal regulators that come in and review their loans. If the loans aren’t performing, the Feds make them write the loans off which affects the bank’s income statement. It’s really no fun for anyone; but that’s what’s going on.

Banks that have been conservative and smart in their lending practices in the past (like this one) are less apt to have what we might call “problem credits”. Banks that have practiced this type of lending are going to be the ones to last during times like these and they are the ones who will be willing to lend to credit worthy customers.

That being said, when it comes time to think about taking out a loan, the credit worthy customer has to think about paying it back. So maybe the lack of lending being experienced right now isn’t a function of the banks saying no but perhaps a function of the customers saying, “I think I’ll wait until I’m sure I can keep my good credit by making sure I can pay it back!”

If you are a credit worthy customer and are ready to take the leap of adding new debt, you have several banks to choose from. When making a decision on which bank to choose, one of the factors to check is the bank’s loan-to-deposit ratio.

Another reason a bank may not be willing to lend is that they may simply be “loaned up” meaning that it has maxed out its percentage of loans to deposits on hand. The larger that percentage, the greater the risk the bank has taken on. If customers begin to pull deposits, the bank might be suddenly strapped for cash.

What do banks that are strapped for cash do? They raise interest rates on their deposits in an attempt to grow them. That’s why sometimes you see a bank paying unbelievable rates. They may need to grow their deposits. The customer may think they are getting a great deal when in fact they may be depositing (lending to a bank) their money to an institution on its way to trouble. When taking advantage of rates too good to be true, be careful and make sure that your deposits with the bank are insured by the FDIC (the government) and that you know what’s covered. When your deposits are fully insured, you have the comfort in knowing that your money is truly working for you, and will be available when needed.

According to various sources, healthy loan-to-deposit ratios typically fall between 80-95%. Banks in excess of that are looking for deposits and in theory, less likely to “need” your loan. While banks under those numbers might be more hungry to lend. To find this ratio, check out your bank’s financial statement (call report) on the FDIC web site and divide “loans and leases, net of unearned income and allowance” by “deposits.”

Next time we’ll talk about what you’ll need to consider when requesting a loan and how to talk to a loan officer!

Mike Hix – Branch Administrator