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By Chris Gaetano
Posted on 4/23/09
NEW YORK -- Despite perceptions otherwise, banks still have credit they’re willing to extend, said a speaker at a recent NYSSCPA Chief Financial Officers Committee meeting. How it’s being extended, and to whom, however, is a different story.
Signature Bank Executive Vice President and Chief Credit Officer Michael J. Merlo discussed the ways in which bank lending practices have changed, and remained the same, in today’s economic climate. The speaker gave his talk during the committee’s March 26 meeting at the Society headquarters in Manhattan before an audience of 43 people (with 13 more listening on conference call).
The credit market isn’t dead, Merlo said, just changed. While the trials and tribulations of larger financial institutions and the debts they manage have dominated headlines, lending is still active, especially among smaller community banks. Overall industry-wide lending fell by only 1.4 percent from the third to fourth quarter while two out of three banks, he said, actually increased their lending in the fourth quarter.
So why the crisis? The issue, Merlo said, was not in credit in and of itself but in the types of credit affected by the recession. For example, consumer credit, an extremely visible aspect of the market has “dried up,” because “the consumer’s not as strong today as they were a year or two ago,” Merlo said.
Merlo is less optimistic about commercial real estate lending. He pointed out that such ventures are not the cash generators they were three years ago. Tenants are eager to renegotiate their leases, if they don’t end up out of business entirely. For Merlo, the bottom on this market has yet to be reached. It’s going to get worse, he said, but not every bank makes those kinds of loans. Those that didn’t are a little more insulated from the challenges of the credit market and so have a little more freedom to lend than some of their contemporaries.
“Eight thousand banks in this country,” Merlo said. “They didn’t all do sub-prime [loans]. They didn’t all do credit default swaps.”
Of course, “more insulated “doesn’t mean “immune“ and “more freedom” doesn’t mean “less prudence.” While the liquidity crisis hasn’t hit community banks as strongly as larger ones, financial institutions of all sizes are changing the way they relate to credit.
Banks have become more reluctant to approve loans, Merlo said, and the ones they do approve are more tightly monitored than before. Multi-million-dollar lines of credit are either being significantly reduced or cancelled outright, Merlo said they represent an open risk at a time when financial institutions are becoming more risk averse. The days of easy money are gone.
“All bets are off,” Merlo said. “Things are different today than they were three years ago.”
He illustrated this with examples from his own experiences with Signature Bank, a mid-market, non-retail bank that emphasizes lending and works primarily with small-to-medium sized businesses. Like other banks weathering the recession, Signature’s exposure to consumer credit was minimal—it was sometimes given as a courtesy to clients but wasn’t a large part of its business strategy. While still willing and able to lend money, much more work and attention is being paid to the strength of the potential client’s capability to pay them back.
“If a client is very good, we might advance them more ... if they can show us how strong they are,” said Merlo.
An extra amount of due diligence is needed with all clients, even longtime ones, he said. Care should be taken to avoid being “enamored with the fact they’ve been with you a long time.”
And new clients? They need to be evaluated a lot more closely than before. This higher level of debt management necessitates a more direct, regular relationship with one’s banker, something that Merlo said smaller, community banks excel at.
With this in mind, he recommended that CFOs get in front of their banks, insist to meet with bankers personally, especially their credit officers, and bring their CPA with them.
This, he said, lets your professionals know what it is you’re doing. At the same time, he said that companies should also pursue relationships with a second bank, if finances allow it, just in case. Meet with their people and get a feel for their institution, Merlo said. There should be no need to make a commitment?the important thing is the establishment of a personal relationship.
“It keeps everyone honest,” said Merlo.
In a short conversation after his presentation, Merlo theorized that the way the credit market might start to recover is through mortgage financing. The issue is perception, he said. Right now, people are more hesitant to act, given the economy. Further, they’re less willing to take on debt, because they’re counting on interest rates continuing to fall.
Merlo said that the setting of some kind of floor for the interest rate, combined with some small financing incentives, can help the economy through the purchase of more homes.
“I think if they can start doing more home mortgage stuff, residential stuff, people who still work may still want to buy something ... it may help,” said Merlo.
Committee members reacted positively to the presentation, with some saying that Merlo’s points related very much to their own recent experiences.
“I was very impressed with what he had to say, he had a lot of the salient points regarding the banking climate today,” said committee member Corey Aronin. “I’m dealing with issues like that with the company I’m with. ... We have an opportunity to do a significant rollup, but the lines of credit are frozen.”
Sandra Albo, another member, expressed similar sentiment, drawing on her experiences as a small business owner.
“I thought he was excellent,” she said. “Being a small business owner, it was very relevant. So I’m not sure exactly where to go but it’s very helpful. It actually happened to me?they cut my credit line, and while I didn’t owe any money, because I didn’t use it, they cut me off.”
