The credit crunch, caused by the inability of banks to borrow funds from other large banks, has caused a slowdown among commercial lenders in the Milwaukee area. Some lenders have limited, changed the terms of or even closed commercial lines of credit.
“We have seen some small-business owners that have come to us that we wouldn’t have seen six months ago because they haven’t been able to get credit with their existing banks,” said Dominic Karaba, senior vice president and regional manager for business banking in Wisconsin with U.S. Bank. “Some of the customers we have seen have been exiting institutions that have put additional requests that they haven’t done in the past.”
Michael Kellman, vice president of sales with North Shore Bank, said he also has heard of other banks pulling commercial credit lines recently, but those lines have largely been related to commercial real estate.
“Some banks are waiving pre-payment fees and have even reduced principal to get these out of the bank,” he said.
Like Karaba and U.S. Bank, Kellman said North Shore Bank has not cancelled commercial lines of credit related to the difficulties in the banking industry.
Pewaukee-based Foundations Bank president and chief executive officer Greg Kolton said he has seen an increase in commercial traffic lately that has been related to other banks cutting their commercial lines of credit and other loans.
“We’ve found that there are a lot of established larger customers that had credit available that has been paired back,” he said. “They are now looking for secondary relationships to get credit for their companies.”
Some banks have been hesitant or less able to make commercial loans because they have been forced to hold more cash in-house to maintain their capital ratios, due to their inability to borrow funds from other banks, said Russ Weyers, president and chief operating officer of Racine-based Johnson Bank. Weyers is also the chairman of the Wisconsin Bankers Association.
“If banks are having a difficult time selling loans, they have to hold more on their books and might not be able to do a commercial loan instead,” Weyers said.
Richard Hensley, Wisconsin president for Citizens Bank, agreed.
“There’s been a real increase in the cost of funds,” Hensley said. “Where banks find money to lend out – they’re buying money every day that they mark up and lend out. As the market is less liquid, it’s become tougher and tougher to lend out.”
Some of the most significant tightening of credit is related to commercial real estate.
“If someone is looking for access for new commercial real estate, it’s very tough sledding,” Hensley said. “Not to say that we want to turn deals away, but we might help a client look at an alternative source to fund (a project).”
Some business owners also may be reluctant to approach a commercial lender now because of the state of the economy, but local banks say they’re still eager to make loans.
“I’m hearing a lot of people say they’re not applying now because they know that funds are not available,” Kellman said. “That’s not true. We almost have to go out there and grab these business owners and tell them to apply. It’s an interesting phenomenon.”
More due diligence
North Shore Bank and many other banks are taking a closer look at a company’s ability to repay its loan and to withstand an economic slowdown. However, when clients have good cash flow, collateral and a solid reputation with the bank, they are still obtaining financing, Kellman said.
“When those three things match up, we’ll write them a blank check,” he said.
Milwaukee-based Park Bank also has raised its lending criteria because of what has occurred in the economy, said P. Michael Mahoney, chairman, president and CEO.
“We’re open for business, but to say nothing has changed is naïve,” he said. “Things are being looked at harder, depending on the business you’re in and with a different eye.”
First Business Bank-Milwaukee is operating in a similar manner, said Dave Vetta, president and CEO of the Brookfield-based bank.
“As we look more closely at things, we’re going deeper on sources of repayment,” Vetta said. “(Clients) need to have liquidity to withstand a longer recession than we think we might be in.”
Because of the higher amount of scrutiny in today’s market, business owners need to carefully and thoroughly prepare before making a formal funding request from their lender, Kolton said.
“We’re requiring businesses to think through their plans more thoroughly, more formally, than they did in the past,” Kolton said. “Banks are being more selective today, but they’re still open for business.”
First Business Bank-Milwaukee also is updating its property appraisals and appreciations to be more current, Vetta said, as well as slightly reducing its loan-to-value ratios.
“In the last year, we clearly are scrutinizing more closely the loans we do make,” he said. “We are making sure the collateral valuations are up to date. We might have lent 80 percent loan-to-value in the past, and today it’s 75 percent loan-to-value because valuations are fluctuating.”
‘Whole relationship’
Some banks have ramped up their efforts to capture business owners’ personal mortgages, vehicle loans, savings and retirement accounts if they want new commercial loans. Many banks call this type of scenario, where a business owner has all of his accounts with one bank as the “whole relationship.”
The practice is more of a return to traditional banking practices, Karaba said.
“I think you’re finding that banks in general are getting back to what they used to do 10 or 15 years ago, in that they expect to have a relationship with you to borrow,” Karaba said. “In the last five or 10 years, many banks have been willing to do just a loan or line of credit because access to capital has been very cheap and easy for banks. Today, it’s not cheap, and it’s not easy.”
Rate reality
Businesses will pay more for loans in today’s market, largely because money has become more expensive for banks, who routinely borrow money from other financial institutions in order to make commercial and personal loans.
“There are vehicles that make money available. They’re just not as readily available at the spreads that people are used to seeing,” Vetta said. “The three-, five- and seven-year money is priced so much higher that it is tougher to get the prices we’ve seen in the past.”
While rates will be higher today, they are more realistic, in terms of historical context, than they were over the last several years, Kellman said.
“Rates are going to be higher than they were one year ago,” he said. “It’s not because the business owner is less credit worthy, but because markets are readjusting to the right place.”
Banking partner
Price is only one factor in a rather complicated equation, Mahoney said.
“What the borrower should find is someone who understands their business, who will make the commitment to be their financial partner, someone who is willing to understand and be with them through the ups and downs,” he said.
In a difficult business environment, a close working relationship with a banker can bring a lot of value to business owners, many bankers said.
“Now it’s time to really pay attention to your cash flow statements,” Kellman said. “Your banker can help you, when you receive your statements, to spread the statements, and that allows us to see deeper into the numbers. We can break your numbers down into consumer talk and see where the collect time is growing, which is causing you to eat up more cash.”
Many bankers say that with today’s tumultuous economy and increased bank scrutiny, business owners should keep in regular contact with their commercial lenders.
“Today, a business owner needs to manage their business relationship and keep their banker informed on their financial performance,” Hensley said. “Meet with your banker quarterly, even if you don’t have a specific need. That way, if something changes, your banker can respond quickly.”
Commercial clients will improve their chances of being able to win bank financing for an expansion, new machinery or a line of credit if they keep in regular contact with their bankers and share accurate, current information, said Tom Ellis, executive vice president with M&I Bank who handles commercial lending and the bank’s leasing company.
“If customers want to get leverage with the bank, that’s how you get leverage – treat us well,” Ellis said. “Our customers don’t want surprises from us, and we work hard to not surprise them. And the bank doesn’t want surprises. Talk to us about (business) as you see it coming and tell us what you’ll do about it. There’s a lot that a business owner can do when they sit down with their banker and ask for money, particularly in a time like this.”
And if a business runs into trouble during difficult times like these, there is an even more pressing need to communicate frequently with their banker, Mahoney said.
“No one likes surprises, and if you communicate early on, we will find what works,” he said. “If you find today that your quarter was expected to be a gain and it was a loss, you need to get on the phone with your banker. If you’ve got a plan to get out of this, your banker needs to know about it. They’ll need to be convinced that it will be a success and they’ll need to look at how your plans have worked over time, what your batting average is.”
Business owners looking for a new banking relationship now should be as careful about whom they choose as ever because so many banks are in trouble, said Ron Gibb, senior vice president with Wells Fargo’s Milwaukee office who manages business banking and commercial real estate.
“I think that historically, a lot of customers didn’t interview their bankers like their bankers interviewed them,” he said. “Ask your bank to provide references that are in a similar industry or size (to your business), so you can do as much due diligence on them as the bank does on you.”
