Battle for the borrowers

Banks muscle for rank in a tough market

Commercial lending is not a competitive market. The better word is cutthroat.

That’s according to Jackie Angel, branch manager at First Independent Bank on Fourth Plain Boulevard.

"A couple of years ago, when the rates were lower, people were running into the bank," Angel said. "Now it’s different. You’ve gotta have the right rates. You’ve gotta have the right relationship."

Interest rates in commercial lending are a bit more dynamic than those in the consumer market. The rate will vary based on risk and sometimes on company size and age. Some banks offer "volume discounts" on rates—a tactic that rings of retail and reveals commercial lending as a customer-driven market. Further, Angel said much of the time the rate won’t even matter; it’s the customer relationship that counts. A borrower may deal with a rate just a bit higher than another lender, just because they like dealing with a particular bank.

First Independent operates 25 branches in Clark County and competes with fifteen others. The bank runs a commercial business arm totaling $700 million. A 2005 industry call report showed banks in First Independent’s peer group averaged 13 percent in new commercial loans and leases, while First Independent reported 62.5 percent. First Independent commercial banking team leader Monte Sillman said to pull off such numbers, a bank needs to be creative.

"You can (compete) with price, but there are better ways from a business standpoint," Sillman said. "You might look at different ways to structure the loan, for example."

Another reason for the change in the commercial lending climate is the number of options borrowers have today. A market that used to have just a few big banks now has many smaller and start-up banks. Also, some credit unions—traditionally consumer lenders—are suiting up and joining the game. This creates an environment that West Coast Bancorp Senior Vice President Gary Desrochers agrees is a borrower’s market. And while more banks try to woo fickle borrowers with customer service perks, Desrochers says the bottom line remains a factor.

"(Price) may not be the leading factor, but it does make a difference," Desrochers said. "The borrower is able to get more competitive rates because there are so many banks. There’s been a lot of growth in banks. There’s a lot of competition in both underwriting and in pricing."

Growth is an appropriate word for the commercial market. In West Coast Bancorp’s peer group, a sample of 129 lending institutions, a total of $22,544,808,000 in commercial and industrial loans were created in the first quarter of 2006. Compare that to $13,693,373,000 for the entire year 2001, and you get an idea of the expansion in this market. West Coast Bancorp alone reported $154,908,000 in commercial and industrial loans for 2001, and $278,705,000 for this year’s first quarter.

The increase in borrowers gave way to the formation of new banks, which appears to be a "self-righting" mechanism in the market. If no new banks had formed to meet the demand, the few old guard banks would have borrowers over the barrel. As it stands, the borrowers have accidentally generated their own advantage. As a result, some banks, according to Banner Bank vice president Dan Clark, are willing to cut deals that lose money in order to get the business and show a large volume of loans.

"It’s gotten to the point where it doesn’t make sense anymore," Clark said. "I see a lot of banks willing to create loans with pricing that does not create profit. It’s like the business owner that spends $1.25 to make his product, and then sells it for a dollar, hoping to ‘make it up on volume.’"

Clark also said he agrees that "cutthroat" is a perfect way to describe the market.

"I think it’s a condition that will correct itself," he said.

To better understand the brutal nature of the market, Angel said, look no further than the advertisements banks run in hopes of hooking big borrowers. First Independent, for example, has only recently begun to advertise to commercial borrowers.

"Up until five years ago, (First Independent) was primarily a money gatherer," Sillman said. "Now, we’ve entered the commercial lending market, and in the last year have really stepped up advertising, and will continue to do more."

In their ads, banks will target very specific markets.

"Here’s a Washington Mutual ad," Angel says, holding up a copy of The Asian

Reporter. "It’s an entire full page ad offering commercial loans specifically to Koreans!"

The ads offer enticingly low rates and other perks, but of course come with a catch.

"A lot of the ads, in the fine print, will say things like ‘introductory rate’ or ‘must have a business account.’"

Desrochers described how technology has helped West Coast Bancorp be more competitive. He said his bank tries to provide a high level of service and top quality products—words designed to attract clients in a crowded market. The bank offers iDeposit, a service launched in Dec. of 2005, where commercial borrowers can do their business banking online, depositing customers’ checks from the office. Technology has been embraced in the market as a way to offer better service to borrowers.

One way technology gives a bank the edge is through speed. Electronic document processing has dramatically streamlined the otherwise cumbersome job of finalizing a loan, allowing savvy banks to get more done in a shorter period of time.