2015 proved to be a bumpier economic ride than many had expected at the outset of the year. Overall, many businesses remained in good shape, continuing to post steady growth. But the stock market experienced many wide swings as investors tried to gauge the health of the global economy amid continuing uncertainty. In early December, New York Times columnist Paul Krugman surveyed the domestic outlook of the “not-so-bad economy,” in contrast to Europe, where the Central Bank’s interest rate was negative.
Banks and bankers closely watch the health and mood of their business customers. Are they looking to expand their businesses and hire more staff? Do they need equipment loans? Are they looking to make an investment by buying a building or some land for the business? Are they using their lines of credit? By most measures, the Minnesota economy has been healthy. In U.S. Department of Commerce data released in December, Minnesota posted a strong showing, with GDP growth of 4.5 percent for the second quarter of 2015, the 14th best showing in the United States.
After years of the federal funds interest rate hovering near zero, the stage is finally set for gradual rate increases, bolstered by a solid, underlying economy. In mid-December, for the first time in seven years, the Federal Reserve announced it would raise its benchmark interest rate.
“People have been expecting rates to go up at some point,” says Bill Long, audit partner in the Minneapolis office of New York-based KPMG. “Overall I think the banking sector remains pretty strong. The interest rate environment is going to change. We’ve known that for a long time.” He emphasized that banks are much more strongly capitalized than they were a few years ago.
If 2015 was not so bad, how are things shaping up for banking in 2016? While there may be some wisps of concern drifting in the wind, the general mood from Twin Cities bankers is that the year ahead looks to be consistently solid, roughly on par with last year. But there still remains a tenor of caution: The economy is not explosive, but durable.
“2015 was another good year,” says Phillip Trier, Twin Cities market president of US Bank. “Our customers are feeling good about the economy. When I talk to customers about 2016, they expect it to be similar to 2015.” Trier works with companies with $10 million to $500 million in annual revenue.
“In commercial banking, we’re generalists,” says Trier. “We’re seeing general optimism across all industry segments.”
One of the few soft spots that Trier sees is that customers still aren’t tapping into their credit lines, a sign of the cautious financial discipline that many businesses adopted in the wake of the recession.
“We’re seeing really good capital expenditure activity. We’re seeing really good loan demand for mergers and acquisitions. That is not showing any signs of slowing down,” says Trier. “Over the last five years, we’ve had [annual] average loan growth of over 10 percent.”
Laura Oberst manages a 10-state region including Minnesota for San Francisco-based Wells Fargo, working with companies that have annual revenues of $20 million to $1 billion. She’s equally bullish.
“We had strong loan and deposit growth in 2015, and it’s been that way for the last three years. The issues that a lot of our companies are seeing is lack of talent. I think that is a challenge for the economy here,” says Oberst, executive vice president and head of Wells Fargo’s Central Region, who also sits on the board of the Greater MSP Regional Economic Development Partnership.
Oberst says that in 2015, Wells Fargo posted solid commercial loan growth throughout her 10-state territory.
“We had double-digit loan growth,” says Oberst of last year. “Every one of my regions saw significant loan growth.”
Oberst does note, however, that two sectors—food/agriculture and energy—are showing some weakness. “There’s always a cycle for every industry, and I believe they’re just rebalancing right now,” says Oberst.
Looking ahead, however, Oberst says she expects loan growth will continue, although it may not be as strong as it has been in the past three years.
Smaller community banks are seeing the same signals. David Reiling, CEO of St. Paul-based Sunrise Banks, says that 2015 was a busy year and that the pipeline for business lending in 2016 looks solid. Business lending during 2015 was “robust,” and Reiling says he expects 2016 to be “a very healthy year for loan growth.”
“From our business customers, we’re seeing expansion of their businesses,” says Reiling. “The commercial real estate category certainly was a busy one for us.” Overall, he envisions general expansion in the marketplace.
Reiling also has seen an uptick in borrowers tapping into home equity loans, a source of capital for many fledgling entrepreneurs trying to start a business. Looking to the year ahead, Reiling is not fretting much about slight increases in interest rates.
“I think it’s going to be a fairly gradual ascent,” says Reiling of rates, adding that he doesn’t think that slight rate increases will be a deal breaker for business owners who may need financing. “I do think it’s overall a very good indication for the economy. With moderate increases in rates, I don’t think it’s going to have a big impact on business lending.”
Springfield, Mo.-based Great Southern Bank entered the Minnesota market in 2012 when it bought Maple Grove-based Inter Savings Bank, which had been shuttered by the FDIC. Great Southern Bank has four metro locations and focuses on commercial real estate lending.
Carl Brandt, Great Southern’s market manager for Minnesota, says the bank—which is publicly traded, has been in business for more than 90 years and has assets of $4 billion—is larger than many people realize. The bank finances a range of projects, including apartment, retail, senior housing and some office projects, Brandt says.
“There still seems to be a fair amount of optimism on the real estate side. We’re probably going to see a relatively strong development cycle” during 2016, says Brandt. “I still see people as fairly bullish.”
Other bankers echo those sentiments.
“The economy—I wouldn’t say it’s thriving—but it’s been a soft, modest recovery,” says Dave Rymanowski, chief business banking officer for Chaska-based KleinBank. “Most businesses are still playing things very conservatively, thinking very hard before they expand or add people, but for us, our business is up for 2015.”
Rymanowski expects to chart a similar path this year. In 2015, he says, KleinBank posted gains in the low single digits for its volume of business banking, boosted in part due to the new loan production office that KleinBank opened in April in Edina.
“My forecast would be that we’re going to have a moderate growth year in 2016,” reflects Reiling of Sunrise Banks.
Some national surveys have shown that CEOs are more cautious about 2016 and may be inclined to temper their investments. But Trier of U.S. Bank says that he’s not hearing those signals on the front lines.
“From the customers that we talk to everyday in the middle market space, we really haven’t heard that message from our CEOs and business owners. Nobody has really expressed caution going into 2016,” reflects Trier. “They’ve said things are good, the outlook is good, and we kind of think 2016 is going to be similar to 2015.”
The total loan volume for U.S. Small Business Administration loans grew to $594 million from 1,912 loan guarantees during the federal fiscal year, which ended Sept. 30, 2015. The total loans and dollar amount were both up compared to fiscal 2014, when the Minnesota District Office approved 1,755 loan guarantees worth $571 million.
The Minnesota District Office serves the entire state (some larger states have more than one district office), ranking 12th among the nation’s 68 SBA offices based on the total number of loan approvals.
The Minnesota office also ranked sixth in the nation for the number of 504 Certified Development Company loans, with 244 loans approved valued at $139 million. The SBA 504 loan program offers long-term, fixed-rate financing to small businesses related to commercial real estate—for the acquisition of land or buildings, or to pay construction and renovation costs.
The office also noted that in fiscal 2015, the volume of SBA loans made to veterans declined slightly, from $24 million in fiscal 2014 to $21 million—but that the number of loans made increased from 71 to 82.
Ranked by the number of loans made, the 10 most active financial institutions using SBA programs during fiscal year 2015 in Minnesota were:
1. Wells Fargo Bank National Association
2. U.S. Bank National Association
3. Minnesota Business Finance Corp.
4. Venture Bank
5. Bremer Bank National Association
6. 21st Century Bank
7. Highland Bank
8. Sunrise Banks National Association
9. Twin Cities Metro Certified Development Co.
Burl Gilyard is TCB’s senior writer.