Lending by banks, savings and loans hits wall in Western Pennsylvania
As commercial borrowers go, Guy Chemical Co. seemed like the kind of company bankers would love to back.
With long and steady sales growth, the Somerset manufacturer of silicone sealants sought an $800,000 loan to double its plant size in late 2008. Its customer base was diverse, its credit rating excellent and its profitability solid.
Yet it took months of effort to splice together the financing early last year from four loans, including a state government program.
"Our company is in perfect health and we've never missed a payment on any of our loans," said Guy President Guy Berkebile. "If it's this difficult for somebody like us to obtain financing, I can only imagine how difficult it must be for a company that's not in perfect health."
Quite difficult, apparently. Balances on loans to businesses and consumers contracted sharply at financial institutions nationally and in this region last year as the recession set in.
Outstanding loans at banks and savings and loans fell nearly 7.5 percent last year, the biggest drop since World War II. Balances fell to less than $7.29 trillion Dec. 31 from more than $7.87 trillion Dec. 31, 2008.
Lending by banks and S&Ls in the Pittsburgh area also fell, a Tribune-Review analysis showed. Excluding the 2008 PNC-National City banks merger, loan balances at the region's next 10 largest financial institutions dropped 11.5 percent from the end of 2008 to the end of 2009.
The 10-bank totals fell for all types of loans, according to bank filings with the Federal Financial Institutions Examination Council. Real estate loans were down 2.8 percent, business loans fell 21.5 percent, and consumer loans dropped 20.8 percent.
"There's a misconception that banks are not willing to lend," responds Dan Berninger, chairman of the Pennsylvania Bankers Association and CEO of Muncy Bank & Trust.
His four-branch bank in Muncy, Lycoming County, for instance, pushed total loans up 13 percent, from $174 million at the end of 2008 to a record $197 million at the end of last year. Berninger said Central Pennsylvania probably has healthier borrowers more eager for loans than in most regions.
"Last year, we lost about 4.5 million jobs nationally. So there may be less people out there looking for loans," he said of the industry's loan decline.
About one-third (34 percent) of small businesses were borrowing money in February, which is "historically very low," said a recent survey by the National Federation of Independent Business.
"Capital spending is on the sidelines, as is the demand for loans to finance these activities," said the association.
Another small-business advocate, Churchill-based SMC Business Council, said its survey in February found that health care and tax issues outranked access to credit as a top concern among members. But the poll showed 60 percent of members found that obtaining credit was a challenge.
Tom Henschke, acting president of SMC, said businesses hesitate to seek financing these days for several reasons. Some are reluctant to take on more debt amid the shaky economy, while others find stricter underwriting too onerous.
"Banks may be willing to lend, but what's the criteria?" said Henschke. "The hoops and hurdles are much higher now."
Local business consultant Marilyn Landis said many solid businesses are "unable to meet lending criteria" these days. Credit started "drying up" in 2008 as the recession set in, she said, leaving many companies to "burn through cash" to finance the operation.
"So the lender goes through the underwriting and sees that cash is low and sales and profits are down, and says, 'This is a bad deal,'" said Landis, president of Basic Business Concepts and past chair of SMC.
Alternatives to bank credit are available but less understood or tapped by borrowers, she said. They include such names as GE Capital Corp. and CIT Group, which recently emerged from bankruptcy.
For instance, lenders called "factors," such as Greenfield Commercial Credit, provide financing in exchange for borrowers' receivables. Another type, purchase-order lenders, such as Bibby Financial Services, provide loans to borrowers that show orders from solid customers.
None of these lenders are based in this area. Landis said many business borrowers "don't know they exist, and they have different pricing model."
Credit unions are another avenue. The 10 largest in this region increased total lending 6 percent in 2009, Tribune-Review research found.
Seven area credit unions — each far smaller than most banks — formed a business-loan cooperative in 2006 to increase their commercial lending muscle. Keystone Business Lending Solutions scrutinizes applicants, and the credit unions pool their resources to fund the loans.
"We have not changed our underwriting standards," said Lanny Horn, past chairman and current board member of Keystone, based in Cranberry.
"If the borrower can afford to repay, we'll make the loan," said Horn, also chief financial officer of Keystone member A-K Valley Federal Credit Union.
But by a 1998 law, credit unions can't carry business loans beyond 12.25 percent of their assets. A relatively large credit union of $150 million, for example, could only fund about $18 million in business loans.
"Credit unions are in a position to make very small business loans of say, $50,000 or $100,000," said Michael Wishnow, spokesman for the Pennsylvania Credit Union Association." "But we have a cap we bump up against."
A big slice of Guy Chemical's financing came from another nontraditional source: state government. The Pennsylvania Industrial Development Authority floated the company a $332,778 loan.
"Instead of getting one clean, single loan, we had to get a package of four different loans," said Berkebile. He and his wife even had to pledge their entire savings for one of the four financing pieces.
This, for a company that was named one of Inc. magazine's 500 fastest-growing companies in 2001, and one of its 5,000 fastest last year.