Banks, borrowers using federal collateral for loans

Cordy Rost needed to expand the frozen-food packaging company he co-owns in Canyon County, but he ran smack into the recession hangover.

The land he wanted to use as collateral for his construction loan had lost so much value, his bank couldn’t make the numbers work.

That’s when a modest-sized federal program, in partnership with Rost’s bank, swooped in with enough cash to turn a dilemma into a solution.

Rost’s is one of dozens of Idaho companies seeking to build or expand that have received loans thanks to the federal Collateral Support Program, through which the federal government supplies part of the required collateral.

Twenty-three Idaho banks are participating in the program, which started in 2011.

The program helps borrowers that would otherwise qualify for a loan but lack sufficient collateral. Several bank executives say the program has been especially useful for construction projects, since falling real estate values have made the land being built on an inadequate source of collateral.

In Idaho thus far, 70 loan applications have been approved, with 53 loans made. While the collateral helps lower the loan-to-value ratio of a potential loan, lenders with several banks said they still rely on other standard measures before approving a loan, including a borrower’s credit, business plan and cash flow.

All told, the approved Idaho loans have received $4.3 million in federally backed collateral, which has unlocked $25.7 million in private lending. The Idaho Housing and Finance Association, which runs the program on the state level, provides the federal collateral to banks on a first-come, first-served basis to banks for loans that meet program requirements. As long as there’s money available, the IHFA will fund up to 20 percent of the needed collateral in a short-term loan

The federal government allotted Idaho $13.2 million for the program, with the state receiving the first quarter, $4.3 million, up front. The IHFA has asked the U.S. Treasury Department for the next $4.3 million for the program to continue providing collateral for loans. Once the loans in the program are repaid, the federal collateral can be used in other loans.

“It’s that missing piece, if you will,” said Rob Aravich, senior vice president at U.S. Bank in Boise. He said with conventional loans, some businesses can show enough profitability to make payments and a good plan for loan proceeds. Still, they fall short of qualifying because banks must accept the appraised values for land a prospective borrower wants to use as collateral.

The federal money fills the gap between the collateral the borrower offers and that which the bank requires, he said.

After the bank approves a loan, the IHFA deposits the federal cash in the borrower’s bank. Only if the loan goes into default and all other collateral has been exhausted may the bank draw from the federal money.

Rost received a loan from Home Federal Bank early this year, along with a U.S. Small Business Administration term loan. He is using the proceeds to build a cold-storage facility west of Caldwell. His company, Idacold Packaging, will be renamed Zoroco Packaging when the new, 37,000-square-foot facility opens.

“We need more space,” said Rost, whose company bypassed the recession. “We’ve been growing over the past five years over a rate of 20 percent a year.”

Idacold packages frozen fruit and vegetables, working with many of the region’s large food-processing companies. From the Idacold plant, the frozen food goes to food-service companies as well as to retail stores and restaurants. The company has more than 50 employees, according to Rost.

Rost said getting the loan, with the help of federal collateral support, was a no-brainer because the monthly SBA loan payment on the new, larger space will be similar to the current rent on a smaller space in Nampa.

“Without (the federal collateral), we either would have had to inject more collateral, or I would have had to reduce my loan amount, which could have stalled the project,” he said.

Warren Kouba, vice president and commercial banking relationship manager at Home Federal, handled Rost’s loan with the bank.

Kouba’s colleague Justin Archuleta, also a vice president and commercial banking relationship manager at Home Federal, said the program allows banks to lower their risk while lending to reputable borrowers.

The lending program created a lasting relationship with Rost. Once Zoroco opens its new facility in November, the federal collateral will go back to the IHFA, with the new building serving as collateral for Rost’s SBA loan with the bank.

The Collateral Support Program is working in other parts of Idaho as well. Key Bank in Boise has used the federal collateral to offer a loan to a veterinary practice in eastern Idaho. And Bryant Searle, commercial relationship manager with Zions Bank in Idaho Falls, said several construction loans have needed the federal support.

“With the way the economy has worked out with real estate and most assets in general, the values are coming in low,” Searle said. He cautioned that the program won’t work for all banks or borrowers, as borrowers still need to meet the banks other loan requirements.

Some banks also don’t view the program as a good or necessary fit. Wells Fargo Bank isn’t participating in the program, though Todd Cooper, the bank’s Idaho Region Business Banking manager, helped the IHFA, Idaho Bankers Association and Idaho Department of Commerce develop the program. He said he supports the program, but that Wells Fargo has no need to use it.

“We felt like we could accomplish the vast majority of the goals of the program with products and programs we have,” Cooper said. He said that, especially with existing customers, the bank is more interested in the borrowers’ creditworthiness and ability to make payments than with adding federal collateral to improve the loan-to-value ratio on a loan.

Bank of the West, another multi-state bank, is also sitting out the program for now.

“We are continually evaluating the best products and services to help us meet the long-term financing needs of our Idaho small business customers,” said George Glines, Bank of the West’s senior vice president and national SBA manager.

Loans under the Collateral Support Program are open to companies with fewer than 500 employees using proceeds for business purposes. The program lasts through 2016.