The Federal Reserve quarterly survey of loan officers across the country (Senior Loan Officer Opinion Survey) is the gold standard for measuring the optimism or lack thereof among bankers who decide which businesses are creditworthy. The most recent results, released on July 31, point to a slowdown in lending and a tightening of underwriting standards. Slightly more than 50% of the banks responding to the survey reported tightening terms of credit in the second quarter for loans to medium and large businesses. The number tightening up on loans for small firms was similar, at 49%.
New Hampshire may not be experiencing the trend to the same degree, but it is not immune. “We have heard from customers and bankers that some banks have slowed their lending by only supporting requests from existing customers, not expanding their base,” says William Stone, former president and CEO of Bedford-based Primary Bank*, which even with $700 million in assets is one of the smaller community banks in the state. “And some have just stopped lending overall and are just servicing existing customers. I don’t have any numbers on that; it’s just what I’m hearing from vendors and people I see at events.”
Chris Logan, chief lending and risk officer at Bank of NH (BNH), based in Laconia, sees a similar trend. At $2.5 billion in assets, BNH is one of the state’s largest community banks. “In general, credit is less available,” Logan says.
According to the Fed report, “The reasons cited most often [nationally] for the tightened lending standards were a less favorable or more uncertain economic outlook, expected deterioration in collateral values, and expected deterioration in credit quality of commercial real estate loans.” In other words, fear of a looming recession.
In NH, those factors are not as salient, according to Logan. “Loans are less available, but that has little to do with lending standards,” he says. “It’s not driven by concerns about creditworthiness of borrowers. At the community bank level, it has almost everything to do with interest rates and liquidity in the banking system.”
A Different Cycle
When interest rates double as they have in the past two years, many business ideas and real estate deals that made sense at 4% don’t make sense at 7%. “When interest rates go up, fewer people qualify for homes. The same thing happens in commercial lending, in that fewer people qualify for loans than did previously,” says Logan.
Combine fewer qualified applicants with lower levels of cash on hand at the bank, and you have a formula for a lending slowdown. But not quite like other slowdowns, at least not in NH. “This cycle of tightening is different from others I’ve seen before,” said Kyle Schneck, chief lending officer at St. Mary’s Bank, a Manchester-based credit union with $1.6 billion in assets. “Typically, you see banks tighten when there are economic recession concerns. They start seeing delinquencies increase and go to protective measures,” he says. “This tightening [in NH] has been driven by liquidity concerns.”
For a decade leading up to the COVID pandemic and for the first year of the pandemic, interest rates were historically low, the Federal Reserve was expanding the money supply and the federal government sent three rounds of stimulus checks to every American household.
“All that stimulus money came rushing into all the banks and credit unions. We were so flush with cash, like we’ve never seen before, and we had to put that cash to work,” says Schneck. “Now we are in an environment for banks with cash going down, our borrowing rates going up and the savings rates we pay depositors going up, so our margins are getting squeezed very tightly.”
Money is Tighter
Nonetheless, the bankers interviewed for this article say they are accepting new business loan applications and are not among the 50% of banks nationally that have gone into a protective crouch. But money is tighter, so the quality of the applicant and the application are more important than ever.
“We have to be a little more diligent,” says Schneck. “We have become more risk averse since COVID in the small business space because we want to make sure that we have a high degree of confidence that the business owner is experienced and equipped and is going to be successful and not have to fold up in 12 or 24 months.”
Businesses that actually benefit from inflationary pressures are at an advantage, according to Logan. “If a business is selling a product or service the cost of which has risen with inflation, that helps. The most negatively impacted group is large commercial real estate loans.”
At Primary Bank, “We have not stopped lending; we are taking on new customers and supporting our existing customers with financing as they need it,” says Stone. “We have seen a slowdown in demand compared to last year. The beginning of last year was more robust in loan demand than the first half of this current year, but we’re still seeing a fairly strong demand in the marketplace.”
Plan to Succeed
One thing that hasn’t changed is the importance of a sound business plan when applying for financing. “First and foremost, anyone who’s going to start up a new business needs to sit down and complete a thorough business plan,” says Stone. “It creates the road map for where they are going to go and what they are going to achieve. It’s very important for them to do some scenarios as to what happens if the actual results deviate from the plan, up or down.”
Schneck and other bankers urge business owners and entrepreneurs to take advantage of the government-funded programs designed to provide expertise and share the risk of financing a new or expanding business, including the NH Small Business Development Center (SBDC), Community Redevelopment Councils, NH Community Loan Fund, the Small Business Administration (SBA), or the Service Corps of Retired Executives (SCORE).
These organizations help business owners or would-be owners design a business plan, make credible financial projections, effectively brand and market their business and accurately calculate the necessary working capital.
“Writing a business plan is not a natural skill you acquire, so take advantage of the SBA or economic development councils we have in New Hampshire that will help business owners prepare business plans and develop finance packages,” says Logan. “I would also encourage people to talk to their banker or several bankers before submitting any applications and find out from them what they think is important.”
Surrounding yourself with a good professional team is essential, no matter the development stage of the business. Bankers want to see that you have experienced management, a good attorney, accountant and industry mentors. But most importantly, establish a relationship with a bank and an individual in that bank.
“Banking is a relationship business,” says Schneck. “I think it’s important for business owners to have a good relationship with their bank and with specific bankers. If I ask a business owner, ‘Who is your banker?’ and they can’t give me a name, then they don’t have a good relationship with their banker, whether an existing business or entrepreneur. It’s important to have a team of people at the institution that represent you and
(*Editor’s Note: William Stone was president and CEO of Primary Bank at the time of his interview. Just prior to publication, Stone departed the bank and Board Chairman William Greiner was named interim CEO.)