26 Sep Private Lending Fills a Void Left in Wave of Northeast Bank Mergers
The number of banks serving borrowers in New York, Massachusetts, Connecticut, Rhode Island, and New Hampshire continues to decline as mergers have come to dominate the strategic thinking of many regional and community banks. 2015 and 2016 were record setting years for mergers throughout the region as loan growth has been stifled by increased regulation and strict requirements that prevent banks from meeting the credit needs of potential borrowers. As banks look to increase assets, acquisitions present an easier alternative to the months long ordeal of sourcing, underwriting, and funding a loan portfolio.
Boston University Law School professor and bank merger expert Kevin J. Handly points out that many mergers involve institutions in “the same or adjacent communities seeking to spread the increasing costs of technology and regulatory compliance.” Those fixed costs and the accompanying regulatory scrutiny prevent banks from lending to many of the most underserved business owners. Dodd-Frank looks to create substantial headwinds for borrowers for the foreseeable future.
Commercial real estate loans (CRE), for example, have become particularly difficult to obtain at community banks. As banks have grown through mergers, the economics of holding CRE are no longer attractive. There is simply too much regulatory pressure on CRE that banks emerging from an acquisition or consolidation are unable to justify holding that portfolio. For real estate developers/investors and business owners looking to pledge CRE as collateral, that reluctance to lend on CRE effectively shuts them out of the conventional lending arena.
Even conventional commercial loans are difficult to fund as minor issues with collateral or earnings, often the reason for seeking a loan in the first place, prevent banks from lending on regulatory and compliance grounds. The successor banks from the mergers throughout the Northeast are too big to rely on anything other than a formula driven underwriting. Given the headcount and fixed costs of managing a larger bank, the most attractive loans become the largest loans, leaving many small and medium sized the Northeast businesses struggling for traction with traditional lenders.
Further complicating matters is the loss of relationship based business that occurs when a local community bank merges with a larger institution. Legacy customers often see their standing with their lenders evaporate overnight. What was once a relationship based on history and trust becomes one based on numbers. For smaller borrowers, the loss of that relationship can be devastating to their capital needs.
With community and regional banks retreating from the lending space, alternative financing sources such as private lenders have stepped in to provide the capital necessary for small and medium sized businesses as well as locally focused real estate developers/investors. Private lenders can provide capital and liquidity where banks will not as the lending decision is based on a real assessment of credit worthiness rather than how well a potential loan checks the boxes in a standardized and bureaucratic review process.
Working with a private lender is often significantly faster and requires a less intrusive underwriting than working with a community bank. Private lenders, free from regulations like Dodd-Frank can still provide the high-touch customer driven experience many small borrowers require. Given the consolidation of the banking industry across the Northeast, alternative financing and private lending are poised to help an even greater number of small businesses.
Worth Avenue Capital, LLC has been in the private lending business throughout the Northeast and Florida since 2008. The company has helped many clients faced with a loss of their community banking relationships with its emphasis on customer focused alternative financing. If you would like a consultation on your borrowing needs, please contact us.