Some commercial lenders here say overall demand for business loans remains weak because their customers are holding off on growth plans due to uncertainties over the economy and future tax and regulatory issues.
Bright spots in the commercial-lending arena, though, include a recent surge in multifamily housing loans and strong interest in U.S. Small Business Administration-backed financing, they say.
Randall L. Fewel, president and CEO of Spokane-based Inland Northwest Bank, says the bank has money available to lend at historically low interest rates, but he's not seeing a lot of requests for commercial loans.
"We're eager to make loans to the community," Fewel says. "We're seeking new customers and calling on new prospects."
Fewel says the manufacturing industry is one of the strongest sectors in the business community, and even that sector hasn't increased borrowing much.
"They're being very cautious," he says. "We're not seeing a lot of optimism."
The anemic demand certainly isn't because of rates, he says.
"Interest rates are as good as you're ever going to see," Fewel says. "But business owners have to feel good that they aren't going to get hit with a lot of new taxes or regulations" before they take on more debt, he says.
Jay Lewis, vice president of commercial banking at Spokane-based Washington Trust Bank, says investment real estate lending for multifamily properties is one growth area.
Lewis says that market has been attractive for investors looking to get a higher return on investment than holding it in low-interest bonds. "There's a lot of capital looking for a home," he says.
Apartment vacancy rates have remained relatively low, in part because of high mortgage-default rates, Lewis says. "As folks no longer are homeowners, they need a place to live," he says.
As for other income properties, the challenge is to have tenants lined up prior to seeking financing, Lewis says.
"In today's environment, it's going to require that the borrower pre-leases at least enough to cover the interest on the debt," he says.
INB is interested in financing apartment projects, Fewel says.
"I think multifamily investment properties are still looked on favorably by regulators as well as bankers," he says.
The bank, though, is limiting apartment-construction loans to 80 percent of the cost, Fewel says. During the construction boom that preceded the recession, INB had loaned up to 80 percent of the appraised value of such projects, which occasionally covered their entire costs, meaning the project owners potentially had little capital at risk.
"We're going to make sure they have skin in the game," Fewel says.
When it comes to community banks, regulators aren't looking favorably on loans for most other commercial land acquisition, construction, and development, he says.
"Regulators have come down emphatically and indicated that community banks in Washington (state) as a whole have done too much of that," Fewel says. "You could make a pretty good case that Washington has had more than its share of bank failures. We're sixth in the country since 2008."
Bucking trends somewhat, Spokane Valley-based Numerica Credit Union has beefed up its commercial lending services and intends to increase its market share of business loans, says Larry Shintani, the credit union's vice president of business services.
"Our forte has been in commercial real estate lending," Shintani says. "In 2010, we were one of the few still lending. In 2011, a couple of other institutions got into more lending. In 2012, I believe there will be more competition."
Now, the credit union is branching into lending to cover equipment, inventory, and accounts receivable. "In my opinion, that's the bread and butter of business lending," Shintani says. "It's a new arena for us, and we've hired people we think can do that."
Numerica recently has hired four people to bring its commercial-lending staff to 11.
Shintani says the credit union recently received a waiver from the National Credit Union Administration, its federal regulatory body, to increase its commercial lending limit to about $270 million from the former limit of about $170 million.
Numerica has been among the top Spokane-area issuers of SBA-backed loans in recent years.
"We do a lot of $100,000 or below 'express products' and larger 7(a) loans," Lewis says. SBA 7(a) loans can be used for startup or working capital, to buy or improve land or buildings, or to acquire long-term equipment.
Carol Mangan, longtime commercial banking executive for Spokane-based Sterling Savings Bank, says the bank is seeing a significant uptick in SBA-backed loan requests.
"SBA loans provide additional flexibility for borrowers and protection for banks through SBA guarantees," she says.
Bankwide, Sterling issued SBA 7(a) loans totaling $31 million for its fiscal year that ended Sept. 30, an increase of more than 200 percent over the previous year, Mangan says.
Commercial lending overall, though, has been restrained by lack of economic optimism, she says.
"Business owners are cautious and concerned about uncertainty in the economy and tax policies not yet resolved," Mangan says. Because of that uncertainty, many businesses that have weathered the recession are paying down debt and building cash reserves rather than taking on more debt, she says.
"I think those trends will continue until the early part of 2012," she says.
The Federal Reserve has indicated it intends to keep interest rates low for an extended period, so there's no sense of urgency for business owners to go out and borrow today, Mangan says.
Competition for commercial customers is intense, especially for those seeking to refinance owner-occupied real estate, she says, adding that business owners tend to compare loans offered by several banks when they're in the market to refinance property.
"We're often competing against three to five banks for every good loan opportunity," Mangan says.
Ken Schumacher, Spokane business banking manager for San Francisco-based Wells Fargo Bank, says customers have driven the slowdown in commercial lending, contrary to the perception that banks are hesitant to lend.
Even the use of lines of credit hasn't approached pre-recession levels.
"You would think lines of credit would increase in terms of utilization," he says. "We've observed almost the opposite. Part of it is a conservative wait-and-see attitude. Nationally, we hear a lot of businesses have more cash than they've had in years."
Schumacher says he's seen an uptick in requests for financing for equipment.
He figures it has to do with businesses catching up with equipment that they had delayed replacing during the recession, although he hopes it's an early sign of a shift toward optimism that sales will increase.
Additionally, some businesses that need to replace equipment are taking advantage of accelerated-depreciation tax incentives, Schumacher says.
The bank is engaged in commercial real estate lending after cutting back on that market when real estate values dropped, he says.
"Now there is a perception that the real estate market is at least stabilized," Schumacher says.
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