A quick glance at the latest numbers for commercial and industrial lending by Wisconsin banks and it would be easy to think the Wisconsin business community is pulling back on making investments, preparing for a recession and had lost all confidence.
Commercial and industrial lending in the first quarter was down more than 14% from the start of 2021 and 0.75% from the fourth quarter to $15.9 billion. It marked the fourth straight double-digit year-over-year decline for C&I lending in the state.
However, numbers aren’t always what they seem. C&I lending peaked at nearly $21 billion in the second and third quarters of 2020 as the Paycheck Protection Program and other government supports were flooding into the banking system amid the COVID-19 pandemic, making direct comparisons somewhat complicated.
Still, supply chain challenges and worker shortages hurt business growth in the first quarter and led some business owners to hesitate in taking out loans, the Wisconsin Bankers Association noted in its quarterly release of banking financials.
It is not as if those issues have abated since the end of the quarter. Wisconsin’s unemployment rate remains at 2.8%, manufacturers continue to lament supply chain issues and COVID lockdowns in China only threaten to add to the headaches. The ongoing war in Ukraine, inflation, rising interest rates and turmoil in the stock market only add to an already complex picture.
Several southeastern Wisconsin bankers, however, are not seeing a substantial downturn in demand from their business customers, even amidst mounting fears of a recession.
The Federal Reserve’s Beige Book found a similar sentiment, reporting a slight increase in business loan demand across April and May, especially in lending for commercial vehicles, restaurants and construction.
“On balance, my feeling or what I’m hearing, is that businesses are still willing to invest,” said David Schuelke, president and chief executive officer of Brookfield-based Spring Bank.
Schuelke added that to the extent he is hearing gloom and doom from customers, it comes in the form of issues getting materials or finding enough people.
“Business owners, I think, for the most part are optimistic for 2022. There are challenges,” he said.
Ivan Gamboa, senior vice president and chief commercial lending officer at Oak Creek-based Tri City National Bank, said there is more caution coming from customers than in the past. With the bulk of Tri City’s portfolio falling in commercial real estate, Gamboa said there is a bit of a slowdown in new construction projects as costs and interest rates increase. The uncertainty of whether materials will be available with supply chain issues also adds risk.
“The added risk plus the additional cost is definitely a factor,” Gamboa said.
He noted many customers seem to be focusing on finding a good workforce.
“Most of our clients have enough work or enough business, but they’re more worried about delivering the business needs or taking care of their clients,” he said.
The challenges facing the economy are not new. The labor force was tight pre-pandemic and has returned to that state. Supply chain challenges have been a fixture throughout the past two years. Inflation and price increases were a frequent topic dating back to the fall and interest rate hikes have been looming.
“I wouldn’t say any of that is any clearer,” said Jeff Standafer, president and CEO of Mukwonago-based Citizens Bank. “I’m not so sure it’s worse. It’s just still there.”
“For me, at least I feel and how our customers are feeling, not a lot of difference now versus first quarter, but as compared to last fall, probably less optimistic just because they know those interest rate increases will affect them and are definitely coming,” Standafer said.
The Federal Reserve has moved to increase interest rates in a bid to control inflation and forecasted more to come throughout the year.
Margaret Capper, senior vice president – commercial banking at North Shore Bank, said the swings up in interest rates and the forecast for additional increases is prompting businesses to make purchasing decisions rather than waiting to see where rates are next year.
“There's incentive there,” Capper said. “I think the market is savvy enough that they're looking at it and listening to what people are saying about rate movement.”
While interest rates may be rising, they do remain relatively low by historical standards. Schuelke noted equipment loans are generally 150 to 200 basis points higher than several months ago, moving rates from in the 3% range to 5%.
“If you can’t handle 5% … you know it’s not 15, it’s not 10% interest rates,” he said, acknowledging the cost of borrowing is higher and certain projects may get delayed.
Capper said North Shore is still seeing strong loan volume, especially in acquisition financing. She noted business owners who were planning to sell in the next five years have had timelines accelerated by the combination of exhaustion from the pandemic and business financials that are still strong and can fetch a good price.
Those not selling are still generally willing to invest in their business, Capper said, noting that many are being helped this year by backlogs built in 2021 because of supply chain shortages.
“I don’t think ’22 is going to be the big concern,” she said. “If they can’t get inflation under control, then what happens in ’23?”
It is hard to know whether the economy is ready to tip into recession and if so for how long. Schuelke said he plans to keep his eye on the employment figures.
“If unemployment goes up, then I’m going to start thinking we are headed for a recession,” he said. “You don’t generally go into a recessionary period with 3% unemployment.
For many, the reference point for a lengthy recession is the Great Recession from the late 2000s, but Standafer said things are much different with the banking industry in good shape, stimulus already having supported companies and loan delinquencies generally very low.
“We are in positions where companies that are strong … we’re able to help them., assuming they still have a good business model, compared to 15 years ago, it was tough,” he said.