An unpredictable economy has weakened the demand for commercial loans.
In the Rochester market, the total dollar volume of U.S. Small Business Administration loans dropped 20 percent in fiscal 2009. Some bankers, however, maintain that their commercial loan volumes in 2009 were up from the previous year.
As businesses struggle, bankers are looking to avoid perilous transactions by ramping up scrutiny and oversight when they extend credit. Lenders are closely watching the financial performance of their borrowers, charging higher interest rates, asking for more collateral and repayment guarantees and making loans based on lower advance rates.
The big question that bankers are asking: Can this client repay this loan?
"We look much closer at financial performance, and we make sure we understand their history and spend more time on reviewing that history certainly than we ever have before in my career," says Stephen Brennan, business banking regional manager for Greater Rochester at First Niagara Bank.
Brennan worked at JPMorgan Chase Bank N.A. for 27 years before joining First Niagara in 2006. He brought three other Chase bankers with him to First Niagara and beefed up the bank’s commercial lending strategy. Since 2006, the dollar volume of commercial loans at First Niagara has increased 235 percent. In 2009, it increased 28 percent over 2008, including commercial real estate transactions, he says.
To improve the commercial lending process and mitigate risk, First Niagara now studies interim performance of a borrower instead of waiting 12 months to 16 months to get financial performance reports. First Niagara also takes a look at a client’s financial goals.
"I always knew as a banker when I didn’t get financial statements that it probably wasn’t good news. When it was on time or in advance of when it was due, things probably were going well," says Robert Seiwert, a business banking expert with the American Bankers Association in Washington, D.C.
Genesee Regional Bank also pores over financial reports from clients more frequently.
"I think monitoring certainly has increased. Bankers certainly are paying more attention, looking more closely on a monthly or quarterly basis," says David Halladay, chief credit officer at GRB.
The larger the loan, the greater the monitoring.
In the past GRB looked at certain financial records on a quarterly or annual basis. Now some borrowers provide monthly statements. The community bank has grown its loan portfolio: From 2008 to 2009, volume was up 29 percent in committed commercial loans, including lines of credit.
In the fourth quarter, GRB received many financial projections for 2010 from clients.
"Around the June time frame, we’ll review to see if (those) swing one way or another," Halladay says.
At First Niagara, one part of the bank’s strategy is to visit the top 25 percent of its clientele quarterly, Brennan says.
"We can’t wait a full year," he says. "We’re looking at how they did that quarter, their sales levels and where they’re going, those types of things."
All other clients are visited at least a couple of times a year. Brennan estimates that 80 percent of the time First Niagara lenders are in the field. They want to understand their clients and learn their strengths and expertise.
"In difficult economic times, we can help the customer weather these conditions," Brennan says.
A few months ago, a First Niagara lender helped a struggling manufacturer by offering advice and guidance on reducing expenses. The customer adopted these changes and ultimately improved profit-ability, Brennan says.
"A lot of businesses have struggled," he adds.
Daniel Burns, Rochester regional president of M&T Bank Corp., agrees that a lot of business owners are struggling.
"Demand (for loans) is down. I get the feeling people are waiting it out," looking for signs of an economic recovery with staying power, he says.
Adds Burns: "Looking forward, my sense is that we haven’t bottomed out yet, that we’ll bottom out later."
The economy has affected commercial loan interest rates as well. They are going to be higher, with an added degree of risk in making the loan, ABA’s Seiwert says.
Says Burns: "Like most businesses, higher costs of doing business make it difficult to keep borrowing rates at the low levels that existed a few years ago when the supply of credit in the marketplace exceeded demand."
Banks have had to manage rates or margins carefully in the past year because of higher costs associated with increased regulation, Federal Deposit Insurance Corp. insurance costs, liquidity premiums and the lower interest rate environment.
M&T, which does business in seven states, saw a 4 percent increase in commercial loans last year. The volume of these transactions, which included commercial loans and leases and commercial real estate, was $34.4 billion in 2009, up from $33.1 billion in 2008.
The percentage of loan growth for the year was very similar in the Rochester market, but the bank does not disclose a breakdown of its total loans by community, officials say.
The lending climate today also is marked by lower advance rates-a reduction in how much an institution is willing to lend as a percentage of the borrower’s collateral, ABA’s Seiwert says.
Before the recession, advance rates typically were 75 percent to 80 percent of accounts receivable, whereas today the norm is closer to 50 percent or 60 percent, depending on the borrower’s industry, Seiwert says.
"The quality of accounts receivable today is not as good," he says.
Advance rates are used to ensure that the secondary source of loan repayment or collateral will be sufficient to pay back the entire loan, if there is insufficient cash flow from the business, Seiwert explains.
Nationally, he says, more bankers are placing a greater value on secondary guarantees for loan repayment in the form of owner guarantees, shareholder guarantees and collateral or business assets.
Collateral coverage also has been affected by depressed real estate markets and lower property values.
"We often find that we have less collateral coverage on certain loans than in the past. We are responding by looking at SBA programs, for instance, to shore up collateral shortfalls," says Thomas Dunning, commercial banking team leader for KeyBank N.A. in Rochester.
Other bankers also use SBA-backed loans, which can offset some of the risk of lending to small businesses. There were 325 7(a) loans made in the Rochester market during 2008-09, with a total value of $33.3 million, down 20.1 percent by dollar volume from the previous year’s 414 loans worth $41.7 million.
"Loan demand in general was soft last year, reflecting business owners’ uncertainty associated with overall economic conditions," says Dunning, who has yet to see a company whose revenues have not been affected by the downturn.
KeyBank’s 2009 commercial loan volume was down from 2008 because of repayments coupled with lower demand, Dunning says.
The bank made roughly $32 billion in new or renewed loans to new and existing consumers and businesses in 2009. It does not break out local or state numbers and did not disclose numbers for 2008.
KeyBank, however, started noticing an increase in loan demand from small businesses during the second half of 2009, and that trend is continuing into 2010, Dunning says.
"The challenge in 2010 is that some companies are coming off of difficult years and, as a result, don’t have the same cash-flow capacity they have had in the past," he says.
Dunning says the current lending environment is causing KeyBank to look more closely to determine whether the cash-flow capacity of a borrower is likely to recover and how long that recovery will take.
KeyBank lenders also look at how companies have responded to the economic slump, what adjustments they have made to find new revenue sources and reduce expenses, and whether their forecasts are reasonable.
JPMorgan Chase also has seen an impact on its commercial loan portfolio.
"Overall (loan) demand is down. You can take a horse to water, but you can’t make it drink," says Malcolm Wolcott Jr., president of Upstate New York banking at Chase.
Last year in the Upstate New York region, Chase reported an increase in loans and lines of credit in comparison with 2008, but usage of those lines of credit by businesses was down, officials say.
"Many businesses were not using their working capital because they were selling existing inventory," Wolcott says.
In addition, business owners have been reluctant to make big purchases or undertake major expansions because they are concerned about their expenses, including health care, energy and taxes, he says.
In New York last year, Chase made nearly $11 billion in loans and lines of credit to 13,644 small and midsize businesses. That included 10,535 loans totaling $9.9 billion for midsize businesses, corporations, governments and non-profits, and 3,109 small-business loans totaling $1.1 billion.
The bank does not have 2008 New York numbers; it started disclosing state-by-state loan figures only last year, officials say.
In spite of economic conditions, Chase, a bank with a presence in more than 60 countries, continues to lend responsibly to qualified business borrowers, Wolcott says.
"I consider each situation based on (its) own merits," says Wolcott, who has been in banking for some 40 years-but had never before seen conditions in the industry like those of the last 18 months.
ABA’s Seiwert voices optimism about lending.
"Loan demand will return," he says. "Bankers want to make loans, but they only want to for viable business going forward."
Lynette Haaland is a freelance writer and a former Rochester Business Journal reporter.
3/5/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail [email protected].