Executives report sluggish demand for credit – despite historically-low interest rates
With commercial loan rates near historic lows, one might assume businesses would be stampeding to their financial institutions looking for good deals on new loans or refinancing existing ones. But according to local lenders, that isn't the case.
"Rates are very attractive right now," said Alan Ludlow, vice president manager of member business lending at Columbia Credit Union. "But loan growth is relatively flat."
Chuck Miller, senior vice president regional manager of commercial lending at the Vancouver office of Bay Bank, said, "There's not a lot of demand for credit. To need credit, businesses have to expand and [the economy] is not there yet."
However, Miller admitted that there are still many businesses, especially those reliant on the struggling construction sector, that will continue to encounter difficulty in securing and extending commercial credit lines.
Ludlow said that the typical rate for a line of credit was about 3.25 percent, with term loans running 2.5 to 4 percent over prime. However, these rates aren't enticing a lot of refinance activity.
"Typically, refinance doesn't occur," said Tami Nesburg, senior vice president at Regents Bank. "There are usually fairly steep prepayment penalties built in."
The low loan rates have led lenders to implement floor rates on loans that come up for renewal or repricing, usually in the 5 to 6 percent range, according to Randy Krenelka, chief financial officer at Regents Bank.
What's in, what's out?
Virtually all the lending experts interviewed for this article agreed that very few land acquisition/development loans and investor-owned real estate loans were being made.
"We're totally out of investor-owned and construction for now," Miller said.
According to Janet Balzer, senior vice president and Western Oregon/Southwest Washington division manager for Banner Bank, it will remain difficult to get investor-owned real estate loans until the economy turns around and vacancies go down.
On the other hand, commercial and industrial and owner-occupied real estate loans are doing well.
"C&I is the biggest concentration in our pipeline," said Kristy Weaver, Pacific Continental Bank's senior vice president and team leader for Southwest Washington.
Likewise, Xandra McKeown, West Coast Bank's executive vice president commercial banking, said, "C&I is the largest opportunity for loan portfolio growth."
Steve Rice, executive vice president of Umpqua Bank, said that the company had recently implemented several initiatives to increase loan growth.
Umpqua's Main Street Lending Program for C&I loans launched in April 2010. This program, said Rice, is unique because if a loan application is declined, it automatically generates a second review of the application.
"It's already generated over $1 million in loans and has helped 25 customers," Rice said.
Some regulatory changes have made it easier for lender to offer owner-occupied real estate loans, Miller said. Previously, the owner had to occupy at least 51 percent of the building to qualify. Today, the owner can occupy less of the property, but the cash flow to cover the loan has to come from some other source besides rent from the remainder of the property, according to Miller.
What's it take to get a loan?
Lending constraints continue to be conservative, according to Miller, and financial institutions are looking at more than just balance sheets and business plans. For example, Miller said, other criteria include the personal credit scores of the guarantors, any contingent liabilities guarantors may have and, most importantly, cash flow.
"We have money to lend," said Wayne Matsumura, business services manager for Unitus Community Credit Union. But, he continued, borrowers need an income-to-debt ratio of at least 1.25. For example, if a loan payment is $1,000 per month, cash flow needs to be $1,250 per month.
"We've gotten back to traditional underwriting standards," Miller said.
Dave Dahlstrom, executive vice president and chief credit officer at Riverview Community Bank, said that banks have decreased their advance rates on real estate loans. A few years ago, banks would loan up to 80 percent of the value of owner-occupied real estate, and 75 percent of investor-owned real estate.
Now, Dahlstrom said, those percents have dropped to 75 and 70 percent, respectively. Combined with declining property values, these lower advance rates can make it difficult to secure a loan.
Besides the financial side of things, Weaver said that Pacific Continental also looked at the borrower's industry experience.
"We want to see if they have been a good manager in their sector or industry," she said.
Signs of improvement?
While lenders report low usage of operating lines of credit and slow demand for new loans, some local financial institutions are seeing some loan portfolio growth.
For example, Matsumura said Unitus' loan portfolio grew 12.8 percent in the first half of 2009 and has grown at a similar rate for the first half of 2010. According to Krenelka, in the second quarter this year, Regents Bank generated $40 million in new loan commitments, with $23 million in usage.
"That's double what we did in the First quarter," Krenelka said.
Lenders are taking a cautiously positive view of the second half of 2010, both for banks and for borrowers.
"We are seeing stabilization in the market, and I see positive things coming down the pike for Third and Fourth quarter," Rice said.
"If a qualified small business owner wants a loan, it should be pretty easy," Balzer said. "There are lots of good banks looking for these customers."