Why Commercial Loans Remain Tough to Get

For 22 years Joy Lang of Jerry’s Flowers in Sister Bay counted on Baylake Bank for her business banking. Each spring she would make the short walk down the highway from her greenhouses to the bank where she would make arrangements for a line of credit to prep for the season.

After two decades it had become routine, like making a deposit. Take out the line of credit in the spring; pay it off during the season. She appreciated the friendly, easy relationship she had with her local bank.

“It was a good feeling, it was part of being up here,” she said.

But in 2011 things changed. When it came time to arrange for the line of credit she was asked to jump through new hoops, to offer up more personal guarantees, and answer questions about her business that hadn’t been necessary in years.

“I was disturbed,” Lang said. “And it’s not like you got notice that things would be different. We didn’t get this information until the 12th hour. There’s an illusion that if you have a business here you’ve got it made, and that’s certainly not true.”

While all Door County businesses are seasonal, the small Sister Bay flower shop and greenhouse may have the shortest season of all. Lang said she has to make her money in May or June, or there’s little chance to make up for it.

“I got the sense that our new loan officer didn’t understand our business,” she said. “When we started our business in the ‘80s we were paying an interest rate of 18 percent. They took the chance on us, and we appreciated that, and they made their money on that. But things were different then. Now after 20 years you suddenly are treated differently, and you start to question yourself.”

Listen to business owners in coffee shops and restaurants in Northern Door, and the community’s frustration with all banks is palpable. One doesn’t need to go far to hear Lang’s story echoed. She said she felt things changed in 2006, about the time her longtime banker was let go.

“It seemed like the bank was in trouble, like they just didn’t have the money to lend,” she said. “The tone of things changed around here.”

As it turns out, Lang had it pretty well nailed. When Robert Cera came to Baylake as its CEO in 2006 the institution was already stressed, he said. When the economy sputtered in 2007, then crashed in 2008, Baylake felt the effect. By June of 2009 the bank’s troubled asset ratio (the ratio of troubled assets to total capital) peaked at 69.50 percent, up from 42.70 percent in December of 2007.

While Baylake was tightening lending before the economic crisis of 2008, the collapse of the national economy sent waves crashing into the small bank’s loan portfolio. Door County had surprisingly little to do with Baylake’s struggles, Cera said.

“Our problems were generally not related to the mortgage crisis or even new construction and development,” Cera said. “It was more acute with commercial real estate.”

After the crash, business and leisure travel slowed dramatically. The effects were heavily felt in the Green Bay and Fox Valley markets, where the majority of Baylake’s lending occurs. Baylake, Cera said, had concentrated its lending too heavily in the hotel and condominium market, and when that segment took a dive the bank was severely over-exposed.

Door County, where more than 50 percent of Baylake’s deposits originate, has held up relatively well, to a large extent carrying the bank’s weaker markets.

“There have not been a large amount of failed developments in Door County,” he said. “It has held up especially well when compared to the condo market in Milwaukee, Wisconsin Dells, and Lake Geneva.”

For Door County business owners supporting Baylake with deposits it’s tough to stomach being punished for the struggles of the bank’s other regions when it’s time to get a loan. Cera said the bank is aware of the concern.

“Our general philosophy is that we want to support small businesses, particularly the seasonal businesses in Door County,” Cera said. “But banks are generally not good at small loans. Obviously you would prefer to make one big loan rather than ten small loans, because smaller loans take disproportionately more time. I know there’s frustration, but I do feel we do it better than most. We don’t take for granted that we have the largest market share in Door County.”

Despite the frustrations aired by many business owners, Baylake actually fares remarkably well when compared to other banks’ small business lending.

According to Multifunding, which ranks banks based on their ratio of small business loan balances (loans to small businesses with balances of $1 million or less) to total deposits, Baylake Bank earns a B, or good rating, putting it at 3,269 of 6,756 banks nationwide. As of the third quarter of 2011, Baylake held $861,320,000 in domestic deposits, carrying $188,804,000 small business loan balances, a nearly 22 percent ratio of small business loans to deposits. Associated Bank, with a ratio of 8.89 percent, earned a C rating, as did North Shore, with a ratio of 7.53 percent.

A national problem

The business-lending squeeze isn’t just a result of Baylake’s struggles, however. Small business lending nationwide is at its lowest level in 10 years, according to a December report by the Federal Deposit Insurance Corporation.

After the crash of 2008 a range of new regulations and standards were imposed on banks of all sizes. Banks have less leeway to give weight to track record, personal knowledge of a borrower, or character evaluations in approving a loan.

That’s something Dick Skare noticed. He has worked with multiple banks in his 35 years at The Cookery in Fish Creek, developing what he called great relationships.

“We never missed a payment, then we hit a couple rough spots after the crash and found out quickly that it mattered much less what your relationship with the banker was,” he said. “They really couldn’t do anything outside the box.”

Cera said those experiences are a result of not just the bank’s practices, but also the new rules.

“The regulatory environment is intense and challenging on banks,” Cera said. “As a result we are being more conservative and thoughtful about lines of credit and lending. For borrowers who once could take for granted that banks would act as they always have, that translates into a situation where they have to prove themselves more than in the past. The marketplace has simply changed.”

The result, Skare said, is that “who you are and what you’ve done just doesn’t count for as much.”

Cera said that while big banks and investment firms deserve great scrutiny, regulators over-reacted to the financial crisis when they applied stiff regulations to all banks.

“No institution should be allowed to affect the economy in that way again, but the same rules shouldn’t be applied to small community banks,” he said. “We’ve been painted with too broad a brush, and it’s counter-productive for small community banks. Very few large banks ever have to worry about one tiny community. In my case, how I act in Door County every day matters to me and this bank.”

Skare said it’s unfortunate that small business owners are bearing the brunt of the pain for a crisis caused by the practices of the very same institutions that are now posting record profits.

“They bailed out AIG with $32 billion,” he said. “Instead, they could have given $32,000 to a million businesses, and it would have been spread out on the street immediately and had an immediate impact.”

On Oct. 9, 2008, the Federal Reserve made a move that would further incentivize banks not to lend money. That’s when the Federal Reserve decided to start paying interest on excess bank reserves, which encouraged banks to sit on huge cash reserves. Rather than take risks lending the money to small businesses, banks are simply collecting guaranteed interest from the federal government. As a result, United States banks are sitting on $1.6 trillion in excess reserves.

Lending has changed forever

Add up all the factors and you’re left with a climate where starting or expanding a true small business is more difficult than it has been in decades. Business owners that want out are unable to find buyers, or at least buyers with access to capital. Those that want to expand are getting frustrated by the hurdles they’re facing.

Cera said Baylake’s situation is consistently improving. The bank has moved many troubled assets off its books, and interest from buyers in those that remain in its hands, like Maxwelton Braes, is growing. As of September of 2011 the bank’s troubled asset ratio had dropped to 34.50 percent.

Cera said the world of business lending has changed forever. Banks are going to ask more questions, require more detailed financials and budgets than before, he said.

“The requirements on us as an institution are just much tougher,” Cera explained. “If your only thought process is that you want it to be like it was in 2005, then you’re going to be disappointed. It will never be like that again. You don’t snap back quickly from something so severe.”

“This is getting better, and Baylake is getting better,” he said. “But it doesn’t happen overnight.”

For Door County business owners who have tightened their belts while watching the nation’s largest banks and financial institutions report record profits, patience is wearing thin.

After struggling to work something out with Baylake, Lang took her business to North Shore Bank. When she stopped making the deposits she had made for 20 years at Baylake she was disheartened that nobody from the bank seemed to notice.

“If you don’t have the banks behind you, who is going to take a risk? Where are we going here?” she said.