Demand for commercial loans herefueled by Spokanes hot real estate markethas been strengthening over the past few years, and 2006 proved no exception, bankers say.


Yet, intensifying competition in the banking industry here and an inverted yield curve, which cuts into banks bottom lines, are posing challenges for bankers in 2007. An inverted yield curve occurs when short-term interest rates, which normally are lower than long-term interest rates, exceed long-term rates. For banks, which rely on borrowing money at cheaper short-term rates and lending it out at higher long-term rates, an inverted yield curve cuts into profits.


Real estate has been a key driver for the Spokane economy, and were looking for continued contribution from growth in the economy here to fuel commercial lending demand, says Greg Hansen, executive vice president and director of commercial lending at Spokane-based AmericanWest Bank.


AmericanWests major markets are Spokane, North Idaho, the Tri-Cities, and the Salt Lake City, Utah, area, where it opened a loan production office last year, Hansen says. Its total loans as of Dec. 31 were $1.2 billion, up 27 percent from year-end 2005, far exceeding its 4 percent loan growth in 2005. About 17 percent of its growth in 2006 was due to the banks acquisition of Pasco-based Columbia Trust Bancorp last year, Hansen says. Commercial loans make up about 85 percent of the banks total loans.


To take advantage of heated real estate activity here, AmericanWest started last year a separate real estate group within its commercial lending division that handles real estate loans here for investors, Hansen says.


Along with the strong real estate market, Hansen attributes AmericanWests commercial loan growth to the work of loan officers and analysts it has hired over the past two years, and says one of the challenges the bank is facing as competition increases here is retaining such people. That competition makes employee recruiting and retention harder, and has forced the bank to make sure its rates and fees are competitive, he says. The inverted yield curve has further tightened margins on the banks long-term loans.


Our margins have moved down some due to competition, Hansen says. Theres a very thin spread between floating rates and fixed rates, and that has squeezed the margin, which makes it harder to make a buck on a loan.


He says AmericanWest Bank expects its loan portfolio to rise in the low double digit range this year. That estimate, however, doesnt include the loans it will gain as a result of its acquisition of Provo, Utah-based Far West Bank, which has $475 million in assets. That acquisition, which is expected to close at the end of this month, will give AmericanWest a total of about $2 billion in total assets and about $1.8 billion in total loans, he says.


Spokane-based Washington Trust Bank, which has branches in Washington, Idaho, Oregon, and Utah, had $2.7 billion in total loans at the end of 2006, up 16 percent from year-end 2005, Chairman and CEO Pete Stanton says. Loan growth has been pretty much across the board, although commercial real estate loans have been particularly strong, he says.


Its just a reflection of an excellent economy in the Northwest in the last three or four years, Stanton says. Commercial lending activity certainly has been fueled by both residential and commercial construction.


Commercial loans typically comprise between 75 percent and 80 percent of the banks total loans.


Stanton says he expects that the economy here will soften slightly this year. While commercial activity might not grow at 2006s pace, it still will increase at a steady clip, and he expects the banks loan portfolio will grow by 12 percent in 2007. Stanton says the inverted yield curve is tightening Washington Trusts margins, but expects that the high volume of commercial loan activity will help it maintain a healthy bottom line.


In terms of activity, were optimistic its going to be another good year, he says. Margins are going to be tougher, and the bottom line might not ultimately be as strong as banks would like, but you live with the cards youve been dealt.


Randy Fewel, president and CEO of Spokane-based Inland Northwest Bank, says INBs total loans grew by 16 percent to $187.5 million as of Dec. 31, about the same growth rate as in 2005. Commercial loans make up 93 percent of the banks total loans, and its major markets are Spokane County, Kootenai County, and the Walla Walla area, he says.


Theres no question about it, the real estate market here has been very strong over the last three years, and that certainly has spilled over into commercial, Fewel says. Its really all driven by job growth.


While a large portion of the banks commercial loan portfolio is made up of commercial real estate loans, demand also has been healthy for commercial lines of credit and commercial equipment loans, he says. One of the main challenges the bank is facing involves setting rates and fees for long-term loans and deciding how many such loans to issue in an inverted yield curve environment, he says.


While Im forecasting lots of opportunity for commercial loans in 07, the wild card is the interest rate environment, Fewel says. Its a good time to be a banker, but its also a very difficult time because of the inverted yield curve and intense competition.


Hiring and retaining good personnel is a major part of Inland Northwest Banks strategy for commercial loan growth, Fewel says. The bank hired four new loan officers at the beginning of this year, giving it a total of 11 commercial lenders, he says.


Fewel says he hopes total loans will grow in the 15 percent to 20 percent range this year.


Heightening competition, especially from banks based elsewhere that are opening loan production offices here, is posing challenges to banks growth, Fewel says. Banks based in rural markets are expanding to Spokane to diversify their loan portfolios beyond agricultural loans, and banks from larger markets have noticed the economic growth here and are seeking to capitalize on it, he says. In addition, some credit unions are focusing more on commercial lending now than in years past.


The businesses in our markets are growing, but the bulk of the loan growth is coming from the fact that you have to take it away from somebody else, Fewel says.


Susan Horton, chairwoman, president, and CEO of Spokane-based Wheatland Bank, says the banking industry in the Spokane market is the most competitive she has seen, but asserts that Wheatland is very well-positioned to meet the strong loan demand were seeing out there.


The banks total loans grew 12.3 percent last year to $126 million as of Dec. 31, Horton says. More than two-thirds of Wheatlands loans originate in the Spokane and Columbia Basin markets, both of which the bank has entered in recent years. Improved asset quality bears testament to the strong economies in those markets, as more borrowers have been able to make their payments on time, she says.


Whats going on here is very exciting, Horton says. We think the economy is strong in the Inland Empire and are optimistic about that trend continuing.


Commercial real estate loans at Wheatland, which used to focus primarily on agricultural lending, now make up nearly 40 percent of the banks total loans, Horton says. Loans in the agricultural sector, which contributes significantly to Spokanes economy, make up about half of the banks total loan portfolio, she says.


Wheatland is budgeting for 18 percent loan growth this year, Horton says. The bank, which plans to open three new branches in the next two years, is relying on its new branches, its marketing efforts, and its investments in technology to help fuel its lending activity. The new loan officers it has hired have contributed heavily to its growth, and the bank plans to recruit even more talented lenders, she says.


Contact Emily Brandler at (509) 344-1265 or via e-mail at [email protected].