Nebraska banks have no trouble with credit flow

Oct 01, 2008 (Omaha World-Herald - McClatchy-Tribune Information Services via COMTEX) -- FINN | Quote | Chart | News | PowerRating -- Nebraska banks and credit unions say that so far money is flowing normally among them and to their customers, despite tightened borrowing and lending nationally.

Some officials said credit problems now occurring among the nation's largest banks could trickle down and eventually affect Nebraska banks and credit unions. Others, however, don't expect an impact here unless the economy suffers a sharp drop, which could happen if the credit crisis isn't resolved.

Daniel O'Neill, president of First National of Nebraska Inc., the state's largest locally owned banking company, said the cost of the Omaha bank's credit card business, an important contributor to profits, increased somewhat because of the recent tightening in national credit markets.

But First National, like most Nebraska banks, primarily depends on its deposits to finance loans and doesn't tap into the troubled national credit markets much, O'Neill said.

"I doubt there is one bank in Nebraska that will deal directly with the government in the (proposed) stabilization program," he said.

Locally owned banks in general didn't make subprime mortgage loans or purchase related securities, said.

First National owns some mortgage-backed securities, he said, but they are high-quality and carry federal guarantees that protect their value and allow them to be traded readily as the bank needs cash for its lending.

It's the "plain-label" securities, created by investment banks from questionable mortgages, that triggered the credit crisis, O'Neill said.

Lenders nationwide were affected Tuesday by an increase in an international loan rate that determines how much banks charge to lend money to each other. The London Interbank Offered Rate, or LIBOR, rose 4.31 percentage points to a record 6.88 percent.

Banks generally use this money to make loans to commercial customers. The LIBOR increase could cause the interest rates paid by many borrowers to increase as well.

C.G. "Kelly" Holthus, chief executive of Cornerstone Bank of York, Neb., said he has heard of "isolated cases" of Nebraska banks that held troubled mortgage securities or whose short-term credit lines were cancelled. Both situations were related to national credit problems, he said.

Most Nebraska banks' farm-related lending -- a key component of their business success -- is as strong or stronger than ever, Holthus said. Lenders compete for ag loans, which keeps down interest rates for borrowers.

Cornerstone sells some of its loans to investors through what is known as the secondary loan market.

"I'd say maybe the (credit) standards are just a little tighter," he said, adding that the mortgage loans that Cornerstone sells are in demand.

The bank's loan applications are of high quality, he said, with adequate down payments and adequate earning power on the part of borrowers.

"They're good loans. People still have money to lend on good loans."

At American National Bank in Omaha, the state's fourth-largest bank, treasurer Andy Schmillen said some automobile loans also are packaged and sold to investors.

If the quality of the loans is questionable, he said, "nobody wants that stuff." And if sales do go through the terms of the transactions aren't as favorable for banks that made the loans.

That means banks are more likely to keep the loans. But if the banks do that, the loans can tie up the bank's capital and reserves and make new lending more difficult, Schmillen said.

So far it's not a serious problem for American National, he said, which still has money to loan to consumers and businesses and can use other ways to finance its lending.

As a result, activity is close to normal, he said. American National has tightened lending standards in some cases and increased fees, but if the situation persists without a national solution, it could begin to restrict credit even to smaller banks.

"It could slow down deals that otherwise would make sense," Schmillen said.

Gail DeBoer, CEO of SAC Federal Credit Union, said some people who got subprime loans with other lenders have problems repaying auto loans, because they make their house payments first.

Bankruptcies seem to have increased slightly, she said, causing some consumer loan defaults.

SAC Federal keeps most of its mortgage loans and easily sells what it wants on the secondary market, DeBoer said.

"We have never done subprime mortgages, so our mortgage portfolio is performing extremely well," with only three delinquent home loans since 1999 and no recent increase.

Jeff Krejci, chairman of the Nebraska Bankers Association, said an early warning sign that problems are spreading to small-town banks would be if their agreements with bigger banks, such as First National of Omaha, to borrow money overnight are tightened or cut off.

"The regional banks know how strong the community banks are," Krejci said "I don't foresee it happening."

Local banks might not make loans outside their geographic region as often as they used to, he said.

"Right now we're able to take care of our markets," Krejci said.

He said the association urges Nebraska's congressmen -- Republicans who all voted against Bush's bailout proposal -- to support the plan when it is reconsidered later this week.

"We feel strongly that we have to have some stability in the market," Krejci said.

"It's hurting Main Street. It's hurting bank customers. It's not hurting commercial banks as much as it's hurting our customers who have 401(k) accounts or investments."

He said people who lost money in the stock market this week are "shell-shocked" and likely to stop buying things, which can hurt the overall economy.

--Contact the writer: 444-1080, steve.jordon@owh.com

To see more of the Omaha World-Herald, or to subscribe to the newspaper, go to http://www.omaha.com. Copyright (c) 2008, Omaha World-Herald, Neb. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index