Business Still Good for Regional Banks
by Linda Hanson
These banks still have money to lend, as most didn’t originate or invest in subprime loans, and have managed their diversified loan portfolios well.
Prior to the subprime debacle, Wall Street investment bankers had commercial real estate’s term debt market cornered by packaging loans as commercial backed-mortgage securities (CMBS), and then selling these for a hefty price to investors who were willing to take financial risks.
As the residential industry worsened it spread into the CMBS market causing major problems for these large investmentbanks.
In addition, many solid, local commercial real estate borrowers found themselves being pressured to refinance loans from their real estate banks that may be under regulatory pressure to reduce their overall commercial/residential real estate loan exposure. In effect, some area banks maybe under pressure to throw their good real estate loans out along with the substandard loans.
As of June, the Federal Deposit Insurance Corp.(FDIC) estimated that of the $631.8 billion current construction loans, $45.4 billion were delinquent causing banks with high percentages of these loans to take immediate action.
They may write off the loans, sell the loans for a much lower price, foreclose properties, and even close the bank. The FDIC already has closed seven banks this year, while the average in recent years has been three.
Loan candidates should look for regional banks that are in a strong financial position, have a low percentage of non-performing loans and strong earnings. Also, look for banks that are focused on relationship management. Smart banking is no longer just about the five C’s—character, cashflow, collateral, capacity, conditions. Borrowers have become much more financially savvy and require more from their bank.
Having an open relationship with a banker about the borrower’s current deposits and loans, even if these are spread among several banks, will allow the banker to help support the company’s future growth and makesound financial decisions.
Regional banks want to be sure to continue growing their clientele. To maintain quality, they need to be taking in as many deposits as they give out for loans. For a bank to be able to issue good loans, having less than one percent of delinquent or bad loans is ideal. This is why banks are becoming more careful and selective when it comes to the underwriting process. Banks are looking for loan candidates that have strong balance sheets, consistent business and a good understanding of their own cash flow.
Borrowers again are relying on regional banks to help originate new deals and refinance short-term loans. Local decision making by borrowers with solid reputations with the help of bankers mindful of local market conditions are importantin this current economy. Now more than ever, commercial real estate borrowers need to develop a total banking relationship with a sound Kansas City bank. 
Return to Ingram's August 2008
Linda Hanson is president of the Kansas City region of Enterprise Bank & Trust.
P | 913.663.5525
E | lhanson@enterprisebank.com