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Rising rates, lessons from recession not discouraging banks from lending

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It’s been just over a decade since the start of the Great Recession, when a bubble economy burst and drove millions of job losses and home foreclosures across the nation. The crisis lasted from December 2007 to June 2009, according to the Federal Reserve.

But the fallout continued long after that, as more than 500 banks failed from 2008 through 2015, up from only 25 failures in the prior seven years, according to Federal Deposit Insurance Corp. data. The good news today is that in June, the Fed said large and regional U.S. banks passed the agency’s latest “stress test” designed to measure their ability to survive a global recession.

‘Go-go’ days over

The lending practices that helped spur the plunge have been curbed, interest rates are rising again and there are fewer banks across the nation and New Jersey now, compared to before the recession. But experts say creditworthy businesses and other borrowers can still get a fair shake.

Banks may be carrying more capital than before, but “we still have to cushion against a downturn,” said Steve Klein, CEO of Northfield Bank. “There’s more discipline in the marketplace and everyone is taking a more prudent approach to lending, but we’re not getting any complaints from borrowers about access to funds.”

He thinks that’s because businesses, as well as banks, are doing a better job of managing their risks. “I know we’re taking a more consultative approach with our customers. At one time, commercial bankers tended to follow the lead of their business customers, but now it’s more of a strategic partnership, and borrowers appreciate it,” Klein said.

Northfield conducts its own stress testing, he added. “We continually run ‘what-if’ scenarios, considering risks and how we and our borrowers would address a variety of situations.”

One consideration is how borrowers will perform in a rising interest rate environment. “We can’t assume that businesses will be able to increase their sales enough to account for higher interest rates,” he said. “So we want to see how well they’ll cope with rising interest rates.”

An industry changes

Other banks also take a measured approach. “Bank of America properly vets all business loan requests, for both secured and unsecured business loans, by closely reviewing ownership history, revenue and any outstanding financial obligations,” said Robert Doherty, state president for New Jersey at Bank of America. “While both types of loans require that the business be under current ownership for at least two years, each one has a specific requirement for minimum annual revenue, with secured business loans requiring a minimum annual revenue of $250,000, and unsecured business loans requiring a minimum annual revenue of $100,000.”

In recent years Bank of America reorganized to focus on customers’ core needs, while simplifying its business model. Among other steps, the institution sold “non-core” businesses such as its international credit card operation in 2011; the international wealth management businesses in 2012; and, last year, completed the sale of its $9.4 billion consumer credit card business in the U.K. to Lloyds Banking Group.

“Additionally, we sold and divested $85 billion in non-core assets including equity interests in other financial institutions, proprietary trading, ancillary wealth management and correspondent wholesale lending,” he added. “We also simplified our product set by eliminating add-on products, reduced punitive fees, simplified consumer products to engage and serve clients around their life priorities and we reduced over 150 products across checking, savings, credit card, home loans, business loans and auto loans.”

Guarding against a downturn

Local banks have also taken steps to reinforce their operations. Amboy Bank developed departments and technology to address transaction risk and overall risks like credit, according to Executive Vice President and Chief Retail Officer Gregory Scharpf. “We applied a structured approach to credit risks and concentration, initial underwriting and issues like interest rate risks,” he noted.

The goal, he said, was to develop strategies to manage activity “in good times and bad times.”

Amboy has maintained its focus on the Central and North Jersey markets and continues to specialize in construction lending, but Scharpf says it also “adapted our expertise as the New Jersey market shifted from single family to multifamily and warehousing. At the same time we’ve expanded our activity to encompass business owners who build and manage their own property, like doctors, dentists and medi-centers. We’re also active in lending in the warehousing segment.”

When Amboy considers a business loan request, Scharpf said it looks at credit scores, cash flow, “and other classic issues, but we recognize that some potential borrowers won’t have a perfect profile. That’s why we establish a relationship with customers and work hard to understand their business. It’s not just zeroes and ones.”

A disciplined approach helped PNC Bank to escape the challenges that some banks faced during the recession, according to New Jersey Regional President Linda Bowden. “We had no subprime lending because we maintained a moderate risk profile and we still do,” she said. “At PNC, we don’t get distracted from a strategic approach. Because we were able to avoid lot of pain, we remained well capitalized and have invested in technology and infrastructure, and we continue to expand with acquisitions and organic growth.”

When PNC professionals consider a loan request, “we look at issues like the history of the company, the industry they serve, the credit history and we analyze accounts payables,” she detailed. “It’s not just the numbers, though. We establish a relationship so we understand the business and the owner and what their needs are. It’s an ongoing relationship.”

Approaches like this also offer sustainability and a degree of certainty — characteristics that business owners appreciate.

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