But the banking model doesn’t work so well when real estate prices are fluctuating so wildly and major industries are falling by the wayside.
Lending is their main business, after all, and how they make a profit. Paying depositors interest without a way to invest those liabilities is not a good business model.
There were two banking panels this week both centered around the topic of why banks seem tighter lending than this time two years ago.
The simple answer: there are fewer “credit-worthy” borrowers than there used to be, bankers say, and regulators are far more involved in their daily operations, which takes time away from meeting with perspective clients and working out loan arrangements.
The main message seems to be that borrowing will return to the old-fashion model: where banks only lend to the soundest businesses and borrowing is more expensive than in the go-go years of the early 2000s, when banks competed fiercely for projects and drove down interest rates. Don’t expect to sign any non-recourse loans, bankers say, which means a personal guarantee is probably mandatory. And one last thing to watch for is a floor on interest rates.
“The regulators are focused on you and making sure you are following their rules,” said Hugh Newton, a president at M&T bank in charge of the Central Virginia region who spoke at a Venture Forum luncheon on Thursday along with two other bankers.
“There are lots more distractions, and lots of costs…this is the new normal,” Newton said.
Brad Booker, an executive vice president at SunTrust said that like at M&T, deposits are up at his bank.
“When the economy slowed, a lot of the good businesses were hunkering down,” Booker said, and that means deposits have grown. SunTrust is even more cautious about lending to smaller businesses with revenue below $5 million.
Harry Turton, a vice president at First Market Bank (which was acquired by Union Bankshares) said that his bank lent heavily in commercial real estate, and that industry hasn’t hit bottom yet.
“We are charging off three or four times more than two years ago,” he said, adding that the lack of lending is not due to a lack of liquidity. The bank has a growing base of deposits, he said.
At a similar panel Tuesday at the monthly meeting of the Greater Richmond Area Commercial Real Estate, three other bankers said there are still ways to get loans for development, but those sources are fewer and farther between, and now involve the quasi-government lenders Fannie Mae and Freddie Mac. And getting a loan with them takes months longer than with a local bank.
“Hotels and for-sale residential projects are almost impossible to finance,” said Bolling Lewis, a senior vice president at Wells Fargo. “The bosses are telling us to go find business … but character still counts, and [we want to see a commercial project] pre-leased.”
Aaron Kremer is the BizSense editor. Please send news tips to [email protected].