Thought Leaders: Andrew Backstrom on Today’s Commercial Lending

1. What makes a project attractive when you are considering funding?

On the investor CRE front, it would be supportable (and realistic) NOI projections that generate debt coverage of 1.20x plus at stabilization, or a solid, verifiable take out source (sale/permanent financing) at completion of the project. We also look for sponsors/owners that have an established track record and high personal character (have they kept lenders whole through tough times). On the corporate banking front (operating lines of credit, equipment loans, owner occupied CRE, etc.), we look for profit­ability and strong recurring cash flow from operations that can cover debt service, recurring Capex at 1.15x or greater.

Financial metrics aside, a very desirable factor is a true, long-term relation­ship with the client. This means that the client/borrower is serious about moving other ancillary business (deposit balances, personal banking, eq­uity & fixed income investments) over to the bank to make our relationship ROE’s desirable. Loans are actually a very low margin product for banks – often with net spreads of well under 2.50%. Imagine trying to attract an equity investor with that kind of return, especially when you can get 4-5% on a simple Money Market account.

2. Once you have interest in funding a project, what are the next steps?

We work closely with the client to answer all of the “why’s” behind the historical and projected financials. At this juncture, we also gather infor­mation on the history, management, and the product/market that the client serves so that the full story can be told. This is then put into a formal write-up (Credit Memo) that we present to a credit approval officer or loan committee. At this point, we also begin gathering all of the formation/entity documentation and any required appraisals to make for a timely closing on the back end.

3. What are the biggest roadblocks you see when customers approach for funding?

On the client side, it would be inadequate cash flow and/or lack of a solid take-out source (discussed above). From the bank side, it would be an overly restrictive credit approval environment or a specific industry or project type that the credit team is not comfortable with. As already stated, a financing only project with no long term relationship component can be a big hurdle, as the ROE is simply too low – bank CEO’s are really holding their ground on this right now.

4. How can they offset those roadblocks?

The client really needs to be detailed and forthright in their explanations of weaknesses in the historical financial statements so that the lending officer has a solid story to tell when presenting up the chain. Second, help us mitigate noted weaknesses. For example, if historical cash flow has some weakness, maybe offset with verifiable projections or pledging of additional collateral until the weaknesses correct.

5. When you consider funding, how much of that calculation is based on the developer versus the project itself?

This can vary by bank (credit culture) and by stage of the economic cycle. I am a classically trained corporate banker, so I will always assert that we look to our primary repayment source first (the project or business) and the developer/sponsor second if things do not go as planned. I have seen construction/development specific bankers that put more weight on the developer, but this is not as common.

However, if we have a developer with substantial financial strength that is diversified, it is possible to make credit policy exceptions on the underlying financial strength of the project itself. If they have multiple avenues to get the bank repaid in a timely manner, then it is somewhat logical that a bank­er would take on more risk on the project side. Again, we have a mitigating factor in place.

6. What are your goals in your role in Northern Nevada?

My primary goal will be to build Customers Bank into the best commercial banking franchise in our state. This will be accomplished by remaining flexible and creative in our commercial financing solutions, growing our deposit base through high touch, single point of contact service; and continuing to recruit the top banking talent. At $21 Billion in Total Assets, Customers Bank is the perfect size to be more flexible and innovative than the larger, national banks, yet still large enough to be product and price competitive with the largest national bank brands.

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Andrew Backstrom holds a B.S. in Finance and Economics from San Jose State University and an MBA in Finance from the University of Nevada, Reno. With 33 years of experience in corporate banking, Andrew has held various senior-level positions at U.S. Bank, Bank of the West, and Customers Bank, including Senior Credit Officer, Market President, and Team Leader. He has successfully funded financing facilities ranging from $2 million to $750 million, with a focus on corporate borrowing entities with credit needs ranging from $3 million to $60 million. Over his career, Andrew has financed over 150 real estate transactions across all sectors, including multi-family, office, retail, and industrial. Currently, he serves as the Northern Nevada Group Director (Corporate & Specialty Banking) for Customers Bank, a $21 billion banking franchise headquartered in Pennsylvania. In this role, Andrew is excited to lead the growth of this brand-new geographic market for Customers Bank into a major player in the region over the next 3-5 years and is proud to serve as the current Treasurer of NAIOP Northern Nevada.