Banks, businesses spar over flow of financing

Taxpayer money intended to stabilize the country's financial system has found its way to two Springfield-based banks, but some local businesses say the bailout bucks seem to have stopped there.

Executives at the two banks - Great Southern and Guaranty - acknowledged that underwriting standards are more restrictive and interest rates higher than in years past, but they said loans are still available for low-risk borrowers.

"The bottom line is that for good customers with good financials, a good management team and realistic expectations for the future, there's plenty of available credit," said Shaun Burke, president and CEO of Guaranty Bank. "Our loans increased over 18 percent in 2008, so we have been very active in providing credit to our community."

Guaranty Bank (Nasdaq: GFED) has agreed to sell $17 million in preferred stock and related warrants to the U.S. Treasury through the department's Capital Purchase Program, which seeks to recapitalize financial institutions and stimulate lending to businesses and consumers. The program is one of many rolled into the $700 billion federal bailout plan - known formally as the Troubled Asset Relief Program, or TARP - approved by Congress in October.

Burke said Guaranty Bank has every intention of complying with the program's stated purpose, but he pointed to an important distinction.

"The government is not mandating that we make loans that are not issued in a prudent fashion," he said. "I don't think that their intent was that we would immediately employ all that money back into the community through lending if the economic viability of our businesses and consumers could not support that lending."

Great Southern (Nasdaq: GSBC) also is exercising discretion to ensure that it safely navigates the choppy economic waters. The bank sold $58 million in preferred stock and warrants to the Treasury in early December.

"You don't underwrite loans in a vacuum," bank President and CEO Joe Turner said. "You underwrite loans fully cognizant of the economic circumstances. ... Does this particular customer have the wind at their back or are they going into a headwind? And if they're going into a headwind, you have to make sure there are other factors which compensate for that risk."

Developer's dilemma

Springfield apartment developer Sam M. Coryell considers himself a creditworthy businessman with a proven track record of repaying construction loans, but his good standing seems to carry less sway these days.

Coryell said local banks appear uninterested in financing a $10 million apartment complex he wants to build on South Lone Pine Avenue in the Galloway area. He said he's floated the proposed 138-unit project to at least six banks, including longtime lending partner Great Southern.

"I love Great Southern Bank," he said. "They are one of the banks that - early in my career - took a chance on me and gave me loans when other banks wouldn't," he said. "On the other hand, knowing that they got the ... TARP money, I have not detected in my conversations with them that they're loosening their restrictions on their lending practices. It's frustrating. I'm trying to do my part here."

Coryell said Great Southern's terms require him to purchase the land outright at a cost of $700,000 and open a deposit account with roughly $250,000 to cover the loan interest.

"That's a million dollars I have to bring to the table - cash," he said, adding that the bank has requested access to "global cash flow" statements on all his rental properties.

If he's unable to secure a loan, Coryell said he would have to shelve the construction project, which means less work for eager contractors and subcontractors he regularly hires to build and finish his apartments.

"I don't doubt that (banks are) still making loans, but they're not making loans to people that create jobs," Coryell said. "I'm no big player ... but I do create and sustain a lot of jobs."

Real estate development loans are among the riskiest right now, said Great Southern's Tuner, who pointed to widespread instability in the housing sector.

A slowdown in new construction combined with declining property values and sluggish sales aren't reassuring, especially for lenders like Great Southern, which reported a $4.7 million loss for 2008. Last year, the bank wrote off $35 million in loans made to ANB Financial, an Arkansas-based bank that collapsed in May. ANB's loan portfolio was heavily weighted toward real estate development and residential construction projects in northwest Arkansas and Utah.

Coryell said he fully understands the bank's trepidation, but he remains concerned about the "snowball effect" of frozen credit on a local level. Fewer construction projects could mean higher unemployment, and unemployed people who can't pay their bills may default on loans, causing banks to tighten up even more, he suggested.

"I don't even really mind the scrutiny," Coryell said. "Probably the reason why we are where we are is because the banks were a little too footloose and fancy-free. All I'm asking is don't throw the baby out with the bathwater."

Compromise on the table

Small businesses unable to borrow money at affordable rates have few choices, said Steve Crowder, CEO of Springfield-based home furnishings wholesaler Decorize Inc.

Crowder has been an outspoken critic of what he says are inflexible lending practices taking root locally. His efforts to establish a new line of credit for Decorize subsidiary Guildmaster were either rejected by area banks or met with much higher interest rates than in years past.

"I think they've gone to the mattresses," Crowder said. "My concern is ... let's not kill all the small businesses during this readjustment period, because long term, this is the engine that drives not only the nation, but definitely the Springfield economy."

Local banks participating in the Capital Purchase Program have more of an obligation to extend financing at reasonable rates to area businesses, Crowder said, arguing that banks wanting to build their deposits should be lending to companies that employ area residents.

"We know at the end of this we are going to pay a higher cost of capital," he said. "We're going to pass that price along so somebody buying a lamp or a piece of furniture later on is going to pay a higher price. It's just a vicious circle."

Guaranty Bank's Burke said businesses have historically adapted when banks raise interest rates to cover their spread.

"Most customers understand that," he said. "They understand that loan pricing ... is a risk-based model. And when cost of funds goes up, they have to adjust accordingly."

Both Burke and Turner reiterated that the Treasury stock purchases in their respective banks are not a government handout. The Treasury receives a 5 percent dividend annually on the preferred stock for five years and a 9 percent annual dividend each year after that.

"This wasn't a grant by the U.S. Treasury to Great Southern," Turner said. "We're paying interest in excess of what these businesses are complaining about paying. ... On a pre-tax basis, we're probably paying over 7 percent to borrow that money."

As the impasse continues, Crowder has turned his attention to a new small-business financing model being floated by Montana businessman Andrew Field, who recently wrote a commentary piece for Forbes.

Field, who said federal bailout money has not found its way to small- and medium-size businesses, has proposed securitizing low-interest loans available through the U.S. Small Business Administration with small-business jobs. He has specifically suggested a $20,000 unsecured loan for each full-time employee.

"If a small business reduces its head count, a pro-rata portion of its loan must be repaid immediately," Field wrote. "If the business expands its head count, it would gain access to another $20,000 of credit for each net new employee. This provides a powerful incentive to keep and grow the small-business work force."

Field has forwarded his proposal to Sen. Max Baucus, D-Montana, who chairs the Senate Finance Committee.