Discarding the ‘Dirt’

Top commercial loan producers

By Katie Kuehner-Hebert

It takes particular expertise to have success in pure commercial lending. That’s because with such commercial lending—often referred to as commercial and industrial lending—a bank cannot rely on real estate collateral—or “dirt” as one lender quips—if the loan sours.

While many community bank loan portfolios are heavily collateralized with real estate assets, Bridge Bank in San Jose, Calif., operates in the “statistical inverse,” with more than 70 percent of its portfolio in commercial loans, says Daniel P. Myers, the bank’s president and CEO.

The $1.3 billion-asset community bank’s loans are “true business loans” with no real estate collateral under the notes or personal guarantees supporting the notes, Myers says. “We chose a different path—because being a true and capable business bank would give us a sustained competitive edge in the business market,” he says.

In addition to diversified commercial lending expertise, Myers adds, Bridge Bank has built its business and reputation on providing a full complement of financial business products, technology and advisory services. These are essential, he adds, to meeting the sophisticated needs of companies operating globally, no matter what their size.

“Notice there is no S word in that proposition—good service is a given now, and it’s not a competitive advantage anymore,” Myers says. “We believe to be really competitive and capable, you have to communicate and sell beyond just service. There’s got to be something extra that you offer to help your clients succeed.”

That advice of providing more to clients applies to all banking facets of a lending relationship.

Before the Wall Street financial crisis, many banks were allured by seemingly easy and profitable collateralized lending to real estate developers or homebuilders. The yields were good, says Jeffrey Harp, president of $200 million-asset Trinity Bank in Fort Worth, Texas.

“It’s harder to grow companies or find new ones to help,” Harp says. “One banker told me that he would never do a deal secured by inventory when he could secure by ‘dirt’—dirt was not going anywhere.”

Big banks and regionals initially reduced their concentrations of commercial real estate loans following the financial crisis, but many are coming back into the business loan market in the Fort Worth area, and competition is heating up again, Harp says. “If we can get borrowers to focus on relationships instead of price, we win a lot of those deals,” he says. “But if somebody sends an RFP to 12 banks, we don’t even fill them out.”

Instead, Trinity Bank’s business lenders try to figure out how to structure a deal that best fits what a particular borrower is trying to accomplish. For example, a large construction subcontractor was considering refinancing with a large bank for a package that included an operating line of credit, equipment loan and an owner-occupied real estate loan. While Trinity Bank’s interest rate offer was 2 percentage points higher, its lenders told the subcontractor that the firm could get an answer within one or two days—and that if the subcontractor “ever breached a loan covenant, they wouldn’t be automatically sent to the workout division.”

“Sure enough they had real issues with a supplier and lost a lot of money, but we worked them through that,” Harp says. “They told us that if they had stayed with the big bank, they would have been out of business by then.”

In Bryant, Ark., Heartland Bank also knows the value of structuring deals to fit the needs of customers, says Phil Thomas, the bank’s chief lending officer.

Heartland Bank, which has $195 million in overall assets, recently funded a working line of credit against inventory and receivables, as well as the construction of a new plant for a high-tech company with no revenue history. Since a traditional business loan was out of the question, the bank packaged a portion of the deal into a participation loan funded through a bond issue.

As the lead lender, Heartland Bank originated a $25 million credit on a project that involved a U.S. Energy Department grant, new market tax credits and a USDA guarantee. The bank’s exposure was limited to the 5 percent unguaranteed portion, and Heartland Bank is now realizing servicing fees from an insurer and a private equity group who purchased the guaranteed portion of the bonds.

For conventional business lending, a bank should not hesitate to obtain outside resources for assistance—particularly “on the legal side of the fence,” Thomas says. “The collateral for C&I loans are some the hardest types to perfect—it’s not like a piece of land where you can just file a mortgage on it.”

For example, Heartland Bank has several clients who want to pledge as collateral an ownership interest in their companies in the oil and gas industries. “Sometimes their business agreements are not made with a lender in mind,” Thomas says. “A lender has to make sure they’ve got liens properly perfected, and they can’t do that without strong legal counsel who understands those industry issues.”

Katie Kuehner-Hebert is a writer in Running Springs, Calif.