The collapse of some national banks — and the federal bailout of others — has many investors and homeowners mistrusting of financial institutions, wondering if their assets are safe and whether or not they will be able to borrow money. Yet, most banks in Waco claim to be doing well. Conservative practices, customer relationships and the decision to steer clear of risky sub-prime lending, they say, have kept them solid.

Waco Today asked the leaders of two locally-owned banking institutions to answer some candid questions about how their banks are faring in today’s market and how they view the fiscal health of McLennan County.

Nesbitt: Yes, that is a fair assessment. While we are not immune from the impact of the current crisis, we are still doing well because we did not participate in the home financing debacle. We continued to require adequate down payments and home values have remained relatively strong in Waco. Also, we are real banks. We are subject to strict regulatory standards that have stood the test of time and our compliance with those standards is subject to regular oversight by bank examiners who know us and know what they are doing. Investment banks are not really banks and are not subject to the same kind of oversight.

Brown: 2008 was a banner year for Extraco. We tend to perform better than our peers in tougher economic cycles because of our conservative management principles. Likewise, we performed below peer averages during some of the good times, again, because of our steady application of these principles when other banks were stretching too far on risks we were not willing to take. We are a family business, so we have a long-term perspective and insist on conservative accounting. We write off good will. We build strong loan loss reserves. 

Nesbitt: Our earnings in 2008 were higher than our earnings in 2007 or any prior year. We expect the current crisis, extraordinarily low interest rates, and potentially higher loan losses to return our 2009 earnings to the 2007 level.

Brown: Extraco is one of the soundest banks in America. We have nearly $100 million in capital. We have loan loss reserves in the 90th percentile compared with peers. Our loan losses over the past decade are one-half that of the local peers, and one-seventh that of the mega banks. We enjoyed better than peer loan growth of 11 percent in 2008, despite our conservative management discipline. We saw our loans increase during the fourth quarter.

Brown: Extraco chose not to participate in the government TARP program, first and foremost, on principle. We don’t need the extra capital, and we don’t need the government as a shareholder. We don’t believe our taxes should be redistributed to our competitors, who we then are expected to compete with as if they weren’t held accountable for their risk choices. Some will use the TARP funds to make acquisitions or be encouraged by the government to take on more loan risk. We feel acquisition strategies are pre-mature, and see our loan underwriting culture as one of our greatest strengths. We have some $250 million in overnight liquidity sources, and have ample capacity to meet the community loan needs.  And, we’re loaning money every day.

Nesbitt: Yes, we were offered the opportunity to apply for an infusion of new capital from the bailout funds. No, we did not choose to apply. We didn’t apply because we didn’t need more capital and because the capital they offered carried a dividend rate that made it too expensive. It was the right move for us.

Nesbitt: We have continued to underwrite home mortgages according to the same standards that we’ve always used. We continue to look at the income available for making monthly payments, the stability of the applicant’s job, the applicant’s ability to make an adequate down payment, and the ratio between the loan and value of the home. Yes, our checks and balances are working, but that’s not to say we don’t make mistakes. The thing we could do to make it better would be to make fewer mistakes.

Brown: Most home foreclosures in Waco are not because of the local banks. Extraco only had one home loan problem in 2008. We work hard with customers on the front end to make sure we are entering into a good situation for both parties. We have a long-term view, and our mission drives us to build relationships based on trust as a first priority. 

Nesbitt: The number one safeguard is to have a quality loan and investment portfolio. In addition to a quality staff of lenders and lending assistants, our loan portfolio is constantly under review by an experienced staff of credit analysts and independent loan review. Beyond that, we monitor liquidity and keep backup alternative liquidity sources in case of an unforeseen circumstance.

Brown: We anticipated this environment, which is why we sold off our mortgage servicing portfolio in 2006 ... Our underwriting standards are reflective of the changes we have anticipated and seen in the external environment. We have made some adjustments, but largely we were already appropriately underwriting loans in the good times. Thus, Extraco continues to delivering a stable, predict-able source of loans for our community.

Nesbitt: Yes, it is true that knowing our customers is our best protection. General Electric used to say that progress is their most important product. And a lawyer’s time and advice is his stock in trade. For real banks, what we have that distinguishes us from our much larger competition is relationship. It is our safe harbor in difficult times. When it is working right, our customers protect us and we protect them. It is a two-way street built on trust.

Brown: People want to bank with someone they know and trust. They want a bank that focuses on the fundamentals. This is good for Waco. Local banks build local communities. Each of us is fully committed to our communities, our customers and enriching all the lives of our fellow community citizens. Local banks offer a tremendous pool of talent and commitment for serving the community. Thus, the next few years offer a sounder solution via local banks for customers, while at the same time building the resources that help make our community thrive over the long-term. An incredible “win-win” opportunity is available for us all.  That is why I bank locally, and always will.

Brown: This economic correction has been triggered by fear, perhaps even over reacted to it, but fear is not the deeper issue. The fact is that our society, and the world, was operating on a scale of risk taking that was unsustainable. Thus, we are now moving through a massive de-leveraging process globally. I think it is healthy... If the government encourages banks to make unsound loans to jump start the economy, it will be like pretending there is no real correction to make only to recognize losses in the future. I believe there is a correction to make. Frankly, government intervention that attempts to prevent economic correction will likely create more uncertainly and risk that prolongs reaching an economic equilibrium point (a recovery) ... I anticipate Extraco, along with other sound local banks, will see loan and deposit growth over the next several years. 

Nesbitt: The fear is understandable and well founded. The primary factor that discourages banks from lending, besides the additional risks the current crisis poses to borrowers and banks, is the shortage of deposits. Over the last 25 years, the government has put everybody and their dog in competition with us for deposits. This includes the investment banks that we used to call brokerage houses. They are the ones that are now failing and accepting taxpayer money to be bailed out so they can continue doing the same thing with inadequate oversight. We all have limitations on the amount of lending we can do relative to our capital and deposits. We currently have $55 million of lending capacity which is adequate to serve the needs of our customers.

Nesbitt: The strategies that have served us well over the years are the ones we still rely on. The bank is well capitalized, has a reserve set aside for foreseeable loan losses, and maintains alternative funding sources in case of a crisis.

Brown: We work hard to master external change and move our company to do what the external environment is doing instead of what our competitors are doing. This creates energy, productivity and innovation. It’s fun. It’s alive. It keeps our customers intrigued and excited about doing business with us. It creates the energy to build relationships and touch lives.

Brown: What sets Extraco apart is our people and our Learning Leadership Culture ...  We bring world experts here, to Waco, to give our employees the best possible opportunities for learning and growth. We have on going feed back programs to listen to our customer, and constantly are looking for ways to build our customer experience while simplifying processes to lower cost. 

Nesbitt: We have two primary purposes for existence: to pay investors a fair and competitive return on their savings and to lend money into our community. We believe it is our responsibility to lend back to the community that funds the lending with its deposits. Therefore, we don’t open branches in one community for the purpose of providing funding to lend to another community.

Brown: Our local banks are run by people who know what they are doing. I’ve seen them in action. We have great leaders in our local banks. Most of them were there in the late 80’s. They have experienced an environment where banks were failing all around them.  Extraco was the only bank in Temple, and one of only five in Waco, to survive the late 80s, and Extraco never failed to make a profit.

Nesbitt: The local banks are safer partly because we are transparent. Anyone can go on the internet and look any of us up at: www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp to see exactly how we are doing quarter-by-quarter and year-by-year. In addition to being transparent, we are accountable to our shareholders, our board of directors, our auditors and our examiners. We are safer because we are small enough and our risk activities are simple enough for bankers and the public to understand. Our rates are competitive and usually better. And finally, the local people and businesses are our only market, so we have to do our best to find something that works for both of us.

Brown: We are operating in a very volatile and stressed financial system.  We feel the economy must correct and re-assimilate around a lower-risk tolerance from investors, government policy, regulators and bankers. Extraco is designed to weather this kind of extended storm. We anticipate that the national problems will affect Central Texas, but our impact will lag the national economy picture and we will be buffered somewhat by the fact that we kept our heads during the good times. In Texas, for example, the state required 80 percent loan to value home equity loans, compared to 140 percent in California. Thus, our real estate prices did not get pushed up to such unsustainable levels as they did in much of the rest of the country. We don’t have as much to correct in Texas, and particularly in Central Texas.  However, realistically we need to be prepared for some economic struggles locally. Let’s remember that change always brings with it opportunities, and there will be significant opportunities for those who are prepared.

Nesbitt: Yes, I am optimistic. There is no place I would rather be than here in Waco and McLennan County. We have all the ingredients in place to continue to grow and prosper together. I like the independent spirit of the people in McLennan County! That spirit produces a community of diverse and independent businesses which are a source of strength in good times and in bad. Those independent and diverse businesses are the reason Waco has more independent banks per capita than any other community in the state and maybe in the country.