Community banks want to make loans

November 25, 2011
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Local community banks are "hungry" to make commercial loans to manufacturers, retailers, service businesses and real estate developers — and not just for mortgages, either. Nor are lenders favoring one type of business borrower over another.

"Not one over the other. I think what you'll find is that most of the community banks have been hungry for loans, and we have been for a number of years. We've had a real steady focus and haven't changed our lending criteria. So we were making loans to those industries two years ago and we're continuing to make loans to those industries," said Dave Kinsman, vice president of commercial lending at Founders Bank & Trust, a local community bank.

"And we're also seeing a gradual improvement in those industries, as they seem to be doing a little bit better, and we're hopeful that they will continue to want to borrow," added Kinsman, who has been with Founders since 1998.

Kinsman said a loan could be for a piece of equipment a manufacturing firm wants, for a working line of capital credit a company needs, or for a mortgage a developer, doctor or hardware-store owner has to have for a building, office or storefront.

"Quite often, commercial loan officers have a specialty in one particular thing because they know that industry so well. One of the reasons some banks don't do certain types of lending is because they just don't have the expertise in an area," said Kinsman.

"A good example would be a hotel, as those require a very specific area of expertise. And there are only a handful of banks in West Michigan that have lenders with that experience that can entertain those types of requests," he added, noting that Founders has a number of industry experts.

Just like its willingness to make loans, Kinsman also said the criteria a community bank follows to grant a loan hasn't changed over the past few years. "There are things we look for, and those haven't changed for the community banks, if I can speak for them, over the last few years. Those things are the fundamentals of lending: cash flow, collateral and credit. If those things are there, we're willing and able to look at the application," he said.

"It's those fundamentals, and that's what most of the community banks have been focusing on. Whereas I think a lot of business owners were frustrated because some of the larger banks seemed to be more haphazardly making decisions not as much based on those fundamentals."

With the prime interest rate at roughly 3.25 percent, Kinsman said commercial rates are similar to residential rates, which are hovering near 4 percent for a 30-year fixed home mortgage. Like consumer lenders, commercial lenders also base interest rates on the prime.

"They are also very favorable, right now," said Kinsman of commercial rates compared to residential. "It's hard to compare commercial rates to consumer rates, but they are low.

"Another thing we're experiencing is some additional competition. As some of the banks are beginning to get healthier, they are entering the lending market again. That is creating a little more competition and is moving some of the rates down a little bit to the benefit of the business owner. So rates are very competitive."

Rates are likely to remain steady into 2013, as the Federal Reserve Board announced a few months ago that it would keep its lending rate to banks at 0.25 percent at least until then. Typically, lenders add 3 percent to the Fed's rate to arrive at a prime, which largely affect a loan with a variable interest rate. The board's next decision on its short-term rate is two weeks away on Dec. 13.

"We would expect to see those variable rates maintained at a low rate based on what the Fed indicated. Who knows about the market, though? It's been so turbulent the last couple of years, I'd really be reluctant to make a guess about where other interest rates are going to go," said Kinsman. "But I would say that the market is going to remain competitive for borrowers, which is going to keep interest rates competitive, and certainly, like I said, banks are hungry for loans. A community bank, like Founders, is anxious to talk to any and all business owners who are interested in borrowing."

Kinsman said commercial loans are generally split between fixed and variable rates. A line of credit, for instance, normally comes with a changing rate, while a mortgage most often has a fixed rate.

As for construction projects, Kinsman said a loan to an owner of a building is a mortgage. But a loan to a tenant that wants to make improvements to a space isn't.

"If it's a commercial building, banks would look at that mortgage only in the event that the owner of the building could pledge the building as collateral. If there's a tenant in the building and they just want to borrow some money to do some office renovations in the space they're renting, that would be a term note to the business for tenant improvements," he said.

Kinsman told the Business Journal that now is a good time to be a community bank.

"There is, I think, a growing demand out there from business owners who want to know their banker and work with local bank loan officers that are consistent and understand their business," he said. "We're seeing a large part of our loan growth coming from business owners that are switching banks, and they're switching to local community banks."

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