A Conversation With ... Don Cowherd

How would you characterize the commercial lending market right now?
I would call it competitive, recovering and say it has opportunity. From the borrowers standpoint in the market we are in right now, just as on home loans, the interest rates are as low as I have ever seen them in 30 years. The prime rate is 3.25 percent right now and I have seen five-year fixed rates around 5 percent. There is a lot of opportunity for commercial borrowers to lock in a better rate. The competitive part, right now, is banks as a whole have a lot of excess deposits. Those deposits aren’t really earning any real return for any banks – such as cash or government securities – those rates are below 1 percent. Everybody has the same problem and everybody is looking for good loans, so that drives down the interest rate and makes banks more competitive.

What changes have lenders instituted since the recession and the enforcement of the Dodd-Frank Act?
When you have a downturn like that, all of your shortcomings really show up. We have tried to do a better job of understanding the deal. We analyze the repayment ability of the borrower and the asset. We try to really look at the numbers and make sure the cash flow is there to produce the income that it takes to service the loan, a focus on debt coverage. We also look at a global picture of the borrower more than we used to. What we have found is your deal may be great, but if your borrower has three other deals and they are problems, that takes away from your asset. We look closely at the equity in the project. For a new commercial loan on a shopping center or apartment building, we want to see 20 percent in equity and we prefer that in cash. When things are really rolling, inflation is covering up your mistakes and the properties are going up in value, you can loan a higher loan to the value of collateral. Now, we have found that the people with real equity are the ones who survive. However, some of the borrowers, through no fault of their own, may be dealing with a bank that is failing or having regulatory issues.

What type of loans are you approving most often?
It’s almost easier to talk about the types we don’t see. We don’t do many land development and the speculative loans for land. Those are the assets that are hardest to finance. At one time, we had a large percentage of our loan portfolio in real estate development, both residential and commercial. Now, most of the things we are seeing are income-producing commercial properties.

How do commercial loan volumes in 2012 compare with the last few years?
We are climbing our way out. What we have found in the downturn is what I like to call a zero-sum game – for every loser there is a winner. As these asset values have gone down, other buyers have come in and picked those up and reset their debt level. We have seen loan requests go up about 10 to 15 percent since over last year. Things have gotten stronger and we have seen debt coverage ratios get stronger. Borrowers and lenders are smarter than they used to be because we have learned from our recent mistakes.

How does the Springfield market compare nationally?
Springfield has always been in sort of a bubble. This is probably the first time Springfield took as big of a hit as it did, as big as the national hit. Generally, the national market is the East and West coasts, the Midwest is typically the stable side. This time, in 2009, ‘10 and ‘11, Springfield got a good dose we didn’t see coming. We were overbuilt in some areas, but not to the extent that we can’t recover.

Will the outcome of the impending “fiscal cliff” affect the commercial lending market?
The biggest effect is the unknown. I have seen more apprehension since this deadline is looming than I have in years because it affects so many people. So many of our small-business owners have their businesses set up in a limited liability company where some of that income blows back into their personal taxes.

You don’t have to be a very wealthy person if you are a business owner and have lots of employees to have $250,000 in income. It’s a big problem. If we know what we have to deal with, we can deal with it; it’s the not knowing that’s hard.[[In-content Ad]]