Bank sees spike in home equity loans

Arrow Financial Corp. reported a 66 percent jump in residential mortgages in the first quarter of the year.
The parent company of Glens Falls National Bank and Trust Co. and Saratoga National Bank and Trust Co. originated $16.3 million in loans during the first three months of 2009, as compared with $10.8 million during the same period last year.
Arrow Chairman and CEO Tom Hoy, speaking to about 100 shareholders at the bank's annual meeting Wednesday at the Charles R. Wood Theater, said mortgage demand was "huge" in the first quarter. Anecdotally, he said mortgages for home purchases picked up, though refinancing still comprised the bulk of the loans.
A report released Wednesday by the Mortgage Bankers Association of Northeastern New York supports that trend. The survey of Capital Region lenders said purchase loan volume exceeded 30 percent of all new loan applications filed in April, an increase over the two previous months' activity.
The association cited the first-time homebuyer tax credit as a stimulus for new mortgages, which, combined with historically low interest rates and low home prices, has created a buyer's market. For the past four weeks, 30-year fixed loans have ranged from 5 percent to 5.25 percent. Fifteen-year fixed conforming loans remained in the 4.5 percent to 4.875 percent range in April.
With customers locking in interest rates at record lows, Hoy told shareholders that Arrow is selling more mortgages to Freddie Mac on the secondary market to avoid being "underwater" when the Federal Reserve's lending rate rises in the coming years.
"We're removing the interest rate risk from our balance sheet and transferring it to someone else," Hoy said.
But because of the turmoil in the financial industry -- especially pertaining to derivative sales of toxic assets by large investment banks -- the documentation and requirements of selling on the secondary market have become "significantly more onerous," Hoy said. Added scrutiny is just one repercussion of the financial sector meltdown that has impacted Arrow, which avoided subprime lending and has held its own throughout the turmoil.
According to the American Bankers Association, 24 percent of banks suffered losses in 2008. As of March 27, there were 21 bank failures this year costing $2.3 billion.
Another consequence of the meltdown, the FDIC has raised the premium on deposit insurance and will charge member banks a one-time fee of between 0.1 and 0.2 percent of total deposits in the second half of the year. While Arrow posted record earnings in 2008 and strong first quarter results, Hoy expressed some caution about the firm's ability to sustain last year's return on average equity, which was the highest since 2004 at 16.26 percent; the net loan losses to average loans of 0.7 percent, which was a fraction of the 0.65 percent average among banks of similar size; or the annualized rate of return on average equity, which was 21.1 percent for the first quarter.
Following the meeting, some shareholders said they would like to see the Arrow board of directors reinstate the annual stock dividend of 3 percent, which was not paid last year.
"If the bank is doing as well as it has, and the CEO is getting stock bonuses because of the bank meeting its projections, (the board) should go back to giving the dividend," said Dan Monroe, a longtime shareholder from Kattskill Bay.
On Wednesday following the meeting, the board declared a quarterly cash dividend of 25 cents per share payable June 15 to shareholders of record as of June 3. It also authorized a stock repurchase program of up to $5 million of the company's common stock over the next 12 months. Bank spokesman Tim Badger said it had not been decided whether the bank would take advantage of that program

The Basics Behind Home Equity Loans

If you owe less on your home than what it’s actually worth, then you have what is known as “equity” in your home. Home equity loans allow you to borrow against that equity and get cash.
There are two types of home equity loans, straight installment home equity loans (HELs) and home equity lines of credit (HELOCs). In this article, we will deal with the basics of HELs. For more information on HELOCs, check out "Home Equity Lines of Credit: The Basics."Installment home equity loans are second mortgages that use the equity you have in your home as collateral. When you take out an HEL, you receive a one-time lump-sum payment in the amount of the loan. These loans are typically at a fixed interest rate (though variable HELs are available). Payments are set so that the loan is paid back in full at the end of the term. HELs often have a 15-year term, but they can be as short as 3 years or as long as 30 years. Home equity loans typically have lower interest rates than credit cards but higher interest rates than primary mortgages. The interest rate is determined by a number of factors, including the length of the term and the credit worthiness of the borrower. Currently, the national average interest rate for a 5-year home equity loan is 8.77%, according to BankingMyWay.com. The national average interest rate for 15-year home equity loan is slightly higher at 9.23%. Because home equity loans are a type of mortgage debt, the interest paid on them is generally tax-deductible (with some restrictions). That benefit effectively lowers the interest rate by the same amount you are taxed. For example, if you have a 15-year home equity loan at 9.23% and you are in the 28% tax bracket, the APR after taxes on the loan is only 6.65% ((1-0.28) x 9.23). The Mortgage Tax Saving Calculator can help you determine how much tax savings you can expect on a home equity loan. Home equity loans have a lot of uses, but some common ones include financing renovations, paying for college tuition, putting a down payment on a second home or even consolidating higher-interest debts. It’s best to use HELs for things that will represent an investment since you are pulling money out of another investment -- your home. Because a home equity loan is secured by your home, they are often easier for those with bad credit to qualify for. Borrowers can also get higher loan amounts if they have adequate equity to justify the loan. On the flip side, using your home as collateral also makes these loans more risky. If you become unable to make your payments, you could lose your house to foreclosure. Home equity loans can also make it more difficult to refinance your first mortgage in the future. Currently, many second mortgage lenders are reluctant to authorize a refinance because they will have to become subordinate to the new loan. With home prices falling, that means they may not be able to recover their losses if your home is foreclosed on

BB&T discloses more stress in home equity loans

BB&T Corp. on Monday upwardly revised the amount of home equity loans it wrote off in the first quarter, but said the revisions had no impact on overall results reported earlier this month.
In a filing with the Securities and Exchange Commission, the Winston-Salem, N.C.-based regional bank disclosed that certain charge offs were inadvertently excluded from the calculation of gross charge off rates in the company's earnings report on April 17. Charge offs are loans the bank considers won't be repaid.
Home equity loan charge offs totaled 1.90 percent of home equity loans, not the 1.09 percent originally reported, the bank said.
As such, Fox-Pitt Kelton analyst Albert Savastano on Monday expressed concern over the significant jump in problem home equity loans in North and South Carolina, specifically.
"As these two states have greater economic stress, we believe credit losses will show in BB&T's numbers at an accelerated rate," wrote Savastano in a note to clients.
Savastano maintained an "Underperform" rating and $17 target price on the stock. He also said that a cut in the company's 47-cent quarterly dividend is likely.
"BB&T is not expected to earn its dividend in 2009 and with the increased stress in North and South Carolina, we continue to expect credit costs to pressure earnings," Savastano wrote.
BB&T will hold its annual shareholders meeting on Tuesday, and Savastano said he would not be surprised if the bank cuts its dividend at that time.
Earlier this month, BB&T reported a 37 percent decline in first-quarter profit, as loans that were overdue or written off as unpaid surged and the regional bank put aside more cash to cover souring credit. But results beat Wall Street's expectations.
Shares slipped 48 cents, or 2.1 percent, to $22.94 in afternoon trading.

The Second Mortgage Home Equity Loan RATE

A second mortgage can also be referred to as a home equity loan. It is in essence a secured loan that is second, or subordinate, to the first mortgage against the property. The key issue for anyone getting this type of loan is the amount of equity they have in their home. This will ultimately determine the amount of money that can be secured for the home owners use.
Equity is the amount of money that is paid down on the home, or it can be the value of the home minus any loans owed on the home. The main reason for taking out a second mortgage is to take equity from your home and turn it into cash in pocket. What this means is that if you have enough equity in your home you can borrow money using your home as collateral. There are three basic types of loans to choose from: the traditional second mortgage, a home equity loan, or a home equity line of credit.
A second mortgage should not be confused with a mortgage refinance or re-mortgage. When you refinance your first mortgage you are replacing your old loan with a new loan, usually at a better interest rate. A second mortgage, or home equity loan, is another loan in addition to the primary loan, which will result in two monthly payments. It is important to distinguish the two to make sure that two payments will not seriously affect your monthly budget.
The interest paid on a second mortgage, up to the first $100,000 borrowed, is tax deductible provided that the loan is on your primary residence. It should be noted that interest rates on home equity loans are generally higher than a first mortgage, usually in the 2-4% higher range. But the interest rate on a this type of secured loan will be lower then on an unsecured loan, such as a car loan, and much, much lower then you will find on a credit card.
The common reasons to get a home equity loan are to pay off high interest credit cards or other higher interest rate debts, refurbishing the home, urgent family matters such as education, medical, etc. This is called debt consolidation and refinancing and is a good way to tap the asset value of your home to meet your investment and budget needs, and helps you avoid incurring high interest unsecured debt like credit cards. If you have extensive credit card debt, and are not making progress in paying it off on a monthly schedule, a second mortgage may be a good move.
There are a couple of things that anyone getting a home equity second mortgage should be aware of. A second mortgage puts a second charge on your home, meaning that the second mortgage provider can take a share of any proceeds if your home has to be sold. What is worse, if you pay the first mortgage but fail to pay the second, that mortgage provider can seize your home, even if the sum involved is relatively small.
Getting a second mortgage home equity loan can be a good way to use the equity in your home to do any number of things. Like all financial decisions using a second home loan should be carefully considered in all aspects. If it makes sense and fits within the monthly budget then it is something to be strongly considered.

Banks Need $875 Billion in New Equity, IMF Says

U.S. and European banks need to raise $875 billion in equity by next year to return to levels similar to the years before the current crisis -- and twice that amount to match the levels of the mid-1990s, the International Monetary Fund said.
The steep funding requirements reflect a financial crisis that continues to deepen, the IMF said. The banking sector's woes have spread from the housing sector to commercial real-estate loans and emerging-market debt. Overall, the IMF estimates the U.S., European and Japanese financial sectors face losses of about $4.1 trillion between 2007 and 2010. Of that, banks are confronting $2.5 trillion in losses, insurers $300 billion and other financial institutions $1.3 trillion.
The banking sector has written down $1 trillion of those losses, said the IMF; it didn't estimate how much other financial firms have written down thus far.
More
IMF report and discussion
"Without a thorough cleansing of banks' balance sheets of impaired assets ... risks remain that banks' problems will continue to exert downward pressure on economic activity," said the Global Financial Stability Report, the IMF's twice-yearly review of the financial sector.
While problems in the U.S. mortgage sector are blamed for the financial crisis, the IMF report shows that other regions played a big role. About $2.7 trillion of the losses from 2007 to 2010 were attributable to the U.S. market, the IMF said, while $1.2 trillion came from bad loans and securities losses in Europe.
The IMF projects that 7.9% of U.S. loans will have gone bad by next year. In a report, Calyon Securities analyst Mike Mayo predicted that losses will crest at 3.5% of loans, a level that he said will slightly eclipse the peak rate during the Great Depression. Mr. Mayo estimated that U.S. banks are about a third of the way through accounting for losses on nonmortgage consumer loans, while losses on business loans "seem in the early stages."
Despite the grim message, some IMF officials said improvements in a few markets in the past month point to the possibility that write-downs could come in below the report's projections.
Market improvements have not been significant enough to alter the overall outlook, said Jan Brockmeijer, deputy director of the monetary and capital-markets department. Some of the biggest improvement has come from emerging-market spreads. On Tuesday, Colombia became the third country, after Mexico and Poland, to seek new IMF credit lines

Replacing a Mortgage With a Home Equity Loan

By Jeff BrownToday’s rock-bottom interest rates are spurring a flood of mortgage refinancing. But many homeowners face a serious roadblock: thousands of dollars in closing costs.
It’s tempting to pay off the old loan with a home equity line of credit instead of a new mortgage, since many home equity loans don’t have closing costs.But although this can work under some circumstances, it may not be the best option in today’s market because of the risk you’d face with higher payments later.With a conventional mortgage, appraisal fees, private mortgage insurance, title-search charges and other closing costs can be a problem if you don’t have enough cash to pay them.And because many of these costs are fixed, even if you borrow a modest amount, you could end up paying thousands of dollars in fees, undermining the benefits of refinancing.For example, $4,000 charge for closing costs would be 8 percent of a $50,000 mortgage. Even if you could afford the closing costs and could cut your loan rate by a couple of percentage points, that could still make a refinancing uneconomical. To see how long it takes a lower monthly payment to offset closing costs, check out the BankingMyWay.com Refinance Breakeven calculator.It is possible to skirt this problem by taking out a home equity loan with no fees. Unfortunately though, it probably wouldn’t pay to do this today with a fixed-rate home equity “installment” loan, as many are charging around 9 percent, according to the BankingMyWay.com survey. The standard 30-year fixed-rate mortgage averages only around 5 percent, making it much more attractive for refinancing, even with closing costs.So what’s left then? How about a home equity line of credit, or HELOC. A HELOC is a revolving loan that works much like a credit card. But rather than receiving a lump sum, as is the case with an installment loan, you borrow what you want, up to your credit limit.Many HELOCs advertise starting rates of 4 percent or less. A homeowner with an old mortgage charging 6 or 7 percent could cut monthly payments dramatically by replacing it with one of these low-rate credit lines.Well-known firms such as LendingTree (Stock Quote: TREE) and PNC (Stock Quote: PNC) provide home equity loans, but use the BankingMyWay.com search tool to see what local banks in your area may offer.Interest payments on home equity loans are generally tax deductible, just like interest paid on ordinary mortgages. Many HELOCs require that you only pay interest charges each month, giving you the option of forgoing principal payments if money is tight.And because the HELOC is a revolving credit line, you always have the option of borrowing more, so long as you stay below the limit. That means you can, in effect, take money back out of your home whenever you want, without the hassle and expense of getting a new loan.So it all sounds great, right? But there is a serious problem -- because HELOC rates are variable, you can’t be sure the savings will last. The loan that charges 4 percent today might charge 6, 7 or 8 percent sometime later.Many HELOCs figure monthly adjustments by adding a fixed “margin” to the prime rate. With today’s prime at around 3.25 percent, a HELOC with a 3.5 percent margin would charge 6.75 percent. You’d probably do better refinancing with a fixed-rate mortgage at around 5 percent.

S&T Bancorp, Inc. Announces Equity Earnings

Todd D. Brice, president and chief executive officer, commented, "The unprecedented economic environment has negatively impacted our commercial portfolio this quarter. Several of our customers are experiencing deterioration in their overall financial condition, which has resulted in a significant increase in our provision for loan losses. We are extremely disappointed in our results this quarter as this is the first loss reported in many years. We do feel that the increase to our loan loss reserve is prudent and, with our strong capital position, will allow us to work through this difficult period with our customers."
During the first quarter of 2009, nonperforming loans increased to $92.0 million or 2.62 percent of total loans as compared to $42.5 million or 1.19 percent as of December 31, 2008.
The most significant increases to nonperforming loans were:
A $32.3 million commercial relationship with an energy-related company. Recent decreases in commodity prices have created cash flow difficulties for the company and a $9.3 million specific reserve has been established for the loans.
A $7.5 million real estate development participation loan that has delayed construction pending better economic conditions. A $0.7 million specific reserve has been established.
A $2.5 million commercial relationship secured by real estate partnership interests. Specific reserves for the full loan amounts were established pending resolution of legal issues among the partners.
$4.1 million for three real estate development projects. Specific reserves of $0.6 million have been established.
$3.4 million for a condominium project. A $0.2 million specific reserve has been established.
The provision for loan losses was $21.4 million, $5.6 million and $1.3 million for the quarters ending March 31, 2009, December 31, 2008 and March 31, 2008, respectively. The allowance for loan losses to total loans for the same periods was 1.70%, 1.20% and 1.25%. During the first quarter of 2009, net charge offs were $4.2 million or 0.49 percent of average loans on an annualized basis. For the same period of 2008, net recoveries were $0.1 million or 0.01 percent of average loans on an annualized basis. The most significant charge offs for the quarter ending March 31, 2009 were $2.7 million for a $3.5 million loan on a mixed use commercial property that lost a major tenant, and a $1.1 million charge off for a $2.4 million office building that was foreclosed and sold during the first quarter of 2009.
Brice commented, "Addressing troubled commercial credits quickly and conservatively has always been, and will continue to be, our credit philosophy. We are fortunate that our residential mortgage and home equity portfolios continue to perform well as a result of traditionally conservative underwriting and the avoidance of any subprime loan products. However, we do recognize that some of our home mortgage customers are experiencing difficult economic times, and we have implemented a number of initiatives and products to assist those customers."
Net interest income on a fully taxable equivalent basis increased by $5.8 million, or 18 percent, to $37.5 million for the first quarter of 2009, as compared to the same period of 2008. Net interest income was positively affected by the IBT acquisition in the second quarter of 2008 and $178.0 million of organic loan growth. The net interest margin on a fully taxable equivalent basis was 3.82 percent, 4.13 percent and 3.99 percent for the quarters ending March 31, 2009, December 31, 2008 and March 31, 2008, respectively. The net interest margin was negatively affected in the first quarter of 2009 by higher delinquent interest and more aggressive solicitation of deposits in order to decrease reliance on wholesale funding sources. The fourth quarter of 2008 net interest margin was positively affected by unusually wide spreads between federal funds and LIBOR rates.
Earning assets have increased $735.9 million over the past 12 months, primarily driven by $749.2 million acquired through the IBT merger, a $153.8 million, or 7 percent, increase in commercial lending and a $24.2 million, or 3 percent, increase in consumer lending. Residential mortgage and home equity loan applications have achieved record levels during the first quarter of 2009 as consumers took advantage of lower interest rates. $36.1 million of residential mortgage loans and $38.4 million of home equity loans were originated during the quarter ending March 31, 2009. Most of the new residential mortgage loans are sold to FNMA in order to minimize the interest rate risk associated with long term mortgages in loan portfolios. Investment securities were reduced by $191.3 million over the same 12-month period, as the risk/reward opportunities for leveraging activities has been significantly reduced during the period.
Deposits increased $639.0 million during the 12-month period, including $573.6 million from the IBT acquisition. Brice added, "The $93 million of organic growth in demand deposits is especially encouraging since this has been an area of strategic focus in order to deepen our relationship banking philosophy with both commercial and retail customers. We know that we have excellent and very competitive deposit products, especially our CMA savings account, cash management services and electronic banking systems, that we believe will continue to keep us competitive and serve our customers' needs well into the future."
Noninterest income, excluding investment security losses, increased $1.4 million for the first quarter of 2009 as compared to the first quarter of 2008. The increase is primarily due to strong performances in mortgage banking activities, debit/credit card revenues and higher deposit fees. Positively affecting debit/credit card and deposit fees was the increased customer base resulting from the IBT merger, as well as organic expansion of demand deposit accounts.
Net investment security losses for the first quarter of 2009 were $1.2 million, a decrease from the $0.6 million of realized gains for the same period of 2008. The investment security losses for the first quarter of 2009 are other-than-temporary impairment charges for two bank equity holdings. The equity securities portfolio has a market value of $13.2 million and net unrealized losses of $4.0 million as of March 31, 2009, as compared to $40.3 million and $8.2 million of unrealized gains at March 31, 2008.
Noninterest expense increased $7.5 million, or 42 percent, for the first three months of 2009, as compared to the 2008 period. Salaries and benefits increased $1.6 million primarily due to the addition of 159 average full-time equivalent staff, mostly due to the IBT acquisition, and normal merit increases. Pension expenses increased $0.8 million as a result of market value declines in the portfolio and the addition of IBT retained staff. Salaries and benefits were positively affected by reduced accruals for incentives in anticipation of decreased earnings performance for 2009. Occupancy, equipment and data processing costs increased through the integration of eight new branches from the IBT merger. Other significant factors affecting noninterest expense increases include FDIC insurance premiums, core deposit intangible amortization, amortization of affordable housing partnerships and higher legal/consulting costs associated with troubled loans. The efficiency ratio, which measures recurring noninterest expense to noninterest income, excluding security gains (losses), plus recurring net interest income on a fully taxable equivalent basis, was 53 percent and 44 percent for the quarters ended March 31, 2009 and March 31, 2008, respectively.
On January 16, 2009, S&T received $108.7 million of funds from the U.S. Treasury's Capital Purchase Program through the issuance of preferred stock and warrants for common stock. The purpose of the government program was to promote lending by healthy banks to individuals and businesses in order to stimulate the economy. Expenses associated with this preferred stock were $1.3 million for the period ending March 31, 2009. Brice commented, "Participation in the Capital Purchase Program was a difficult decision for S&T since we were already designated as "well capitalized" by regulatory guidelines. While the additional capital is comforting during these times, our intention is to obtain regulatory approval for returning these funds once a positive direction in the economy becomes more clear." S&T's capital ratios for leverage, Total, Tier I and tangible common capital to tangible assets at March 31, 2009 were 9.73 percent, 14.82 percent, 11.58 percent and 6.46 percent, respectively.
S&T Bancorp, Inc. declared a common stock quarterly dividend of $0.31 per share on March 16, 2009 which is payable on April 24, 2009 to shareholders of record as of March 31, 2009. This dividend represents a 5.8 percent projected annual yield utilizing the March 31, 2009 closing market price of $21.21.
Headquartered in Indiana, PA, S&T Bancorp, Inc. operates 55 offices within Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland counties. With assets of $4.3 billion, S&T Bancorp, Inc. stock trades on the NASDAQ Global Select Market System under the symbol STBA.