Where to Find the Money
by Ruth Simon and Maurice Tamman
Monday, March 15, 2010
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Despite a Contraction in Consumer Loans, Some Banks Are Rolling Out the Dough

Some bankers still say yes.

That is hard to believe considering the drought in lending. U.S. banks posted a 7.5% decline in 2009 in total loans outstanding, the steepest percentage drop since 1942, according to the Federal Deposit Insurance Corp. Consumer lending fell by 3.8% as roughly 7,200 banks and credit unions pulled back on mortgages, credit cards and other loans, according to an analysis by The Wall Street Journal.

So it was no surprise that Michael Hollomon, a 42-year-old commodities trader who just moved back to the U.S., had two recent mortgage applications rejected last year. On paper, he is the type of borrower that went out of style when the housing bubble burst: no job and no salary.

But Mr. Hollomon’s luck changed last June at Bank of Princeton in New Jersey. After reviewing Mr. Hollomon’s generous severance agreement and references, the three-year-old bank gave him a loan of $1.95 million for his $2.6 million Princeton home. The mortgage, which has a 6.25% interest rate, requires a balloon payment after five years. Bank of Princeton charged into the market for “jumbo” loans last year, tripling its consumer lending to $45.8 million after big rivals headed for the exits. “Pretty much everything we are getting is from people who have tried to go to a larger institution,” says Martin Melilli, the bank’s president.

Across the country, thousands of other banks and credit unions also are bucking the just-say-no mentality that dominates the headlines. In the wake of the financial crisis that saddled banks with huge losses, the largest 10% of banks by asset size shrank their consumer lending by 4.7% last year, tightening the spigot on loans that aren’t backed by the government. At many smaller banks and credit unions, though, cash continued to flow. Consumer loans grew nearly 3% at financial institutions that fall in the bottom 50% of the industry in assets, according to the Journal’s analysis of financial-institution data filed with regulators. Some smaller banks and credit unions continued to ramp up their business in mortgages, auto loans and credit cards and gain from the pain of their larger rivals.

“It’s been quite an opportunity,” says Patricia Husic, chief executive of Centric Financial Corp.’s Centric Bank, based in Harrisburg, Pa., which increased its consumer lending by 30%.

The Journal’s findings are in line with an analysis of fourth-quarter bank lending by the FDIC. More than 90% of the decline in loans outstanding occurred at banking organizations with more than $100 billion in assets, according to the agency. Those 48 banking giants include Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM). The FDIC examined all the loans being carried on bank balance sheets, adjusting the figures for mergers and acquisitions.

The Journal analyzed all 16,000 banks and credit unions in the U.S. at year end. For each financial institution, the Journal calculated the percentage change in outstanding loans as of Dec. 31 compared with a year earlier. The analysis includes mortgages, credit cards and auto loans held in their portfolios and excludes products they sell off, such as government-backed mortgages. There are some bumpy parts: For banks, but not credit unions, information is adjusted for acquisitions. For some lenders, accounting changes affected results. For a description of the methodology, go to WSJ.com/PersonalFinance.

Companies’ appetite for different types of loans can change over time, so it is important to ask a lender what types of loans it is most eager to make. The trick to getting a good deal is to compare costs. A sampling of current interest rates can be found in the table on page B10. A number of Web sites provide real-time information on prevailing rates. Rates on various types of consumer loans, including mortgages, credit cards and auto loans, can be found at www.bankrate.com. Mortgage rates can also be found at www.hsh.com and www.zillow.com. Credit-card Web sites include www.lowcards.com and www.cardratings.com. Rates for auto loans can be found at www.edmunds.com.

Many of the companies that have boosted lending can do so because of their strong financial position. At Oconomowoc Bancshares Inc.’s (OCNM.PK) 151-year-old First Bank Financial Centre in Oconomowoc, Wis., only a tiny 0.84% of loans were at least 30 days past due as of Dec. 31. Because it is well-capitalized, the bank could put $25 million of mortgage loans into its portfolio.

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Not all fast-growing lenders still extend generous credit or offer the best rates. Lenders of all sizes are being cautious. But many smaller firms say they can make loans bigger banks pass up because they know their customers better and, in turn, the risk they pose. Community Bank Delaware, based in Lewes, lends to fishing-boat captains, the self-employed and people with cyclical jobs “because we understand the market and know what the cash flows are,” says its president, Lynda Messick. The bank also works with borrowers whose credit has been hurt by divorce or medical bills. Consumer lending rose 44% last year.

Other lenders focus on the wealthier set. Bank of Oswego, a five-year-old bank in Lake Oswego, Ore., where consumer loans tripled in 2009, offers business and personal loans to professionals and business owners. The bank caters to its affluent customers with smaller enticements such as complimentary courier service and chocolate-chip cookies baked on the premises. After hours, borrowers with an urgent matter are told to call the bank’s president, Dan Heine, at home.

Here is a look at lending:

Mortgages

More than nine out of every 10 mortgages now being originated carry government backing, giving lenders few incentives to do anything unconventional. But if you have good credit and otherwise fit government standards, there are plenty of lenders happy to give you a loan.

The options are likely to be more limited for other borrowers, such as those whose loans are too big for government backing (generally, $417,000 to $729,750, depending where you live). Smaller lenders and credit unions often can be more flexible because they know their customers and local market better or may have a prior relationship with the borrower.

Some lenders have continued to expand by offering jumbo mortgages, those too big for government backing. At Hudson City Bancorp’s (HCBK) Hudson City Savings Bank, consumer loans grew by 8% last year. The Paramus, N.J., bank will lend up to $1 million to borrowers who put at least 20% down. Instead of relying on credit scores, Hudson City looks at consistency of income, payment history and a borrower’s equity.

Most borrowers now wind up with 30-year fixed-rate mortgages, but many lenders that hold loans on their books prefer to offer adjustable-rate loans to protect the bank against rising interest rates, which can eat into profits. At Bank of Jackson Hole in Jackson, Wyo., a unit of Bancshares of Jackson Hole where consumer lending was up 34%, mortgage rates adjust at least once a year. Typically, the mortgage amortizes over 30 years, but carries a “balloon payment,” which means the loan must be repaid or refinanced after three to five years. The bank typically will finance up to 75% of a home’s value, with a 60% limit for larger properties.

Some adjustable-rate mortgages have longer terms but a cap on how much rates can rise. The State Employees’ Credit Union, based in Raleigh, N.C., where outstanding consumer loans rose 7%, offers mortgages that carry a fixed rate for the first two years then adjust every two years after. Rates start at 3.75% and can increase by no more than one percentage point every two years and by no more than eight percentage points over the life of the loan.

Some lenders offer better terms to borrowers whose loans they consider low-risk. Centric Bank will lend up to 95% of a home’s value — instead of its standard 85% — if a borrower has a credit score above 700 and total debt doesn’t exceed 25% of income, including the new loan. Payments must be deducted from an account at the bank.

For home-equity loans, terms have become less generous. HomeTown Bankshares Corp.’s HomeTown Bank in Roanoke, where consumer lending was up 31%, will lend up to 85% of a home’s value, down from 90% a year ago. Rates are lower for borrowers who have a checking account at the bank or some other banking relationship.

Credit Cards

Amid record credit-card delinquencies and tighter federal regulations of card-issuer practices, many companies have curtailed card offerings, raised rates and reduced credit limits.

Credit unions often offer lower rates than big banks, although their rewards programs can be less generous. Piedmont Advantage Credit Union in Winston Salem, N.C., last June lowered its credit card rate to a fixed 6.9% from 8.9% to help members struggling in the weak economy. Piedmont, open to anyone in six North Carolina counties, says it has tried to encourage borrowers to transfer balances from other institutions rather than add new debt. Consumer loans climbed 19%.

BB&T Corp.’s (BBT) BB&T Financial unit, which increased consumer lending by 33% last year, says it didn’t raise its rates in response to the tougher new credit-card rules. The Winston-Salem, N.C., bank’s cards carry a 0% introductory rate that rises after six months to a range of 8.15% to 14.15% for adjustable-rate cards and 13.9% to 15.9% for fixed-rate offerings.

Sometimes low rates come with added scrutiny. At Dollar Bank in Pittsburgh, where consumer lending fell 6% in 2009, credit-card lending increased 56% because the bank promoted its adjustable-rate credit cards with rates of 7.24% for a basic card and 10.24% for a rewards card. Every credit-card application is reviewed by an underwriter, who looks at the applicant’s debt-to-income ratio, revolving debt, credit history and the stability of their employment. OnPoint Community Credit Union in Portland, Ore., tries to reduce losses on its low-rate cards by looking beyond borrowers’ credit scores to their history with the credit union.

Auto Loans

Car loans are gearing up again, but borrowers should prepare to pay up unless their credit scores are pristine. Lenders typically want a down payment of at least 10% to 15% and a 60-month loan term, with tougher terms for subprime borrowers.

Some auto lenders have benefited from the woes of larger institutions. As big lenders dropped out, auto dealers have funneled more loans to Financial Institutions Inc.’s (FISI) Five Star Bank in Warsaw, N.Y., where consumer lending rose 71%. Some loans are as long as 72 months and the lowest rate is 4.39% for someone with a credit score higher than 730.

There can be incentives for bundling your banking needs under one roof. At Antelope Valley Federal Credit Union in Lancaster, Calif., borrowers can cut their rate by 0.25 percentage points if they sign up for direct deposit and by the same amount if payments are automatically deducted from an account at the credit union. Lending is up 167%.

At some credit unions, the loan surge is coming mostly from used cars, not new ones. Based in Dearborn, Mich., DFCU Financial, which serves people who live or work in Michigan, gives members a rebate of 0.5% — or one cent per $200 — on their average savings and loan balances.

Says Mark Shobe, DFCU’s president: “We’re still ready, willing and able to lend.”