Alaska Pacific Bank is done sharing loans with large groups of other banks.
The $196 million-asset bank had participated in several large out-of-state loans with dozens of other banks, but three of the loans recently went bad. Now it will join in only on loans made by Pacific Northwest banks it knows well, its chief executive officer says.
"We'll continue to participate in loans with banks with whom we are familiar, as a way to diversify our portfolio geographically," said Craig Dahl, the CEO of the Juneau bank and its parent, Alaska Pacific Bancshares Inc. "But it's unlikely we'll engage in any more large consortium loans, because we just have too little control over what happens."
Loan participations have dropped industrywide as many community banks have shied away from getting in on other banks' loans, bankers and consultants say. Though aggregate data on participations is not available, industry experts say there is anecdotal evidence that in the slowing economy banks have become increasingly skittish about these loans.
Participations are also down because banks are scaling back on lending in general to shrink their balance sheets and preserve capital. Losses mainly on residential construction loans have eaten into capital at many banks, particularly those in high-growth areas of the West and Southeast.
Nonetheless, community banks interested in participation deals should have no trouble finding them, especially since larger banks and conduits such as pension funds are not serving as the lead lenders on loans as much as they were in the past, and they are not providing "take-out" loans for completed commercial construction projects.
Steve Brown, the CEO of the $504 million-asset Pacific Coast Bancshares in San Francisco, the parent of Pacific Coast Bankers' Bank, said participation opportunities have actually increased over the last six months, but the amount of deals being completed among its member banks has declined.
"Banks who haven't been able to raise capital are trying to lay off some of their loans on other banks, but then other banks are also trying to shrink their portfolios at the same time, and so not as many deals are getting done," Mr. Brown said.
He said participations also are taking longer to finalize because many banks have tightened their underwriting standards, which means the lead banks' borrowers have to do more paperwork.
The participation loans getting done are mostly for the purchase of commercial real estate, particularly offices and apartments. Those willing to join in on commercial construction loans usually do so if the project is nearing completion and has already demonstrated some cash flow, Mr. Brown said.
The market for residential construction loans is virtually nonexistent, he said.
Alaska Pacific Bank got burned on three residential construction loans, including one for a condominium project in Orem, Utah, in which 42 banks had participated. If not for those loans Alaska Pacific would have had a profitable second quarter, but instead it lost $761,000, taking a $1.6 million provision for loan losses. Its provision in last year's second quarter was just $45,000.
Umpqua Bank in Portland, Ore., historically has been the lead bank in many participation loans, but these days fewer banks are willing to come to the table, said Brad Copeland, the chief credit officer for the unit of the $8.3 billion-asset Umpqua Holdings Corp.
While the reasons may be varied, some banks have told Mr. Copeland they have enough commercial real estate loans in their portfolios and are worried about increasing their concentrations.
Likewise, a number of banks in the Midwest are passing up on participation deals because during bank examinations regulators voiced concerns about the concentrations of their CRE portfolios, said Bill Lloyd, chief lending officer at the $364 million-asset Midwest Independent Bank, one of two bankers' banks owned by Midwest Independent Bancshares Inc. in Jefferson City, Mo.
"These banks need to think twice" about putting additional CRE loans on their books, "because of the regulatory environment we're in," Mr. Lloyd said.
Still, some participations are being done for CRE loans in the Midwest, particularly for the purchase of existing strip malls and hotels, and to a lesser extent for the construction of new projects in those sectors.
Richard A. Soukup, a partner with the Chicago office of the consulting firm Plante & Moran PLLC, said most Midwest banks tend to join in only on loans made within their markets by other local banks. But those banks still interested in out-of-market deals find they have "completely dried up in the last six months."
In the northern Plains, even in-market deals have withered, but mainly because of the slowdown in the economy there, says Richard Solberg, the CEO of the $1.8 billion-asset State Bank and Trust, a correspondent bank in Fargo, N.D., which typically is the lead bank for participation deals in the Dakotas, Minnesota, and Iowa.
Brian Bueche, the chief lending officer at Silverton Financial Services Inc.'s Silverton Bank in Atlanta, a $2.9 billion-asset bankers' bank that coordinates participation deals nationally, said its business has slowed down.
"Larger banks and conduits have pulled away from the correspondent side of banking, so that has created an opportunity for community banks to participate on loans for income-producing commercial properties," such as apartments and retail stores, Mr. Bueche said. Still, like the loans of its counterparts, Silverton's loans are taking longer to complete.
