The banking environment is improving across the country as the larger nationals get back into the lending game again, although most certainly under different terms than they offered pre-crash. Management’s judgment about the soundness of the market and individual loans in a low-interest-rate environment is a separate matter. Some argue the larger banks are being too stingy and delaying a recovery. That might be so, but they at least are in a position to make real-estate loans again if they want.
Federal regulators began focusing on local and regional banks in 2010 and 2011. Most who were under federal watch were forced to improve their capital positions and strengthen their balance sheets. In simple terms, if they did not have enough cash on hand to cover troubled loans, they were either forced to shut down, merge with another healthier bank or find new investors willing to put up their own cash in exchange for an ownership stake. Those who survived usually did so at the expense of original shareholders. New capital that steps in to save a business tends to ask for a priority position when profits are distributed, which tends to dilute or subordinate existing shareholders to the new investors. Banking operates within the same investment parameters and nearly every local bank that did this effectively washed out their existing shareholder’s value or secured them a fraction of their original investment.
But they survived. For bank management of many local and regional banks with shaky real-estate loans filling their books, their options were few and none were possible if they did not recapitalize or throw in with a healthier bank willing to buy or merge with them.
From all of this, local and regional banks are starting to lend money again, allowing opportunistic buyers to make moves and shore up the bottom of this market cycle. As more equity capital in the hands of real estate buyers is matched with loans from banks, more transactions are possible and terms become more competitive. As transaction volume increases, values are likely to increase as well. Recovery was always going to depend on the lending environment. That spigot may now be opening up again thanks to the recovery of local and regional banks.
Eric Sprink, president of Coastal Community Bank in Everett and one of the survivors, sees real-estate lending very pragmatically. “We simply make what we think are smart loans. We loan to good borrowers on real estate with strong underlying fundamentals. Nothing has really changed. That’s how we’ve been banking all along.”
Mountain Pacific Bank’s removal from regulatory oversight this year is another promising sign. Mark Duffy, its president, brought in a new investor to reset their future after working through the challenges of the recession. Other local banks are stepping up lending as well. Most are doing so gingerly, with a great deal of caution around multi-family. But solvent and strong borrowers are sure to have more than one bank interested in making a loan now — something that has not been the case until recently. Others such as AmericanWest, which acquired Bank of Everett after it merged with three other local banks into Bank of the Northwest, as well as Whidbey Bank, Banner, Sterling, Washington Trust, Washington Federal, Opus and Columbia, are among those in the survivor pool. That’s enough to support a recovery.
As for the process of securing a loan, Sprink said that borrower strength and track record are probably just as important today as cash flow and balance-sheet strength on the real estate itself.
“It serves a borrower well to have a very well written loan request tied to a business plan and budget,” he said. “The more a borrower can show where both risk and returns might be, the better off they are in a loan approval process. I’m optimistic. What I’m seeing are quality opportunities coming into the bank again. Everyone learned from the past, of course, including borrowers. But they are people. We never abandoned them. They remember that and they are rewarding our loyalty to them with a first look at opportunities they need to finance as the market recovers.”
Tom Hoban is CEO of The Coast Group of companies in Everett. Contact him at 425-339-3638, email@example.com or www.coastsvn.com.