Small businesses that need money can’t get a loan, and those that can get a loan are finding a way around it.
At a recent roundtable discussion held at The Daily Transcript and sponsored by CDC Small Business Finance, a group of local bankers mostly agreed that banks — especially smaller community banks — are anxious to lend, but are hitting barriers due to regulations, competition and little demand.
“We don’t see the demand on the lending side,” said Tory Nixon, president of the San Diego division of California Bank & Trust.
He said over the past two to three years, balance sheets have been restructured and companies have carved costs out of income statements. He said they’ve delevered (reduced their debt percentage) and increased profitability for more than a year.
“And so, I think companies are very cautious about trying to borrow money,” Nixon said. “And, what we see in this market in particular, is everyone at the table wants to make loans and that’s the fundamentals of the banking business. But all we’re doing is kind of moving peas around the plate. We’re taking business from each other and there’s no real lift in the marketplace.”
Kurt Chilcott, president and CEO of CDC Small Business Finance, said he hears lenders say they have capital and have no problem providing small-businesses loans, but hears small business say they’re not getting access to credit.
“Many small businesses, their financials aren’t looking that great so it makes it difficult. But I do believe you have a group of bankers that are anxious to lend — they want to make loans. They don’t want to not make loans; they want to grow their portfolios,” Chilcott said.
Lawrence Henry, senior vice president and regional executive at Union Bank (NYSE: UB), said lack of confidence in the market has affected companies’ willingness to borrow.
“We have companies with the capacity to borrow. They have the balance sheets to borrow. There is a need for them to borrow, but they’re staying silent because what we’re seeing is, for every piece of good information, of good news, we’re hearing something to combat that,” Henry said. “And I think it’s causing the borrowers that we at this table would like to get in front of to wait on the sidelines.”
Confidence among the banks themselves has also affected current conditions, said Bob McGill, chairman and CEO of Neighborhood National Bank.
“We’re so overwhelmed by bad news — regulators and regulations are just hitting us one after the other,” McGill said. “Big banks are getting hit in the first wave, all of the community banks know that we’re going to get caught soon, so we’re all cautious in terms of the economy, in terms of world events, in terms of the regulations.”
He said it’s hard to justify giving a loan to customers who have paid the bank through the downtime, but now have damaged profits and cash flows.
“We’re all tightening down our underwriting because of all the other stuff going on. And you match that up with customers that look a lot weaker than they did five years ago — it’s tough to make the loans, certainly at the rate we did in the old days,” McGill said.
Philip Teyssier, president at Atomic Investments Inc., said he sees California as an “incubator state” — companies start here and then move out of the state, to avoid the cost of doing business here.
“I think we’re years away before we see a real turn in trends because of regulation, because of people fleeing the state and you’re right, absolutely, I see many businesses doing the same thing, added Frank Mercardante, CEO of San Diego Private Bank. He said that it will be years, not months, before confidence comes back.
While companies with the ability to borrow have been holding back, Henry said others are attempting to get loans and the banks are unable to help.
“What we are seeing are some of our distressed businesses who are coming to us and looking to borrow, but unfortunately we’ve tightened our guidelines, as all of us have, and those who want to don’t have access to it,” Henry said.
Chilcott said his company works with small businesses that can’t get traditional credit from banks. He said he’s seen an increase in smaller loans due to tightening of credit.
“We’ve all been demonized. Some of us have done things we shouldn’t have in some respects, but the banks have been demonized, in my opinion, far beyond what they should have been,” added Mercardante. “Regulation that ties our hands is making it more difficult for us to lend.”
Nathan Rogge, president and CEO of Bank of Southern California, said companies looking to borrow should speak to more than just one bank when trying to get a loan. Nixon said he doesn’t remember a deal recently when there weren’t five banks involved.
“Once you’ve been to three or four institutions, you should be listening to what they’re saying. There’s going to be a trend — if you’re not getting financing, there’s a reason. And I think probably all bankers around this table probably spend time now with business clients letting them know what bankable looks like,” Rogge said.
He said banks will typically discuss balance sheets and income statements with clients, and recommend additional equity and building outside net worth.
“There’s a whole group of people that are easily qualified that we may all fight over, and there’s a whole group of people that really need to work on their businesses,” Rogge added. “And I think that there are resources out there and that there may be organizations that they can join, like Vistage, where you can work on your business.”
Being aware of the options is important for both the business owners and the small community banks. Rogge said the big three to five banks, including Bank of America and Wells Fargo, dominate the market in San Diego. He said going from 7,000 to 4,000 banks in the United States “isn’t healthy” for small businesses, and could cause people to believe they are out of options when a big bank says “no” to a loan.
“The SBA lending, year-over-year, is down 40 percent. I wonder if there’s a correlation to the number of community banks that are disappearing that would normally do maybe five to 10 SBA loans. But if you multiply that times 1,000 banks that have disappeared, [that’s] 10,000 business loans that might have been done,” Rogge said.
Both California Community Bank and Security Business Bank, which were represented at the roundtable discussion, are in the process of merging with larger institutions.
The cost of doing business — as much as 40 basis points in return on assets — has made it a “tough market” for small community banks, Rogge said.
“I don’t know if it’s 40 basis points or more in some cases. It’s enormous and that’s what’s choking our industry. That’s what’s driving out a lot of the smaller community banks,” Mercardante said. “They cannot afford a small community bank under $500 million unless they have a special niche they’re working in that’s generating income for them.”
Larger banks, like Bank of America (NYSE: BAC), offer 3 percent financing, which Mercardante said “none of us around the table can afford to do.” But Nixon said the distractions to larger banks, like the Euro crisis, create an opportunity for smaller banks to take the market share.
Steve Espino, executive vice president and senior lending officer at Security Business Bank, said community banks have the challenge to convey value beyond the transaction, including providing the client with an adviser and connecting them to other professionals they may need in order to grow their business.
Nixon said there’s hope in the market and not all is “so dire.”
“There’s hope in the sense that people have delevered. There are still great ideas born every day of people wanting to start companies, people wanting to expand their businesses — it’s just fewer than it used to be,” Nixon said. “And we just sit around the table trying to beat each other up trying to do the deals, because everybody wants that business and that’s a really good thing for the consumer and the small business owner.”
Espino said he uses line utilization, line commitment versus how much is being utilized, as an indicator for the economy. He said it continues to drop over the past three to four years.
“We would average in the good days about 60 percent. It’s down to 40 percent, and that’s a big number. We see some of these community banks just shrinking. A lot of the time it’s not payoffs, it’s just utilization of lines of credit and delevering,” Espino said.
Nixon said there is “certainly cash in the banking business” and Mercardante said clients are looking for more comfort and predictability before making investments.
“We, like other banks, have tremendous amounts of capital that hasn’t been deployed properly and we’d like to get it out there,” said Mike Scogin, executive vice president at California Community Bank.
Kurt Chilcott, President & CEO, CDC Small Business Finance (sponsor)
Steve Espino, Executive Vice President & Senior Lending Officer, Security Business Bank
Lawrence Henry, Senior Vice President & Regional Executive, Union Bank
Bob McGill, Chairman & CEO, Neighborhood National Bank
Frank Mercardante, CEO, San Diego Private Bank
Tory Nixon, San Diego Division President, California Bank & Trust
Nathan Rogge, President/CEO, Bank of Southern California
Mike Scogin, Executive Vice President, California Community Bank
Philip Teyssier, President, Atomic Investments Inc.