Fears of a recession have resurfaced as yet another summer slowdown has people wondering if the economy has enough velocity to remain above sea level. Sluggish quarterly economic growth, declining consumer confidence, and a one-month dip in manufacturing output, the first one in three years, have all combined to fray economic nerves, and few people expect good news out of Friday’s national jobs report.
As this gloom was gathering, IB spoke to executives from Green Bay-based Associated Bank, who gave their take on the economy, the borrowing appetite of small businesses, and what lies ahead. The future of the $22 billion financial services company includes moving its headquarters to downtown Green Bay. In March, president and CEO Philip B. Flynn confirmed that Associated would centralize many of its key corporate functions from various locations around “Titletown USA” to the Regency building at 333 Main St., bringing 350 employees downtown.
The big picture
Commercial Bank Group Leader Gary Schaefer is optimistic about the Wisconsin economy, and he has company. Half of the bank CEOs who responded to the latest Wisconsin Bankers Association survey of bank CEOs indicated they expect the state’s economy to grow over the next six months.
“We have a number of clients in our portfolio, and in touching base with those clients, they are actually enjoying a better year in 2012 than they did in 2011,” Schaefer stated. “They were more successful in 2011 than they were in 2010.”
If a business is tied to housing, building, or construction, “obviously that is still a bit slow, although housing sales have picked up in past 60 days,” Schaefer said. “If you are a Realtor, you are seeing positive signs in the Wisconsin market and in Madison. If you are in home construction, that is still pretty soft.”
| “We have a number of clients in our portfolio, and in touching base with those clients, they are actually enjoying a better year in 2012 than they did in 2011.” –  Gary Schaefer |
Regarding the appetite for borrowing among business clients, Schaefer would not call it robust, but it’s stronger than it was in early 2011. He said Associated Bank’s loan demand and loan growth both are up in 2012; as the bank adds to its balance sheet, some of the growth comes from picking up business from competitors, and some is organic.
Still, hiring has not significantly increased because companies remain focused on driving efficiency. “Our customers are expanding, albeit slowly,” Schaefer explained. “They are looking at some new machines on the manufacturing side and perhaps some plant expansion, whereas 18 to 36 months ago, they would not have been considering such a thing.”
As consumers pay down their debt and more banks return to profitability, Associated Bank has seen a decline in noncurrent loans. Overall, the number of noncurrent loans in Wisconsin banks, which are loans and leases that are 90 or more days past due, plus loans and leases in nonaccrual status, was down by 46% in the first quarter of 2012, compared to the same period in 2011, according to data from the Federal Deposit Insurance Corp.
That makes it easier for banks to underwrite new credit, belying the perception that banks aren’t lending, but if there is one thing that gives Schaefer optimism, it’s the “pretty low” cost of borrowing with favorable interest rates.
Schaefer’s biggest economic worry is the uncertainty of additional government regulations, especially on small businesses, family-owned companies, and the banking industry itself. “It’s a burden that is going to be pretty dramatic going forward, and that’s a concern,” he noted.
Risk appetite
The borrowing appetite of Associated Bank’s small business clients is hardly suppressed, but it’s not what it could be. The bank has its largest pipeline ever, according to Doug Kohlbeck, director of business banking, and within that pipeline for small business banking – companies with $5 to $10 million in sales and credit needs of $1 million to $2 million or less – the bank has seen good activity, he noted.
However, there is a caveat related to the kind of borrowing that is taking place. “We’re seeing some growth in inquiries for credit, but in inspecting that inquiry, the dominant share of it, more than 90%, is in the form of companies looking to refinance, whether it’s existing debt with us because rates are lower and they want to take advantage of that, or with new business prospects or taking business from other banks,” Kohlbeck said. “Less than 10% was companies we’re working with. We have a random sampling in the state of Wisconsin that are investing in their growth, facility additions, purchasing businesses, those types of things.
| “What I keep telling people is that it’s kind of a zero sum game out there right now. There is a lot of inertia ….” – Doug Kohlbeck |
“What I keep telling people is that it’s kind of a zero sum game out there right now. There is a lot of inertia as it relates to this segment, the small business segment.”
Newer customers, especially start-up businesses, have a higher barrier to clear when seeking loans. “I’d tell you our process is very consistent for new or existing customers,” Kohlbeck said. “The difference is that with existing ones, we have the luxury of understanding their payment history, so if there is very strong evidence of cash flow by virtue of how we’ve been paid, certainly that benefits the existing client decision as well as our relationship with them.”
In absence of that history, the same cash-flow rules apply. Given the economy, banks don’t have the luxury of looking at three or four consistent years of cash-flow history, so they have to evaluate a borrower’s ability to repay on recent patterns. A short but positive cash-flow history requires more due diligence on the character of new business owners in terms of how they handled obligations, personal or business.
Could a start-up business demonstrate cash flow from a signed contract or two, an indication that there are a couple of clients in the fold? Most banks, including Associated, would give very little consideration to speculative cash flow, Kohlbeck explained. For a start up to overcome the absence of cash-flow history, there would have to be mitigating factors like the owner’s personal financial wherewithal.
“To bring in either good cash to the table so they have some stake in the game, or proving their ability to collateralize or cash flow some or all of the debt, it’s important to have sources that are being generated from something other than the start-up project,” Kohlbeck said. “So, yes, I’d tell you there is not a lot of start-up lending going on. The appetite of entrepreneurs is down.”
Covering real estate
Michael Finn, commercial real estate senior regional manager, offers anecdotal evidence of the state of commercial real estate, citing improved attendance at the annual conference of the International Council of Shopping Centers and the consensus of gradual recovery among a recent panel of experts at Marquette University.
“There has been a lot of focus on the question of when are we really going to be sure that we have hit recovery? When will we have that kind of confidence all the way down to the individual consumer level?” Finn asked.
| “Today, the borrowers understand that it has be real equity, 20% cash and real skin in the game.” – Michael Finn |
Finn believes that Associated Bank’s real estate portfolio is in better position than most. When Philip Flynn arrived two years ago, he immediately began to clean up the balance sheet with bad loan pool sales on the secondary market and negotiations with 30 or 40 borrowers.
The bank has transitioned into a period of changing terms and conditions for underwriting commercial developments. The new norm is quite a contrast from the peak of what Finn called the “feeding frenzy,” when borrowers needed 20% equity, and that could be valued with land appreciation, deferred developer fees, and other non-cash components that once counted toward an equity position.
“Today, the borrowers understand that it has be real equity, 20% cash and real skin in the game, real cash into the deal,” Finn stated. “Through this downturn, borrowers themselves have become very conservative. When you talk about things like office buildings that need to be pre-leased before you are willing to lend on them, they get it and they want the same thing.”
Finn said the surviving borrowers are the kind of developers who are willing to put real cash into a deal, and he doesn’t foresee a return to the “go-go” lending days, even if the economy regains traction. “If it gets rolling again, I don’t think so,” he opined. “One advantage in commercial real estate lending is sometimes there is a limited number of qualified players,” he noted. “Whereas you might be able to see a lot of banks for a residential mortgage or a small business loan, banks willing to do larger commercial loans are somewhat limited.”
Vested in perspective
In a period of disappointing economic data, Sara Walker, senior vice president and investment officer for Associated Trust Co., points to a foundation of resilience in the U.S. economy.
“It’s not the best, it’s not perfect,” Walker said of the economy. “Growth is certainly less than one would expect in this point of a recovery, especially when you consider the amount of fiscal and monetary stimulus that has been applied. Growth of 1.9% is a huge disappointment, but it’s still growth.”
| “Growth of 1.9% is a huge disappointment, but it’s still growth.” – Sara Walker |
That growth, she notes, is accompanied by strong corporate earnings, which are much healthier than forecasts suggested in March and April. Strong bottom lines also come amid the backdrop of investor worry over the European debt crisis, a run on banks in Spain and Greece, and a sluggish global economy generally characterized by too much debt and insufficient growth.
“There was a lot of talk that first quarter earnings would be anemic and less-than-expected, and they came through pretty well, which highlights how smart and how effective corporate America has been at keeping costs under control,” Walker stated. “It’s frustrating from an economic standpoint because it means they are not as willing to hire, but the corporate sector is in good financial shape, which is contributing to that resilience.”
Walker has seen her share of slow economies in a 30-year career, but she’s also seen a few bounce backs, which is why she cautions against panic. “Just when it’s most difficult to hold onto your principles, to hold onto your long-term investment ideas, and hold onto your idea of family business and transferring wealth to the next generation, when it’s most worrisome and most concerning that it can’t be done this time, or that our problems are too much to overcome, that’s when it’s the exact right thing to hang onto your investment, hang onto your principles and stand firm,” she said. “I’ve seen family after family and business after business be rewarded for doing just that.”
Sign up for the free In Business Wisconsin Report – your weekly resource for local business news, analysis, voices, and the names you need to know. Click here. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.
