New Financial Terrain For Minnesota Bankers

New Financial Terrain For Minnesota Bankers

The Trump administration and rising interest rates create uncharted territory for bankers and their business customers.

Bankers have a front-row seat to track the ups and downs of the economy. Lenders who work with small business owners and other companies don’t need to look at polls and statistics to gauge current confidence in the economy: They can see first-hand what their clients are doing—or not doing—with their businesses.

Here’s what they are seeing today:

Business owners have seen a few years of gradual but consistent sales increases. Operators are generally optimistic about 2017, but are still wary about a reversal of fortune. Businesses that survived the Great Recession have clung to the conservative financial habits they adopted during the downturn. That means they have healthy balance sheets, but have been sometimes cautious about spending money on expansion, equipment or real estate.

As they look down the road, there is uncertainty. Finding and retaining good employees has become increasingly challenging. They have been careful about tapping lines of credit. What will happen with interest rates and what the new president will truly mean for business remain unknowns. They may be seeing sales start to plateau, so they are scanning the horizon for potential mergers or acquisitions as an avenue to growth.

“It was really tough for them to grow their top lines,” says Ken LaChance, a senior vice president and middle market manager for Wells Fargo, citing a challenge that he saw for clients in 2016. “They have to do more strategic things themselves. Some did acquisitions, while some added a product line. They had to change or alter the status quo.”

For years bankers have been expecting interest rates to rise at some point, but in recent years, rates have barely budged—the prime rate has been below 5 percent since 2010. A 25 basis point increase by the Federal Reserve in December 2015 marked the first increase since 2006. In the wake of the election, interest rates started to creep up, but have remained at low levels.

No guesses on the future

After several years of wrong interest-rate forecasts, bankers are disinclined to make “crystal ball” predictions for 2017.

One veteran banker says that making such forecasts is a fool’s game.

“There are people who don’t know what’s going to happen, and those that don’t know that they don’t know,” says Steve Block, market president for Sioux Falls, S.D.-based Great Western Bank. He says that a number of challenges remain for small business operators as they weigh potential expansion or acquisitions.

“I don’t remember a time when the small business owners have been so impacted by government and regulation. The burdens of operating a business are tough. There’s a lot of uncertainty out there for them,” says Block. “They’ve been sitting on capital, usage of [credit] lines is down. There’s just uncertainty out there for the typical small business owner.”

Block takes a long-term, big-picture perspective. He started his career in the financial services industry in 1980, when the prime rate was approximately 20 percent—a startling statistic for those who think that interest rates have always been as low as they are today.

“As the economy normalizes, so will the rates, but I can’t tell you when or how fast,” says Block. “I don’t think it’s going to be a dramatic ramp-up.”

Block says that he thinks large-scale projects like U.S. Bank Stadium or the light-rail Green Line helped boost the economy in the Twin Cities.

“There’s been a lot of that activity that’s sort of buoyed the local economy. That’s a lot of economic impact,” says Block. He adds that he’s not seeing many similar large projects on the horizon. “I don’t know what’s out there of that magnitude.”

One of the emerging themes for 2017 that nearly every banker mentions is that they see clients wrestling with trying to attract and retain good employees.

“Most of our business clients are dealing with some wage pressure and trying to find qualified people. We’re essentially at full employment,” says Dave Rymanowski, senior vice president and chief business banking officer with Chaska-based KleinBank. “That’s a cost that businesses are dealing with.”

Rymanowski says that climbing interest rates have actually prompted some deal conversations to speed up, rather than slow down: “It may be more expensive to do this [in 2017].”

While results vary from bank to bank, Rymanowski says that he saw a slight slowdown during the last half of the year. But he notes that rising rates are a good sign for the overall economy.

“I would say it was a solid year. We experienced a little softness towards the end of the year,” Rymanowski says of 2016. “The irony in rising interest rates is that means the economy is strong. [They have] just been so low for so long you kind of forget about that.”

Avoiding overconfidence

Another gauge of the economy is the volume of loans approved by the U.S. Small Business Administration (see the chart). For the federal fiscal year—which ended September 30, 2016—Minnesota saw a total of 1,949 SBA loans for $685.3 million, up 15 percent from $594.3 million for fiscal year 2015. Minnesota ranked 15th in the nation based on total loan value for federal fiscal year 2016. SBA loans are made by banks but are guaranteed by the federal agency.

As the loan margin yield has become thin for banks, many have looked to add fee-based services for customers. At Wells Fargo that includes treasury management services to handle company payables and receivables, electronically collecting and dispensing company cash.

“It puts us in an advisor chair,” says LaChance. “It allows you to better understand your customer.”

In some regards banks are seeing the same pressures as their customers: They’re looking at potential deals for their own growth.

“There’s been a real drive for growth, both organically and through mergers and acquisitions,” says John Depman, national leader, regional and community banking for New York-based KPMG LLC.

At the same time, bank customers are looking for increasingly mobile options. “The expectations of the consumer are being set by the likes of Google and Amazon,” he says.

Perhaps the best summation of the current mood for local lenders: They’re feeling confident about the year ahead—but not too confident.

“What’s been interesting in the last 18 months is there have been a lot more financing needs related to acquisitions than there has been [for] just pure organic growth and expansion,” says Troy Rosenbrook, senior vice president and commercial banking group manager for Bloomington-based MidCountry Bank.

Rosenbrook says if a 50 basis point increase in interest rates is enough to scuttle a future deal, the potential transaction might not have been that strong in the first place.

“[Credit line] usage is generally down because I think many companies have improved their liquidity positions over the last five years,” says Rosenbrook. “I think there’s still a fair amount of liquidity in the market that has not been fully deployed.”

In some cases that has meant that banks are cut out of deals or have reduced roles.

Rosenbrook cites a deal that MidCountry is working on where the client company is pursuing an acquisition. But the money for the purchase is being provided by private capital; MidCountry will provide a line of credit.

“That’s not the first one we’ve seen like that,” says Rosenbrook of the hybrid financing arrangement.

Among bankers and business owners alike, no one thinks the sky is falling. But they also don’t expect a sudden burst of explosive economic growth in the year ahead. “Cautiously optimistic” is the most bullish phrase that many will venture at the outset of 2017.

Mirror image of 2016?

Many say that 2017 will look a lot like 2016 for commercial banking. If that sounds familiar, it’s because forecasters said that 2016 would resemble 2015. Ultimately, no one knows exactly what’s in store for banks and their customers this year.

“Before the election we were forecasting a 2017 that looked a lot like 2016 in many ways—probably slow economic growth,” says Todd Lee, executive vice president and Twin Cities managing director for Fargo, N.D.-based Bell Bank. “The extent to which any of that changes because of the election it’s an unknown at this point. It’s not only unknown for banks, it’s unknown for borrowers.”

In the wake of the November election, interest rates have started to climb, jumping significantly in a matter of weeks.

Janet Yellen, chairwoman of the Federal Reserve, announced in mid-December that the Fed would raise its benchmark rate by a range of 0.5 to 0.75 percent.

Because 2017 could usher in big changes, some bankers were seeing caution at the end of 2016.

“I was just talking with one of our bank presidents in the Twin Cities who said there are deals that he was working on that got put on hold. That tells you that our borrowers share our uncertainty about what the future holds,” says Lee. “It’s way too early for me to say that’s a pattern.”

He says that amid intense competition and low, stagnant interest rates, some lenders started making loans to customers that previously would not have passed muster.

“It’s hard for banks to make money with skinny margins and ever-increasing costs for regulatory compliance,” says Lee. “There’s no question that some banks in our market have eased credit in the past year or two in an effort to grow and survive in this low-interest-rate environment.”

Lee says that Bell Bank did not relax its credit standards, but has confidence in the outlook for the economy. “Long-term, Bell is very bullish about the Twin Cities economy. We’ve been through a lot of cycles,” says Lee. “You’ve got to be patient.”

Another banker shares that perspective. “The economy is stable and there’s optimism for greater growth opportunities in 2017 and beyond,” says Andy Claar, senior vice president and market manager for corporate banking at Wayzata-based TCF Financial Corp.

“Most of our clients are taking a wait-and-see approach. Clients who expect tax rates to decrease [this year]are holding M&A deals until [later this year],” adds Claar. “Other clients are guardedly optimistic that a tax decrease will spur the economy and help to grow their businesses.”

Burl Gilyard is TCB’s senior writer.