St. Louis businesses, bankers hold split views on credit situation
ST. LOUIS POST-DISPATCH
November 29, 2009
By Jim Gallagher
Kemco Aerospace employes 80 people in Kirkwood making parts for airplanes, missiles and guns. "We're the old-fashioned guys. We actually make things," says Daniel Ladenberger, company president.
Ladenberger recently found a way to make more things and hire as many as 50 more people. His company landed a fat contract to make gun parts. But he had a problem. Kemco would need $2 million to buy equipment and software for the job.
At the tail end of the Great Recession, with banks still suffering and retreating from risk, how could Kemco get a loan?
There's a dissonance to the stories told by St. Louis business people and bankers when the subject turns to credit. Bankers at healthy banks -- including most banks in St. Louis -- say that they have money to lend but that good business customers don't want to borrow. On the other hand, business people say that it's very tough to get a loan these days and that some bankers are giving business customers the boot.
Both views may be right.
Banks are certainly lending less money. Nationally, the FDIC reports that bank loan balances fell 3 percent in the third quarter, the biggest drop since data collection began in 1984.
Data from 77 banks based in St. Louis -- most of them small -- indicate that loan balances actually rose 1 percent in the quarter, but there was a big difference by type of loan. Commercial and industrial loans rose 4 percent, indicating banks' willingness to lend to on-going businesses. But loans backed by commercial real estate were down 1 percent and construction and development loans down 2 percent.
The change from a year ago was more dramatic, with commercial real estate loans down 5 percent and construction development down 12 percent. Commercial and industrial lending was flat.
The survey excludes large banks -- such as Bank of America and U.S. Bank -- with big market share in St. Louis. Those banks don't break out local lending figures. National statistics indicate big banks are reducing loans more than small banks.
"Our community lenders are the ones still making the loans. Our national lenders are not quite reviving yet," said Dennis Melton, director of the Small Business Administration's St. Louis office. The Bank of America, for instance, used to be one of the SBA's top five lenders. It has dropped off the top-five list after taking a $45 billion government bailout.
In its modern factory, Kemco makes wing parts for the F-15 fighter, a wiring cabinet for the C-17 Air Force transport plane, pieces for rifles and missiles and parts for the Boeing 737 airliner. About 40 percent of the work is military, with the rest for civilian use.
If the year were 2005, when credit flowed freely, Ladenberger thinks he could have walked into a bank and waltzed out with $2 million. After all, he has a profitable business, a good payment history and a contract in hand.
This time, he didn't even try for a regular bank loan. He turned to the SBA for help.
The result was a fete of financial gymnastics. Half of it is a loan from First Bank. Another 40 percent is from the St. Louis County Economic Development Council, provided through the SBA, and 10 percent is an investment from Kemco's owners.
The SBA's central loan approval office in California at first rejected the Kemco loan. "(The company) didn't do the paperwork right," said Rep. Todd Akin, R-Town and Country, who got involved in trying to reverse the decision.
Melton also jumped in, helping supply the right documents and explanations. Kemco got its loan.
Why wouldn't a bank make the loan without SBA backing? Part of it is the condition of the banking industry. Profits are down across the board, and sour loans are up. On average, the 77 St. Louis banks barely broke even in the first nine months of this year.
Only a handful are in danger of failing, but others are reducing lending in order to shore up flagging capital. Nearly all are worried about rising defaults on commercial real estate loans, which make up 37 percent of loans at area banks.
Businesses complain that banks are cutting lines of credit and refusing to renew loans. "We had a couple of really good businesses call us and say their lenders told them to take their business elsewhere," SBA's Melton said.
Banks that avoided most of the loan pitfalls have money to lend but say good businesses aren't in the mood to borrow. They're waiting for sales to improve before buying equipment or launching new ventures, bankers say.
"We're scrambling for loans everywhere we can find them," says David Kemper, CEO of Commerce Bank, which has come through the recession in good shape. "Our problem is soft loan demand, because of the economy."
Some are taking advantage of other bankers' sorrow. UMB Bank is known as a very conservative lender, and that risk aversion let it avoid problems today. Tom Chulick, chief of the bank's St. Louis operation, says it's lifted commercial and industrial lending by 14 to 15 percent in the local market.
Much of that comes from business borrowers fleeing their former banks, says Chulick. "They'll get a call from their banker saying, 'You know that $5 million credit line? You've really only used $3 million. Mind if we reduce it to $3 million?'" says Chulick.
Credit standards are up sharply over two years ago. The good news is that the cycle of credit tightening may be topping out. Only 15 percent of banks reported tightening standards for commercial and industrial loans in the Federal Reserve's October survey of lenders, down from 80 percent a year earlier.
The SBA's statistics may reflect the effect of that tightening. SBA loans in St. Louis slid sharply as the recession deepened and business pulled back. But SBA lending then picked up markedly as the economy bottomed out in mid-year.
That may reflect banks' demand for a government guarantee before they'll lend. The SBA normally guarantees repayment of 75 to 90 percent the bank loans it backs. The agency raised its guarantee, dropped fees and eased loan refinancing requirements as part of the federal economic stimulus program.
Tighter credit standards mean that business loans are more expensive, as well as harder to get. "We'll renew the loan. But instead of prime minus one, it will be prime plus one," says Steve Marsh, CEO as Enterprise Bank.
Still, the bank is always willing to lend, Marsh says. "Profitable, well-run companies have access to credit in St. Louis."
