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Lydia Rodriguez
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Lending Up, But Standards Loosening

Steve YorkSan Antonio — Loan growth is accelerating at nationally chartered community banks and thrifts in Texas, thanks to the oil- and gas-industry boom. But regulators are beginning to see looser lending standards stemming from the pressure to make profits.

Competition for loans has been so fierce that banks increasingly are granting concessions, such as releasing guarantors, not taking as much collateral or not requiring endorsements, according to Gilbert “Gil” Barker, the deputy comptroller in the Office of the Comptroller of the Currency's Southern District in Dallas.

“Our concern is that anxiety for income and earnings pressures that exist today will lead to improperly managed (loan) concentrations or (the) expansion of products that were at the heart of the recent downturn,” Barker said on a conference call with reporters Tuesday. His comments were based on observations of the 490 nationally chartered community banks and thrifts operating in OCC's Southern District covering nine states, including Texas. Those institutions, 413 community national banks and 77 federal savings associations, each have less than $11 billion in assets.

The OCC is encouraging banks to compete on price rather than on structural changes in loans, he said.

“I completely agree with that. I wish everyone would listen,” said Steve York, executive vice president of San Antonio-based Broadway Bank's commercial lending division, in an interview.

“There are always players in the marketplace that are willing to place themselves in, shall we say, more liberal positions in order to gain a greater percentage of the market or to get into the (loan) conversations,” York said.

Still, Broadway managed to increase loans 11.8 percent to nearly $1.2 billion last year. He attributed the increase to larger legal lending limits that have allowed Broadway to make loans to bigger businesses.

Overall, the OCC reported average loan growth rate among banks in the OCC's Southern District increased 4 percent last year, double the 2012 rate.

The rise surprised Ronnie Miller, president and CEO of Community National Bank in Hondo. Its loans shrank 3.2 percent to $92.8 million last year.

“Most of the banks down here (in South Texas) are suffering the two-edged sword of the Eagle Ford Shale,” Miller said. “There's a tremendous amount of money and a lot of loans being paid off with cash that's coming out of the area. And we still haven't seen the economy really get heated up.”

The OCC noted the huge influx of deposits in areas with oil and gas plays, including the Eagle Ford Shale.

“Banks operating in these communities have more liquidity than they can deploy because there's very little loan demand,” said Janice McQuary, associate deputy comptroller in the OCC's Dallas office.

The 16 community banks based in the Eagle Ford (both nationally and state chartered) added about $207 million in deposits last year, while loans increased $72.4 million, the San Antonio Express-News reported earlier this year.

“For most community banks, making loans is the primary way that they make money,” McQuary said. “A secondary earning opportunity would be investments. But given the low interest-rate environment, this is a difficult avenue to pursue because banks would need to take on higher levels of interest rate or credit risk if they want to boost earnings.”

The surge in deposits is affecting banks' Tier 1 leverage ratio, which measures their capital to assets. For the purposes of the ratio, deposits are considered an asset. So the more a bank receives in deposits, the less capital it has as a percentage of assets.

“We are keeping an eye on that,” McQuary said. “It is creating a strain on their capital ratios. I think we have to keep in mind that they are not taking on a lot of risk, so we have to balance that.”

Banks must maintain a Tier 1 leverage ratio of 5 percent to be considered “well capitalized,” though regulators prefer that it be higher so that they have a “cushion,” Barker said.

Community banks also are grappling with increased costs related to new regulations instituted in the wake of financial reforms. Overall, banks in Texas have escaped problems that have stung institutions in other parts of the country.

“Whether it's the San Antonio market, the Dallas market, West Texas, the Houston market, we've been very fortunate that banks are doing quite well,” Barker said.

Only three national banks have failed in Texas since the Great Recession, he added. They are Texas Community Bank of The Woodlands, closed in February; First National Bank of Edinburg, closed in September; and La Coste National Bank, closed in 2010.

“Two of those situations, there was fraud,” Barker said. While he didn't specify which lenders had committed fraud, La Coste's president in 2011 went to federal prison after pleading guilty to making a false entry in the bank's books with the intent to defraud and deceive banking regulators.

“So we were really able to avoid the bulk of the problems that occurred,” Barker said.

Resource: By Patrick Danner - http://www.expressnews.com/business/local/article/Lending-up-but-standards-loosening-5422518.php


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