Return to Lender?
Commercial-loan Market Remains Sluggish
The financial meltdown of 2008 and the recession that followed in its wake were a double punch to commercial lending nationally, as banks tightened up credit and businesses of all types retreated from capital investments. In Western Mass., banks say they still have plenty of money to lend, but demand is still stubbornly low as companies remain uncertain about their own growth. Overall, the picture is improving … but slowly.
Almost two years ago, the worldwide financial-services industry was rocked by a credit crisis that left many large, national banks reeling and awash in toxic assets.
The repercussions of that meltdown hit a faltering economy hard and contributed to whats become known as the Great Recession and also to a tightening of credit across the board, as banks that had facilitated reckless loans over the past decade focused on digging out from the wreckage. Meanwhile, the recession caused businesses in all industries to back off from further borrowing and capital investment.
Almost two years later, by many accounts, the economy may have hit bottom and started to rebound (see related story, page 6). But are banks still willing to open the commercial-loan window? And are businesses actively seeking those loans?
Yes and no, said Paul Scully, CEO of Country Bank. We are totally prepared to lend money. This belief that money is not available for small businesses is just not true. In this region, theres plenty of money to do that.
However, he added, businesses are definitely being cautious. Theyre not 100% comfortable because they dont know where the economy is going. We are finding some real caution in terms of whether people want to leverage their organizations more.
David Glidden, regional president of TD Bank, sees the same skittishness.
There has clearly been a drop in demand from borrowers, he told BusinessWest. A lot of companies were dealing with are rightfully nervous about the economy and have been paying down debt instead of building up cash. Theyre nervous about when theyre going to see the light at the end of the tunnel economically.
These two trends the repercussions of the credit crunch and a reluctance to borrow could be starting to give way to more activity as businesses gain more confidence. But bankers say that, while they want to lend, they need to see healthy revenue streams and an ability to repay. And so far, the uptick in commercial loans has been sluggish at best.
Emerging from the Storm
According to Plunkett Research, a provider of financial-industry trend analysis and market research, greatly increased regulatory oversight has already begun to restrict lenders, and an era of much lower risk-taking by bankers has begun.
Yet, the executives we spoke with stressed that regional banks and, in TD Banks case, a larger institution with a strong presence in Western Mass. remained healthy throughout the crisis because they werent prone to taking unwise risks in the first place.
Last year, from a market standpoint, statistics would certainly back up a contraction in commercial lending in the U.S., Glidden said. But you have to understand that a lot of the larger, money-center banks were having financial issues with their own balance sheets.
Regionally, however, many of the banks, ourselves included, remained triple-A-rated institutions, and our lending outpaced the market, he said. There was a huge constriction just because the volume of lending capacity represented by the large players dropped.
Our health is fantastic, Scully said, noting that Country Bank made close to $7 million last year and is well-capitalized to lend. None of that is an issue. The marketplace has contracted, and businesses arent ready to take that next step and say, I want to expand my organization.
Thats the way of the world right now, he added. I think caution is a good thing for a business, but I dont expect any change for awhile; I think this caution will continue right through 2010. We may not start to see any pickup until businesses are at the point of increasing their employment base.
Banks want to write loans, said Jeffrey Sattler, president of NUVO Bank, a recently established player in the regional lending market. But theres not enough incentive out there in the economy for businesses to take on undue risk. Theyre not borrowing; theres also too much uncertainty with issues like taxes and health insurance.
The landscape is better than it was a year ago, he conceded. I do think theres a sense of optimism; on the other hand, were not out of the woods. Were seeing very low appraisal values.
M. Dale Janes, NUVOs CEO, said New England-based banks were good, sound lenders, for the most part, on commercial real-estate and residential mortgages. But the subprime market crashed so hard and had such a ripple effect; people lost jobs, businesses lost revenues.
Many businesses are struggling with profits right now, with lease rates on property down and revenue streams curtailed. Sattler cited one loan applicant whose business brought in $1.5 million in sales one recent year, and $600,000 the next, with a net loss of about $125,000.
For such cases, Plunkett Research said alternative lending sources are on the rise, from peer-to-peer loans to angel investors. Janes said family-and-friends lending can fill the gap, as can agencies like MassDevelopment, but we need more of these kinds of programs.
Janes suggested that the real-estate market might be near the bottom, because there are bottom fishers out there now, looking to purchase distressed real estate at rock-bottom prices. When the bottom fishers are coming in and starting to get active, thats followed by more activity from people who are not necessarily looking for the lowest price.
The problem is, some go get big buildings that are 15 or 20 years old, well-constructed, for an unbelievable price, but they may not have any tenants, or enough to provide the bank with cash-flow coverage to support the loan, he said. So there may be great real-estate deals, but they need to make sure they have their own money or lease it up first, then come to the bank. I dont think any bank, with the way the regulatory environment is, can finance distressed real-estate properties that are not fully leased.
On the Way Up?
In Western Mass., Glidden said, there are a number of major industries that drive the regional economy. The state economy has obviously seen a transformation to much more of a service economy, but when you look at Western Mass., the areas that have stayed robust have been good areas to lend in health care, higher education, even the manufacturing sector in Western Mass. and the Greater Connecticut River Valley has done surprisingly well throughout this economic recession.
Still, the nervousness many feel about the economy has caused even thriving businesses to shy away from investing in their companies, choosing instead to pay down existing debt on an accelerated basis and build up cash reserves, he explained, adding that the pace of loans will pick up once its clear that the economy has indeed hit bottom and is on its way back and employers are increasingly feeling that way.
Im starting to get the sense from business owners that their level of confidence is coming back, which is the first and most important thing, Glidden said. Many businesses have been doing well, but if they dont have a lot of confidence in the economy, theyre not going to reinvest.
Meanwhile, banks continue to say theyre ready to loan to companies that do get back in the market and are financially stable enough to do so.
Were all at the mercy of where the markets are going, Sattler said. There arent many cranes in the air. Look at Springfield; there arent many buildings being created, while theres a glut of buildings in industrial parks waiting for someone to fill them.
Were looking for those who want to reinvest, but weve got to find where the bottom is, he added. After that, well see more people coming back to reinvest in their buildings.
Janes said there will always be a bad real-estate deal or two, or an overly aggressive bank facilitating it, but that situation is the exception right now, not the rule, and banks will continue to be cautious.
If a company has a decent track record over the past few years and a reputation for good management, banks will be lined up at their door. Everyone wants loan volume, but its got to be quality loans, he said. Banks are aggressive to get new business, but not aggressive like they were years ago, cutting rates and reducing collateral requirements. Were all trying to sell our services, but were trying to bank responsibly, too.
Its a philosophy that kept regional banks afloat while national institutions were rocked by their own poor lending decisions and has kept them prepared to do business as the economic picture improves.
People feel, knock on wood, that the worst is behind us, Glidden said, stressing, however, that no one thinks the economy will come racing back, only that it might have hit bottom. Even though its not necessarily a robust environment, businesses are starting to feel better about looking at expansions and acquisitions and seeking capital. When they dont have that level of confidence, they kind of hunker in.
So were optimistic that weve turned a corner, he continued. But caution will continue to be the operative word for the next 12 to 18 months.
Its still very slow and very cautious, and there are still a lot of fragile pinnings to this economy that can go the wrong way. But as the businesses we deal with get more confidence, were hopeful that the worst is behind us, and we can start cautiously moving ahead again.
Joseph Bednar can be reached at