Despite concerns, local banks say business loans available

In an analysis of the regional economy, the Federal Reserve Bank of Richmond pointed out that:

"District loan officers reported that lending activity grew at a slower pace in recent weeks. Concerns about a slowing economy and diminished corporate profits contributed to more cautious lending by commercial loan officers.

"A commercial lender in Charlotte, N.C., reported that even though demand for business loans has remained fairly strong, he had become 'more selective' in extending credit in recent weeks.

"A banker in Richmond, Va., expressed similar sentiments, noting that she was now a little more 'conservative' in lending, because of declining profit margins in cyclical industries such as building products."

A description of the state of the current economy?

Actually, this report was written in December 2000.

And while the substance of this report might be true in some regions of the nation today, things aren't quite so dire in the Charlotte region-yet.

"We're not hearing about this situation yet," says Matthew Martin, economist in the Charlotte branch of the Federal Reserve Bank of Richmond. "We are hearing that marginal borrowers are finding that they are not as creditworthy as before, and some family-owned businesses are using more of their own money" to finance expansion and growth.

The commercial lending situation does not seem to be as tense as the residential mortgage lending situation has been in recent months, although D. Anthony Plath, associate professor of finance at the University of North Carolina-Charlotte, says banks in general are "doing more 'i' dotting and 't' crossing" on the commercial side of their ledger, where loans still can be made.

In fact, the impact of the mortgage lending crunch, which has affected many banks, has not yet been felt on the commercial side for local community banks, according to Jim Engel, president and chief executive officer of Aquesta Bank in Cornelius.

Aquesta, which opened in August 2006, has "only marginally changed" its lending standards and practices, mainly relating to home equity lines of credit.

"On the commercial side in general, we've not made any specific changes," Engel says. "We have a skeptical eye out, but that's because we started out pretty strict."

For a bank such as Aquesta, the process of seeking a commercial loan is not necessarily time-consuming, but it does involve a review of a lot of data.

If Acme Widgets were to seek money from Aquesta for a business expansion, Engel says the company would have to provide:

o Two years of tax returns.

o Current financial data, including cash flow.

o A projection of future financial data (though not always required, Engel says).

o An accounting of debts, assets and liabilities.

o A credit check.

In addition, assuming that the business is privately owned, the bank also would review personal financial data on the owner or owners, including tax returns, "because a personal guarantee is needed if they own at least 20 percent of the company," he says.

A bank lending officer would examine the loan-to-value ratio of the loan request and then write up the proposal with the assistance of an in-house underwriter. A loan request for up to $500,000 goes to the chief credit officer for review and approval; a loan exceeding $500,000 goes to the president, chief operating officer and chief credit officer, Engel explained.

Larger loan requests require more participation in the review process-a loan of between $1 million and $2 million also goes to a loan committee consisting of several members of the board of directors. A loan request of more than $2 million must be reviewed by the entire board, and a loan request exceeding $3 million requires participation by a larger financial institution.

Smaller loans can be approved in a matter of days; larger loans might take a few weeks, Engel says.

A key element in the loan application and approval process is the applicant's business plan.

Robert Marziano, chairman and chief executive officer of Bank of the Carolinas in Mocksville, says this is a critical element in his bank's commercial lending review process.

"We have not changed any policies regarding commercial lending. Our responsibilities to our customers have not changed in any way," he says. "I am sure there will be more or new regulations concerning the current credit crisis, but it will be geared toward mortgages and securitized loan instruments.

"The best way to approach a bank with a commercial loan has never changed. Have a good business plan."

"Whether the economy is good or bad, we still see some ideas coming in the door that are half-baked," Aquesta's Engel says. "We are not just giving a loan, we want to see them (the applicant) become successful. Sometimes people get laid off and want to become an entrepreneur, and we try to help. Some are successful, and some are not."

Plath of UNC-Charlotte points out, however, that banks are not usually the first source of business financing for startup companies. Venture capital sources and U.S. Small Business Administration sources are more commonly used.

"Remember that banks are cash-flow lenders, and entrepreneurs don't have a history of cash flow yet. If I were working with an entrepreneur, I'd want a personal financial guarantee, and I'd put a second mortgage on his house," Plath says.

Nationally, attention is focusing on problems in the residential mortgage lending market, but a spillover effect shows up in commercial lending. A Goldman Sachs Group Inc. economic report in early March noted that the supply of credit for businesses and consumers could fall by $2 trillion, the equivalent of 7 percent of all household, corporate and government debt, according to a Bloomberg news report.

In fact, the Goldman Sachs report noted, while losses on home mortgages could reach $500 billion, losses on commercial real estate and business loans, when combined with credit card debt and auto loans, could be as much as $656 billion.

The Charlotte region is not seeing that problem right now, Engel says.

"We have no problem loans-none of our commercial loans are 30 days past due. A lot of business is coming our way."

Aquesta has approximately $122 million in assets, and its business and commercial loan portfolio is about $85 million, out of a total loan portfolio of about $90 million, Engel says.

Local bankers say this region does not seem to be moving in the same direction as banks nationwide. A Federal Reserve survey of senior loan officers, conducted in January, said American banks tightened lending standards and terms for businesses and consumers alike.

The survey also showed also that demand for loans weakened among businesses and households over the last three months, according to a Reuters news report.

Banks that were tightening business credit terms "pointed to a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as reasons for their more-restrictive lending policies," the Fed survey said.

Engel and John Martelle, Wachovia Bank market president for Cabarrus and Stanley counties, say banks in the Charlotte region generally are wide open for commercial lending business.

Engel points out that interest rates for commercial loans are attractive-rates have dropped from more than 8 percent to about 5.25 percent-and Martelle says the worries about the lending and credit crunch at the national level have not seemed to trickle down to southwestern Carolina.

"Here, in this area, it is quite the opposite. The lower rate environment here has let people borrow. The money is here to borrow," Martelle says. "Our Cabarrus and Stanley county regional business loan portfolio is up 5 percent now over last year."

Wachovia has not changed its standards and practices for reviewing and approving commercial loans. "We are operating pretty much business as usual. We have a sound system of due diligence in place, and that system has allowed us to not deviate at all from strict standards," Martelle says.

Martelle says the procedure for approving a commercial loan has remained constant, and the bank provides prospective borrowers with a due diligence list of things they would need to obtain a loan.

His advice: "Be prepared to talk openly and candidly about your business. While a startup business is very difficult to underwrite, for our existing customers that are up and running, they won't have to be filing a business plan."

Wachovia's regional operation does not have problem commercial loans, "and if we had them, when they do pop up, we have a standard procedure for working with the borrower," Martelle says. "We have a group at the bank to work with loans that might need help. It's not so much a consulting role, though we can make suggestions that might help a business with its cash flow."

Woody Washam, market president for CommunityOne Bank NA in Iredell County and Lake Norman, says his 4-year-old bank also has no problem loans, and the commercial lending business has remained strong in his region.

Standards and practices have not changed locally in recent months in response to national lending problems, he says, as the bank remains "in a position to strictly adhere to our policies and procedures. We are not in a position to take chances or speculate."

Though standards haven't changed, bankers are exhibiting more caution.

"There's a cautious air out there. When (borrowers) consider an expansion or investment, we are going the extra step in asking them to provide detailed information. The appraisal process has tightened considerably, and the scrutiny that the FDIC gives the entire process has stepped up," Washam says.

Washam, who started in banking in the early 1970s, predicts that stricter lending review will be a way of life in the foreseeable future, and the banking industry will benefit in the long run.

"I think this is a good thing in the industry. I've gone through downturns and periods of high interest rates over the years and seen lots of problems," he says. "You learn a lot, then you become complacent. I think banks will look at their underwriting standards, and in the long run, it'll be good for industry.

"A little more stringent review of the lending process will be with us for a good while."