In the News: A Slow Thaw

Bob Atwell was recently quoted in the Insight article, A Slow Thaw. Click here to read the original article.

A Slow Thaw
By Nikki Kallio
Insight, April, 2010

Commercial lending is still tight, but some loan programs could loosen credit

Take a look at the vacancy signs and darkened storefronts and you start to get the picture that prospects for lending in the commercial real estate market aren’t yet bright.

“It’s tough and likely to stay tough,” says Bob Atwell, CEO of Nicolet National Bank in Green Bay. “The reality is there was too much easy money for too long, too much building.”

Lending to small businesses is a little more hopeful, but area bankers say it’s going to take a while – and some smart decisions by both banks and prospective business owners – to recover from the overall malaise.

Atwell says rampant growth in the commercial real estate sector after the terrorist attacks of Sept. 11, 2001, was one of the factors that led to the current slump.

“Federal financial policy post-9/11 was to flood the capital markets with liquidity in order to stimulate real estate construction so that real estate would lead the economy recovery,” Atwell says.

That worked well for a time, he says.

“People bought into the idea that real estate never goes down in value,” Atwell says. “As long as everyone thought that was true, they were going to keep building.”

But now, commercial real estate lending remains a challenge, says Tim Schneider, chief operating officer and co-founder of Investors Community Bank in Manitowoc.

“It’s a challenge for buyers, sellers and the banks. With the downturn, many banks face concentration issues and need to better manage their commercial real estate portfolios,” Schneider says.

Commercial real estate lending will remain challenging through at least 2010 because of the tighter underwriting by the banks, more regulatory awareness and falling market values, he says.

“Updated appraisals with higher capitalization rates have driven down the value of many classes of real estate,” Schneider says. “This is most evident in development deals and tertiary markets where vacancy rates have increased.”

Market values for some properties in primary markets, such as those in heavy retail corridors, have managed to weather the storm better than others, he says.

But small business lending looks a little brighter than commercial real estate. Although banks will naturally be cautious in this climate, they’re still looking for good customers, Atwell says. Programs such as those operated by the Small Business Administration and the U.S. Department of Agriculture help facilitate lending.

State and federal officials are well aware of the outlook and are working on proposals, including the proposed Small Business Capital Access program, working its way through the state legislature now. The proposal, which would create a public-private loan loss reserve to reduce risk to banks and encourage them to make small business loans, was approved by the Assembly in January and went to the Senate for consideration. A public hearing on the measure was held in February.

Bankers are somewhat skeptical about such proposals, however, and prefer advancing programs that have been proven successes.

“These types of measures further confuse markets and detract from the critical work of fixing the state’s fiscal mess,” Atwell says. “We need someone in Madison to lead us to make the tough choices necessary to get our state back on a sane financial footing.”

Schneider says renewing the federal government’s Small Business Administration incentives would be more helpful. Last year’s Recovery and Reinvestment Act boosted federal guarantees on small business loans from 75 percent to 90 percent and eliminated some fees, but the incentives have expired.

“The stimulus efforts in regard to small business lending are effective,” Schneider says. “We see the increased guarantee amounts and reduction or elimination of SBA fees as an effective way to motivate banks and borrowers to get deals done.”

Another promising proposal is President Obama’s Small Business Lending Fund, under which $30 billion in TARP funds would be transferred to a new program to support small-business lending. The program would operate outside of TARP and ideally wouldn’t have the same restrictions on banks, says Thomas Detienne, executive vice-president of business banking at Investors Community Bank. It would offer incentives for the recipient banks to increase lending to small businesses. Small banks – those with under $10 billion in assets – account for 50 percent of all small business loans even though they represent 20 percent of the asset base, Detienne says.

“I believe this would be a good program for the broader economy and small banks,” Schneider says. “TARP served its purpose of protecting the too-big-to-fail banks, but did little to assist the smaller banks that meet the needs of small business. Ideally, this program will be properly presented and positively received as a ‘loan program’ to assist banks that are committed to the small business community.”

It’s not that banks aren’t lending, but the nature of the economy and the state of some banks themselves are necessarily making them cautious. Atwell says 2009 showed a steady, significant rise in the number of problem loans and problem banks. Regulatory guidelines state that real estate lending shouldn’t exceed 300 percent of a bank’s capital “and most banks in Wisconsin are well over that level,” Atwell says.

Even healthy banks, he says, have an increased number of problem loans.

“There are too many properties and too much debt,” Atwell says. “That’s the fundamental problem. It needs to work itself through.”

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