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The back and forth over business borrowing

Banks say they're ready to lend as executives strike a cautious course

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Tom Geisel says business owners should take advantage of the low interest rates available to companies.
Tom Geisel says business owners should take advantage of the low interest rates available to companies. - (AARON HOUSTON)

Sun Bancorp Inc. CEO Tom Geisel says lending to small business should be more robust at this stage of an economic recovery.

But Geisel still notices uneasiness from borrowers. Loan applications are up — the Vineland bank reported a 38 percent increase in overall loan production in 2012, compared with 2011 — but Geisel says the size of loans sought have not recovered to pre-recession levels.

The result is incremental, rather than bold, progress.

"What that tells me is that businesses need to borrow, but they are borrowing at the absolute minimum," Geisel said. "They're not taking advantage as much as they could in this low-interest rate environment. What you are finding is borrowing as a necessity, rather than borrowing to be opportunistic."

Geisel summarizes widely expressed uncertainties about the economy. The financial meltdown and subsequent credit crunch are now old news. The recovery, at least as technically defined by economists, began four years ago.

Yet small business remains reluctant to borrow or spend, a trend partly blamed on political uncertainty in Congress and partly on the tepid nature of the recovery.

Richard Kulman, president of Prime Appraisal Inc., a small Woodbridge appraisal company, can relate. Kulman said he hasn't borrowed in recent memory other than for a car that he mostly uses for work. Nor does he anticipate borrowing in the near future.

With energy costs steep and prices of commodities like paper rising, Kulman said he's more concerned about maintaining business than taking on new debt. He's even thinking about tacking on additional fees for late payments.

"With payments coming in slow, you're trying to cut back and not spend," Kulman said. "Gas bills are going through the roof. If I buy something, it's because I need it. I'm not just going out and saying, 'hey this looks good, I'll buy it.' You think twice now."

Poll numbers confirm the wariness of small businesses. A PNC Bank biannual survey released last month shows a rising, albeit modest, number of small businesses planning to take out loans.

About 18 percent of small-business owners participating in PNC's national survey said they would probably or definitely take out a new loan or line of credit in the next six months. That compares with 15 percent one year ago.

About 58 percent of small-business owners surveyed said they plan to spend more on capital investments in the next six months. That's the same as last fall, but down from 70 percent one year ago. Technology is the top equipment priority for small businesses, according to the PNC Economic Outlook Survey.

Small to midsize banks, meanwhile, said they're eager to do business, with lending bound to improve once business and consumer confidence rebounds.

"Banks are willing to put capital to lending," said John McWeeney, CEO of New Jersey Bankers Association, which consists of 118 members. "They are really flush with deposits — not just in New Jersey but nationwide. They have liquidity and capital, the appetite to lend. They are hoping it will start to pick up more."

Startups are being more careful when it comes to taking out loans or lines of credit, says Elizabeth Magennis

Elizabeth Magennis, chief lending officer of ConnectOne Bank, an Englewood Cliffs-based company with eight branches, said most lending requests now tend to come from existing clients than new entrepreneurs.

"I'm not seeing a lot of startups or small businesses coming in and saying 'I need a $100,000 line of credit,' " Magennis said. "Whereas during the economic expansion, we saw a lot more of that. People were more willing to take on risk."

Magennis said ConnectOne prospers in this climate by maintaining a steady, disciplined approach of building credibility with clients. ConnectOne went public in February, and its assets recently surpassed $1 billion.

"For us, it has always been about relationship building. It is not about the size of the request," Magennis said. "We're showing results. We do not need to make a killing, as far as profit goes. We're steady and consistent."

Bankers said the caution among borrowers has an upside — small businesses are mindful of prior lessons, and are careful not to overextend.

"When times were good, I'm not so sure as much thinking went into it," said Bob Young, senior vice president and central New Jersey market manager for PNC business banking. "It was just about growth. If anything, I think business owners are much more educated, in terms of the position of their business in the bigger picture of the economy."

Among applicants who do seek loans, bankers said credit quality is generally solid. Geisel said delinquencies have declined for two straight years.

As conditions slowly improve, banks are setting less aside to cover bad loans. Sun National's allowance for loan losses fell in the first quarter to $47.1 million, down 9.6 percent from $52.1 million in the year-ago quarter.

"That tells us business credit quality and financial statements have gotten stronger in the last couple of years," Geisel said.

While small to midsize banks said they are willing to lend, external factors pose challenges for their business, as well.

Smaller banks say tighter regulations enacted after the financial crash tend to group all banks in the same category, even though their business models are vastly different than larger institutions. Geisel said community banks traditionally have maintained sound lending standards, contrary to public perception of big bankers on Wall Street, and should not be lumped under one-size-fits-all policies.

"There's a lot more than banking with (large) financial institutions," said Geisel, whose company reports $3.2 billion in assets and operates 60 Sun National branches statewide. "Banking is part of what they do. The financial institutions will get involved with exotic products and services. That's how we got into trouble."

Ultra-low interest rates also are squeezing margins at smaller banks, whose profits rely on charging higher interest rates on loans than what they pay on deposits. With the spread on long-term and short-term interest rates historically narrow, that makes it harder for those banks to profit. Smaller banks tend to have fewer auxiliary lines of business, like wealth management services available at large banks, to generate revenue.

Loans on average rose 7 percent in the first quarter compared with last year, according to an American Banker analysis of about 160 banks with $35 billion or less in assets. But net income is down 1.6 percent over the same period.

With competition for loans fierce, Geisel said small to midsize banks need to maintain as diverse a revenue stream as possible, ensuring fee-generating businesses, such as mortgage lending, provide income in addition to interest-earning assets.

Despite the tough climate, many bankers see hope from a recovering housing market.

Most markets including New Jersey are showing upticks in home prices and fewer foreclosures, improving the prospects for new building. More construction bodes well for related industries, increasing employment among plumbers and other trades workers.

"Construction lending is going up, that's always a good sign" Magennis said. "Demand is picking up. People are moving. People are investing."

Looking ahead, bankers said headwinds against small business stem from politics, ranging from implementation of health care reform, tax hikes, potential increases to New Jersey's minimum wage and periodic spending cuts triggered by the federal budget sequester.

"I still believe the small-business owner has the most difficult job," Geisel said. "Large business has so many levers they can pull to manage expenses, or for financing or investment advice. A small business can tweak here and there, but they don't have as many levers to influence the negatives."

Challenges notwithstanding, McWeeney said the lending climate is moving in the right direction. With demand slowly picking up, interest rates eventually will rise from historic lows and more loans will be sold. He says that's the bread and butter of banking.

"If they're not moving into loans, then what's the alternative?" McWeeney said. "They can invest overnight with the Federal Reserve for 25 basis points. That's not very profitable."

E-mail to: tomz@njbiz.com
On Twitter: @biztzanki


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