Much has been written in recent months, by me and others, about the state of the banking industry; specifically about the availability of capital for businesses and individuals. In this week’s column, I have surveyed several of our local banks to get a sense of their current lending practices, the overall availability of loans, and their outlooks for the local lending environment as we move from recession to recovery.
First, a little overview of the survey – I emailed several questions to representatives from several banks with local operations. I received some fantastic responses, but unfortunately, I don’t have room to include everything in one column, so I will do part one today and part two next week.
Here are the questions for part 1, which I provided to the banks for their responses:
- How has (bank) changed in terms of lending policy from 2007 to today?
- Are you writing loans?
- For businesses and/or individuals, what are some of the loans that you are writing currently?
- Do you see the availability of credit increasing in the short-run? Why or why not?
- What is your overall impression of the lending environment today?
Eloy Ortega, CEO of The Bank of Santa Barbara says that, with the recent change in ownership and management, they are now more focused on relationship transactions, meaning that they are looking for complete banking relationships, and not just transactions. They will provide owner-user CRE loans or investment property loans if they have strong cash flow and a modest LTV, not to exceed 75%, and a debt coverage ratio of at least 1.35X.
They are also focusing on commercial and industrial loans, particularly in the medical/dental and other professional fields, as well as specialized interest in non-profit organizations. We are aggressively seeking to write loans, but we are a cash flow lender (not a collateral lender). We will look at turnarounds and startups, if capital levels in the business are adequate. We are not in the market for speculative real estate development/construction loans, but will provide construction and permanent financing for owner-users. We are currently writing working capital lines, equipment term loans, tenant improvement loans, CRE acquisition loans, and bridge loans.
Ortega does not see credit availability increasing in the short-run because the economy has not rebounded enough to reduce bad loan levels at banks. Many banks are focusing their efforts solely on collection of existing loans rather than making new ones, which gives The Bank of Santa Barbara, with a tier 1 risked-based capital ratio of 15.5%, a competitive advantage. They have also increased deposits by $43 million in their first 4 ½ months since the change in ownership. They are well capitalized and are looking to redirect their liquidity into the local business market. Ortega believes that the lending environment is extremely tight today. He has been receiving referrals from other banks, not because the borrower has issues, but because many banks can no longer provide loans due to regulatory restrictions.
Don Toussaint, Regional President of Rabobank, states; “Rabobank has always had a disciplined approach to lending and that is one of the reasons our bank has enjoyed a AAA rating for the last 25 years. We have tightened our lending criteria in certain segments that have been under duress; particularly non-owner occupied commercial real estate lending. In that sector we have increased debt service coverage requirements and decreased LTV’s (Loan-to-value). We are absolutely originating new loans, particularly in the commercial and industrial, agricultural and small business and consumer segments. We are actively seeking new, full-service lending relationships in those segments. We do see the availability of credit increasing over the rest of the year as economic conditions improve. I would describe today’s lending environment as ‘cautious.’ These are still very challenging times for many banks and all banks are exercising caution to make sure borrowers are on ‘stable’ ground before extending new credit.
Jeff DeVine, CEO of American Riviera Bank, says; “We’re very cautious on construction lending that is build-to-sell or build-to-lease as opposed to owner-occupied. There is too much inventory of completed condos and homes for sale by investors already. We are channeling our resources in this area toward helping those that have been impacted by the fires rebuild their homes. Very few lenders are providing any construction lending these days which makes our bank unique. We’re asking for a higher debt coverage ratio on commercial real estate loans of at least 1.25 times (it was 1.2 times). We are very interested in making owner-occupied construction loans, small and medium sized business loans, and commercial real estate loans in our local market. In 2009, American Riviera Bank increased loans by $19 million (22%) and are looking to continue growing this year.
Certain types of lending will be constricted for quite some time, such as land loans for acquisition and future development and build-to-sell construction loans. These are the loans that most community banks took losses and write-downs on and these are the types of loans that regulators are asking banks to reduce their concentrations in. A business must show a track record of adequate cash flow to repay its debts over a reasonable period of time in order to qualify for a loan. The current lending environment is better than in 2009, but 2010 will still be a challenging year for banks and borrowers. Borrower stress will remain high until the employment picture improves.
Pacific Capital Bancorp (Santa Barbara Bank & Trust) relates that they remain an active lender in our markets, and continue to originate and renew loans for their customers. As have virtually all banks, over the past few years, they have appropriately tightened their underwriting criteria as a result of the weaker economic conditions. For example, they require more equity to be contributed by the borrower for commercial and residential real estate loans. For commercial loans, they are requiring higher levels of debt service coverage to ensure that borrowers have a sufficient cushion to continue meeting their debt obligations if they experience a decline in cash flows if the economic weakness persists.
They have also reduced their origination efforts for certain types of loans in order to manage their exposure to riskier asset classes. They are not originating residential construction loans at this time given the softness in the residential real estate market, and they are not originating out‐of‐market loans. Our current focus is on meeting the credit needs of existing customers within our established markets along the Central Coast of California. From a strategic perspective, we are focusing on lending to small and middle‐market businesses that need financing to support their growth and have demonstrated the ability to generate sufficient cash flow to service their debt.
Julie Campbell, of Wells Fargo, says that Wells looks at each opportunity closely to determine if and how they can say “yes.” In 2010, they plan to expand their lending to small businesses by 25% to more than $16 billion for businesses with up to $20 million in annual revenues. Wells is writing loans locally. In California from October 1, 2009 to February 28, 2010, Wells Fargo has extended 260 SBA 7(a) loans to businesses for over $90 million. In 2009, Wells Fargo, together with Wachovia, extended $13 billion in new loans to small business owners, and was the #1 SBA lender in the nation in 2009. For the past seven consecutive years, Wells Fargo has been America’s #1 small business lender in loans under $100,000. Wells has seen competition among banks to make loans to qualified borrowers increase within the past few months. Over the last 6 months or so, they have seen traditional small business lending pick up. There is more demand for loans, and the businesses that are applying are stronger. There has been a steady increase in approval rates for the smallest borrowers over the last 6 months as well.
Gary Kishner of Chase says that Chase has been and continues to lend using the Fannie Mae and Freddie guidelines (conforming loans). Each branch in the Santa Barbara area has a loan advisor who meets with borrowers to present them with information and all options available to them so that they may make an informed decision, and we are writing auto loans, home equity lines, mortgages, including refinancings, and student loans, and for businesses, lines of credit, term loans, SBA loans and lines, real estate loans, a variety of leases, and more. In November 2009, Chase announced that it plans to increase its lending to small businesses by up to $4 billion in 2010, boosting expected new lending to about $10 billion. Chase continues to receive a steady flow of loan applications and continues to lend responsibly to businesses and individuals.
Though times are certainly tougher for our banks, it is clear from their responses that they are in the business of making loans and they are providing much-needed capital for businesses and individuals. Access to capital is the only way we will see unemployment and the economy in general, rebound at a sustained pace. For those looking to borrow, don’t be discouraged! Money is available; you just need to go get it!