combination of all these factors make the ‘perfect storm,’ so to speak, as it relates to the availability of credit to both consumers and small business owners.” With regard to the current regulatory environment, Stewart says regulators are focused on assuring the safety and soundness of depositors’ funds. “In short, that is accomplished by reviewing the policies, procedures and loan portfolios,” he says. “In reviewing the loan portfolio they assure that loans are graded or risk rated properly. Historical repayment ability/capacity based upon the financial results is a key aspect. As a borrower’s financial result deteriorates, the loan grades must reflect that risk.”
Troubled Asset Relief Program (TARP) went to banks. In reality, much of it was disbursed to nonbanks such as financial services company GMAC ($16 billion), government-sponsored enterprise Fannie Mae ($85 billion) and insurance company AIG ($48 billion).
Has demand for loans dried up?
Lending is down, not only because applications are not being approved, but because requests for loans have dropped.
FORUM’S Irvin says several factors have driven demand down compared to previous years. For one, small business owners are holding off on expansion and banking If the capacity of the borrower to repay the their money. Likewise, consumers aren’t debt is the first thing banks look at, Crow says collateral is the second thing—and The formula for getting the value of collateral has decreased across back to normal is simple— the board. “It’s not only decreasing in the grow jobs, lower unemployhousing industry—it’s the value of some vehicles, the value of equipment or the ment and grow the economy. value of a commercial building.” –Gary Irvin, FORUM CU CEO Contrary to what people may think, the criteria for getting a bank loan hasn’t buying new homes or trading cars as often really changed recently. It was relaxed as in the past. In fact, most of the loan when banks had to compete with financial applications FORUM has received recently institutions such as Ford Credit or GMAC have been related to the refinancing of (entities that don’t have to pay FDIC insur- mortgage or auto loan rates, so members ance or follow the regulations banks are can lower monthly payments or pay off held to) and has not been reinstated. their loans faster. “The expected ‘pent-up’ demand for loans that many economists predicted has not materialized due almost entirely to the lack of consumer confidence in the economy,” Irvin says.
“The toughest thing for banks like ours is that a lot of those competitors weren’t regulated like we are,” Crow says. “If you have to compete with somebody who’s not regulated, you either lose the business or you lower your standards and keep the business. That’s what drove us to step away from our credit standards.” Crow says community banks are also getting a “bad rap” because many people think all the money distributed by the
“We have seen an increase in applications for startup businesses and franchises on the commercial side as well as requests for lines of credit for existing customers,” he says. “The approval rates have remained fairly average in that it still takes ‘skin in the game’ for a startup loan and good cash flow and credit history for a line.” Irvin says FORUM’s approval rates are trending only about 10-percent lower than historical approval rates. “The primary factor in the lower approval rate has been the lack of equity in the home,” he says. “Members are credit-worthy but don’t have the equity they need for the loan to meet the collateral requirements for approval. We are predicting tepid loan demand and lower loan yields for the next nine to 15 months. ”
Getting back on track
Irvin says the formula for getting back to normal is simple—grow jobs, lower the unemployment and underemployment rate and grow the economy. “There is an old adage, a rising tide raises all boats,” he says. “Same for our business, a growing economy makes all businesses, especially While the demand for loans has decreased, the lending business, much better.” it is not falling as rapidly in Hamilton While the return to normalcy won’t necesCounty as it is in other markets, accordsarily be an easy one, Hamilton County ing to Crow. “The small business owner certainly has an edge on other areas of is not coming to us for increases in his line of credit or to add on to his building,” the state and country. As one of the most affluent communities in Indiana, Hamilhe says. “He’s coming to us for loans to ton County didn’t feel the full force of the maintain the assets he has such as replacing a piece of worn-out equipment. Small recession, and is expected to pull out of the recession’s aftermath faster than most. businesses are not in a real expansive “Hamilton County residents live in a little mood right now, although we are seeing different world,” Crow says. “All the banks that beginning to turn around.” want to come here because of the deposit base.” Hamilton County has close to $4 First Merchant’s Stewart agrees, and sees billion in deposits and as many banks as moderate growth and a stable local econMarion County. v omy moving forward in the near future. Hamilton County Business Magazine/December 2010 • January 2011
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