December marks five years since the official start of the Great Recession, and the world has become a dramatically different place.
Many consumers are more focused on saving than spending. And business owners are more apt to consolidate operations than expand them.
Those changes have created both challenges and opportunities for bankers.
As more people pay down debt and build up savings, banks have more money on deposit. That means more money to lend. The challenge is to find folks who want to borrow – and have the ability to pay the money back with interest.
Local competition for those high-quality commercial loan applicants has become pretty aggressive, said Mike Cahill, Tower Financial Corp.’s president and CEO.
Fort Wayne-based Tower’s bankers aren’t alone in that arena.
Ron Hostetler, Wells Fargo’s Indiana business banking manager, agreed that banks across northeast Indiana are aggressively building loan portfolios.
We want to make every good loan we possibly can make, he said.
And that means considering a large pool of potential loan applicants. Business owners often ask Hostetler which industries Wells Fargo lends to.
We lend to all industries and all businesses, he said. What we want to lend to is well-managed and profitable companies.
Banks have limited ways to earn a profit. Most revenue comes from charging interest on loans and fees on services. In the simplest terms: If a bank paid interest on savings accounts – even a paltry percentage – but didn’t lend that money to another customer at a higher interest rate, it would lose money.
As a result, banks are very motivated to lend – when the loan applicant is on solid financial footing. But, in general, business owners who have paid down debt are reluctant to take out new loans, Hostetler said.
I think a lot of people are just kind of holding back, he said.
Rod Lasley, the Indiana Bankers Association’s vice president of products and services, said the advocacy group has seen member banks statewide scramble to compete for borrowers that can put up higher down payments and meet other requirements.
And just because companies could afford to borrow doesn’t mean they wanted to.
Businesses have been pretty reluctant to expand and build up inventories with the economy the way it was, he said.
But some of those concerns could be waning.
Consumer confidence unexpectedly improved in September to 79.2 from 74.3 the previous month, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment. Consumer confidence reflects regular folks’ optimism about the economy. The statistic is vital because consumer spending accounts for about 70 percent of the U.S. economy.
The benchmark of 100 was set in 1985. During the recession, the index averaged 64.2. In the five years before the recession, the average was 89.
Business borrowers also seem to be a bit more confident.
The Commerce Department reported this month that business inventories grew by 0.8 percent in July and sales increased by 0.9 percent. Total business inventories increased to $1.59 trillion.
When companies stock up their storerooms, it means they expect sales to climb. It also creates more demand on manufacturers, which might need to hire more workers, potentially cutting into the U.S. unemployment rate, which was 8.1 percent in August.
The Federal Reserve has also given business owners a reason for hope. On Sept. 13, the Fed announced plans to buy $40 billion of mortgage-backed securities a month until the economy and job market are on firmer footing.
Buying these securities will take them off the market and force banks, corporations and investment funds to look for investments elsewhere. That helps the economy. For example, if additional money flows in to stock markets, share prices would climb.
Some of the region’s banks reported commercial loan growth in the second quarter – the months of April, May and June – as compared with the same period of last year.
Lakeland Financial Corp.’s commercial loans totaled $1.88 billion for the period ended June 30, a 4 percent increase over last year’s second quarter. That number includes loans made to farm operations, apartment complexes and other commercial real estate.
The Warsaw bank’s industrial loans totaled $789 million, an 8 percent increase over the second quarter of 2011.
Fifth Third Bank’s second-quarter earnings also show an increase in commercial lending. The Cincinnati-based bank’s commercial loans and leases increased to $46.9 billion, an 8 percent improvement compared with last year’s second quarter. The category includes $32.7 billion in industrial loans, which was a 17 percent increase from the previous year’s second quarter.
Tower Bank has grown its loan portfolio a few times recently by cooperating with some competing lenders to make loans larger than any of the community banks could comfortably make on their own.
Those deals happened when the borrowers had trouble refinancing existing loans that came due, said Cahill, Tower’s CEO. He thinks various Wall Street-based lenders are less inclined to work with a company that owes a higher-than-desired percentage on a property than local or regional lenders are.
More companies have run into debt-to-value ratio problems with new assessments made after the real estate market collapsed. But those business owners with a solid loan payment history can still be good borrowing prospects, Cahill said.
And as the banker put it, any company that has weathered the recession and survived has shown real resiliency.