Agility in an Unpredictable Recovery
Commercial banking clients who were cautious during the peak of the pandemic are borrowing again to finance expansions. They’re spending on new equipment and new facilities, and many are acquiring other companies.
But there are two aberrations in the economy that business owners and bankers can’t easily address—labor shortages and supply chain disruptions.
Phil Trier, Twin Cities market president for Minneapolis-based U.S. Bank, recently was talking to one of his commercial clients, a leader of an over-the-road trucking company that operates nationwide.
“I asked him, ‘If you could have as many tractors and trailers as you could manage today to meet demand, what would you take?’ He said, ‘If we could take delivery today, we could use an extra 300 semis and 1,000 trailers.’ ’’
Trier says the anecdote is illustrative of today’s economy. “That gives you a really good sense about how much demand there is to move goods across the country,” Trier adds. Not only is his client having trouble accessing a supply of vehicles, but that’s on top of the transportation industry’s ongoing difficulty finding drivers.
Fully reopening the economy
By and large, businesses in the Twin Cities region and throughout much of the country are bouncing back from the pandemic downturn, particularly in the second half of 2021. Except for hospitality businesses that “have been hit particularly hard, our clients have performed really quite strongly in 2021,” Trier says. “In many cases, they have very strong top-line revenue, and they’ve proven to be quite profitable.”
But as that trucking business discovered, it can be challenging to get delivery on new equipment. Bankers also note that their business customers’ ability to recover is tempered by multiple supply shortages, which includes qualified hires. Thus, Trier says, as metro businesses look ahead to 2022, “overall, the sentiment is cautiously optimistic.”
Optimism was one of the key takeaways from a survey released in September by the Federal Reserve Bank of Minneapolis. Businesses in the Minneapolis Fed’s district “reported positive revenue growth overall during the last three months compared with both the same period last year and the previous three-month period this year,” according to the survey. In addition, “the outlook for the coming three months was even more upbeat, with almost half expecting revenue gains over last year, and just 20 percent projecting revenue decreases.”
The Minneapolis Fed survey mirrors national confidence. A national survey conducted by Pittsburgh-based PNC Bank, which in 2021 opened its first Twin Cities branch in Roseville, reports record-high optimism about the national economy among the small businesses that responded. The survey, which concluded Aug. 31, reported that these companies expect sales and profits to continue climbing, particularly as more people are
Small businesses surveyed are also optimistic about the local economy, says PNC regional economist Abbey Omodunbi. Another source of confidence, he says, is the recovery of the labor market. That market, Omodunbi observes, is “still below the precrisis level, but they’re seeing solid progress.” At the same time, he notes that 34 percent of respondents are having difficulty finding workers.
As for the Twin Cities region, Omodunbi says that it is trailing many metro areas in recovering from the pandemic-driven downturn. That said, he adds that “underlying consumer demand drivers are very strong,” and “the outlook is very positive.”
Regional bankers also report a somewhat slow start to 2021. Ken LaChance, Minneapolis-based senior vice president and market executive for Wells Fargo Commercial Banking, cites the pandemic’s lingering effects as a reason. “We didn’t emerge as quickly as everybody had hoped,” he says. Though numerous banks, including Wells Fargo, helped process federal Paycheck Protection Program (PPP) loans, the federal initiative slowed down their own lending in the first half of 2021. LaChance also notes that shortages of inventory and labor—“both big uses of cash”—also lowered loan demand.
For Wells Fargo and many other banks, that changed midyear. “We were starting to see confidence restored as the vaccines came in and business leaders began to move with some urgency and opportunity,” LaChance says. “We’re seeing some acquisition financing get done. We’re seeing the return of working capital growth. Some of it was right away because inventory costs went up, though that might have been short-lived in certain sectors.” In terms of loan activity, he adds, “it’s been a better second half of the year than the first half.”
The region’s economic recovery is reflected in increased commercial loan activity. Big banks like U.S. Bank and Wells Fargo have by no means been the only beneficiaries. Troy Rosenbrook, president of Highland Bank, which has five branches throughout the region, notes that “we’ve seen a good uptick in commercial lending.” Overall, he notes, it’s been a strong year for his bank, with growth in loans outstanding and customer acquisition.
“We saw an aggressive rebound in the first half of the year, but GDP moderated in the third quarter due in large part to the Delta variant. [In 2022] we’re going to have some pretty robust economic activity.”
—Phil Trier, U.S. Bank
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Rosenbrook says that much of his bank’s lending activity, particularly in the second half of 2021, has been driven by ownership transition. That includes internal buyouts, company owners selling their businesses, and M&A deals. This activity picked up a fair amount in the second half of the year, he says.
Ongoing low interest rates helped make those transactions work. A demographic shift that started years ago also is triggering the sale of companies. Some business owners have reached the ages at which they want to retire, but they don’t have internal successors for their companies. So they are willing to do transactions. “There’s also a lot of liquidity in the marketplace,” Rosenbrook says. Private equity firms and other investors are hunting for places to put their stockpiles of cash to work.
Tom Beck, president and CEO of Minneapolis-based Northeast Bank, notes that his institution booked “a ton of PPP loans for businesses.” Still, he adds, “for a while, businesses were tentative. They just weren’t sure what the future held, so they were holding back. I think that’s thawing a little bit, and we’re seeing things open up again.”
That noted, “all of the cash pumped into the system by the federal government has really helped drive some of this economic vitality,” Beck says. The stock market is performing well, consumers are buying, and interest rates look to be low “at least for the foreseeable future.”
Like their commercial customers, bankers generally held their breath at the beginning of 2021. After wondering what to expect, Jon Dolphin, president of Minneapolis-based 21st Century Bank, notes that “2021 has turned into a pretty good year.” One reason is what he terms “the normalization phase of the pandemic.” Hospitalization levels have certainly been a worry. At the same time, it’s clear to most people that the vaccines work. “We all have nearly two years of experience with [Covid] now,” Dolphin says. “So with that, you’re seeing signs of optimism.”
Reasons for that current confidence are abundant: The booming stock market, home prices rising at unprecedented levels, and the strong earnings reports from companies in many industries. Prices for investment properties such as apartment buildings and commercial rental facilities “have been rising pretty dramatically, fairly similar to home prices,” Dolphin says. Consumers are buying more, and “they’re buying consistently,” he notes.
“We were starting to see confidence restored as the vaccines came in and business leaders began to move with some urgency and opportunity. We’re seeing some acquisition financing get done.”
—Ken LaChance, Wells Fargo Commercial Banking
At 21st Century Bank, loan originations in 2019 exceeded those in 2020 (excluding PPP loans) by 15 to 20 percent. Dolphin says that loan demand in 2021 has resulted in originations that are going to be about halfway between the two preceding years. During all three years, about 70 percent of loans were made to owner-occupied businesses and other small businesses, and 30 percent went to investors. About half of the bank’s loans to businesses are SBA-backed.
These customers are using those funds for expansion, startups, business acquisitions, and what Dolphin calls “rent replacement,” which means buying or constructing a building of their own. 21st Century Bank isn’t seeing a trend or focus in any one area. “There’s a normal mix of activity,” he says. Company managers, he observes, are feeling “positive enough” to make advances in their businesses.
Aligning supply and demand
Looking ahead to 2022, Dolphin acknowledges that there are reasons to be somewhat cautious. Covid-19 hasn’t disappeared. Inflation is lingering, there’s a possibility the Federal Reserve will raise interest rates in response to it, and supply chain disruptions and labor shortages are ongoing headaches for businesses. Dolphin regularly hears about these uncertainties from his bank’s customers.
But companies have demonstrated an ability to respond nimbly to some big challenges. “During the pandemic, a lot of businesses, us included, learned a lot about themselves, about how you could retool or do things more efficiently using technology and other means,” Northeast Bank’s Beck says.
Companies that delayed technological improvements or simply didn’t know they existed are making them. “A year and a half ago, I didn’t even know what Zoom was,” he adds. “Now we’re able to conduct business [that way] all the time.” Technologies that automate tasks previously done by hand also are helping businesses adjust to the lack of suitable hires.
During the early months of the pandemic, “people got smarter,” says Wells Fargo’s LaChance. “They got more efficient. A lot of businesses started to utilize technology, not only in how they communicate with each other. A lot of them took advantage of our automated treasury management platform.” That online platform is designed to automate accounts payable processes, add speed and transparency to transactions, and improve cash flow.
Many clients, he adds, have adapted their operations, so they can do their work with fewer people. Still others acquired companies in the same sector whose plants were underutilized while theirs were bursting at the seams.
“People now are being more aggressive in their quest for growth and efficiencies,” LaChance says. “I don’t think that is going to change. Supply and demand will get better aligned in 2022. But the labor shortage—I don’t know of any immediate fix to that.”
U.S. Bank’s Trier notes that as of mid-October, the consensus for full-year GDP growth in 2021 is around 6 percent. “We saw an aggressive rebound in the first half of the year, but GDP moderated in the third quarter due in large part to the Delta variant,” Trier says. For 2022, economists are generally anticipating 4 percent GDP growth, though even that lower number suggests “we’re going to have some pretty robust economic activity,” Trier says. His bank’s customers are expecting strong demand in 2022. But they’re also cautious given supply chain challenges and labor shortages, which could mute growth opportunities.
How quickly Covid-19 recedes also is likely to determine how strong 2022 business conditions will be. PNC Bank economist Omodunbi says that one of the most telling findings in his bank’s recent national small-business survey was that vaccinations are top of mind for business owners. These companies “see a direct relationship between increasing vaccination rates and improvements in economic activity.” According to the PNC survey, businesses with higher employee vaccination rates were particularly upbeat in their outlook.
As 21st Century Bank’s Dolphin puts it, “What drives the economy is confidence.” Even with the lingering worries over Covid and the stumbling blocks of labor shortages and supply chain snarls, bankers like Dolphin and their commercial clients are looking to the coming year more confidently than they did at the beginning of 2021.