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The Des Moines Business Record sat down recently with Tom Stanberry, chairman-elect of the Iowa Bankers Association’s board of directors and chairman and chief executive of West Bank; John Sorensen, the IBA’s president and CEO; and Dan Vessely, president of Iowa Bankers Mortgage Corp., to discuss the banking climate in Iowa.

How tight has credit become in Iowa?

Stanberry: A year ago, if there was a loan that was marginal, the decision would tip in favor of the borrower. Now, for that same loan, it’s going to tip in favor of the bank (not making that loan). For creditworthy borrowers, credit is still available. But marginal credit risks are not finding much opportunity right now. Some large commercial projects for Greater Des Moines are being put on hold for a year or two; among them are two Target stores that have been planned.

Last fall, the Federal Home Loan Bank of Des Moines reached its largest advance balance in its 75-year history, with $31.6 billion in outstanding advances as of Sept. 30, 2007. What does that mean for Iowa banks?

Stanberry: Those advances are probably the top one or two sources of funds for banks to make loans as compared with funding from deposits. If you didn’t have Federal Home Loan Bank advances, you’d have a much tighter credit environment. In an ideal world, we would fund as many of our loans with core deposits as we could.

Other major sources of funds for banks are structured repos (repurchase agreements) and public funds (certificates of deposit). The Gramm-Leach-Bliley Act allowed these other sources of funds to be used. The rates at which banks can borrow these advances from the Federal Home Loan Bank are very attractive. Plus, the banks are getting dividend payouts from the FHLB (which had been discontinued but were resumed). There are incredible pressures right now to find more core deposits.

Sorensen: Competition for deposits in a declining rate environment is really compressing banks’ spreads. However, when you look at return on assets, return on equity and delinquency ratios, they’re all still in a very positive range. Community banks in Iowa for the most part just didn’t make subprime loans; there were a small number that did.

Stanberry: Already we’ve seen a (government regulatory) reaction. The thing we’re concerned about is mortgage brokers. One change has been that the Iowa Division of Banking can now, for the first time, audit mortgage brokers. We just need to educate people better about how to be a better consumer and to avoid products that are bad for them.

Fannie Mae and Freddie Mac recently shifted to a risk-based credit management system in which they now require interest rates on loans they purchase from banks to be based on borrowers’ credit ratings. What will that mean for banks that offer these loan products?

Stanberry: Risk-based pricing makes sense to us; we use it when making commercial and consumer loans. To use it for making home mortgage loans makes sense. If you’re going to be selling loans to Fannie and Freddie, you have to play by their rules.

Vessely: I would say most banks in Iowa do sell to Fannie Mae and Freddie Mac. Banks also pay a quarter-percent adverse market fee on loans sold to these agencies. It’s up to the banks whether they pass those fees on. It depends on how competitive they want to be.

Will that higher rate become a new hurdle for home buyers?

Stanberry: No. It’s a recognition that if you take on more risk, you get more reward.

Vessely: It means the days of quoting a rate to a customer are over. Now, all you say is that “at best, your rate will be … ” and then start looking at their property, the loan-to-value ratio, their credit score.

Sorensen: This is a further move by the industry to risk-based pricing.

What do you think about the general perception of banks and how’re they’re discussed in the news?

Stanberry: All financial institutions seem to be painted with the same brush right now; you have to look at each sector of the financial market separately. The local community banks for the most part have stayed in the middle of the market and have acted relatively conservatively.

Sorensen: There are differences between the money-center banks as well. I think Wells Fargo (& Co.) has done fairly well through this.

Is there a different story with community banks in larger states?

Sorensen: I think my counterpart in Florida is having a much more interesting time than I am right now.

What’s ahead for Iowa’s economy? How insulated is it from a recession?

Stanberry: When the (2002) recession hit here, it was delayed, but it hit us as hard as the rest of the country. In terms of foreclosures, we’re still in the middle of the pack compared with other states.

Vessely: I think it’s a safe bet that foreclosures and bankruptcies will go up this year. You’re not going to be isolated from it in either direction.

Stanberry: If (New York Times columnist and author) Tom Friedman is right and the world is flat, we’re going to feel the impact sooner than we have in the past.

Vessely: The consumer is going to be the key to all of this. If there’s stagflation, it’s going to be tough for all the sectors. The other thing I look at is we’ve come off some record years for borrowing; you can’t maintain that pace.