Have money — will lend

Wisconsin bank and credit union leaders expect the economy to slow down in the second half of 2023, but still anticipate a robust lending environment for small businesses.

When Paladin roamed the Old West in the classic American Western television series Have Gun — Will Travel, he provided his services as a hired gun to help solve people’s problems.

Wisconsin’s financial institutions find themselves in a similar position: well capitalized and willing to lend to businesses and consumers as the economy remains resilient despite predictions of a recession in the second half of 2023. It’s familiar territory for Badger State banks and credit unions, which have traditionally weathered economic storms better than their peers on the coasts.

Optimism also abounds, at least as much as it can among a typically conservative bunch like bankers, and that should be a good sign for small businesses that rely on access to loans to keep their operations running.

According to the Wisconsin Department of Financial Institutions, Wisconsin’s 125 state-chartered banks and 109 state-chartered credit unions continued to demonstrate sound financial performance in the first quarter of 2023, the most recent period for which data is fully available.

Total assets of Wisconsin’s state-chartered banks stood at $66.1 billion through March 31, 2023, down from $68.0 billion reported March 31, 2022. The net interest margin has improved, increasing from 3.11% as of March 31, 2022, to 3.32% as of March 31, 2023. Net loans have increased by 6.3% from March 31, 2022, up $2.8 billion.

In the 12 months ending on March 31, 2023:

• The capital ratio remained satisfactory at 9.77% compared to 10.05% in March 2022;
• The past due ratio improved to 0.55% from 0.64% in March 2022;
• Net operating income was $162.7 million, down from $190.3 million in March 2022 due, in part, to the end of the Paycheck Protection Program fee income and declining secondary market income;
• The return on average assets ratio declined to 0.97% from 1.13% in March 2022; and
• Bank liquidity remained adequate but was impacted by the increase in the loans-to-assets ratio at 70.61% compared to 64.58% in March 2022.

At the end of the first quarter, total assets for Wisconsin’s state-chartered credit unions rose to $61.9 billion. This is an increase of $1.2 billion since year-end 2022. Over the same period, loans outstanding grew by $896.4 million, and shares and deposits rose $1.3 billion. This resulted in a slight decrease to the loan-to-share ratio from 89.11% at year-end 2022 to 88.57%.

In the three months ending on March 31, 2023:

• Net worth to assets were at 10.38%;
• Delinquent loan to total loan ratio was 0.59%, a decrease from the year-end ratio of 0.65%;
• Net income was strong at nearly $103 million, 0.67% return on average assets; and
• Growth ratios were all positive.

All of that bodes well for the remainder of 2023, even if a recession should occur, because Wisconsin banks and credit unions are starting from a position of relative health and strength. What happened during the Great Recession of 2008–2009, when a number of Wisconsin banks and credit unions failed, is not likely this time around.

Bank on it

First-quarter 2023 data from the Federal Deposit Insurance Corp. (FDIC) indicates that Wisconsin banks remained on solid footing even as two out-of-state institutions failed during the period, according to the Wisconsin Bankers Association (WBA). While deposits decreased slightly at Wisconsin banks, borrowers overall continued to keep up to date on their loan payments. Residential, commercial, and farm loans all increased year over year, net interest margin remains strong at 3.30%, and capital levels are healthy.

“Wisconsin banks overall fared very well during the first quarter of 2023 despite the strain on the banking system caused by inflation and rising market interest rates,” says Rose Oswald Poels, president and CEO of the WBA. “Banks in our state — and the U.S. banking system overall — have the capital and liquidity to continue to meet the needs of consumers and businesses. This goes to show that Wisconsinites can continue to have confidence that their money is safe in a Wisconsin bank. With respect to the ongoing economic challenges and geopolitical concerns, Wisconsin banks are well-positioned to weather the mild economic downturn that is expected in the remainder of 2023.”

WBA noted several indicators pointing to the health of the state’s banking system:

• Residential loans continued to grow, both year over year (16.47%) and quarter over quarter (1.92%). With low inventory, homes continue to sell quickly. Despite recent interest rate increases, rates remain relatively low in historical context.
• Commercial lending increased year over year (11.27%) but slowed in the last couple of quarters as business owners held off on borrowing due
  to concerns of recession in 2023.
• Farm loans increased both year over year (2.58%) and quarter over quarter (2.06%).
• Borrowers continue to pay down their debt, and noncurrent loans decreased year over year (-15.98%) and quarter over quarter (-1.26%).
• Deposits decreased slightly year over year (-0.70%) and quarter over quarter (-1.56%) as consumers and businesses felt the pressure of inflation on their savings or left traditional banks in search of higher yields elsewhere.

In the WBA’s biannual Economic Conditions Survey of Wisconsin bank CEOs, nearly three quarters of respondents rated Wisconsin’s current economic health as “excellent” or “good.” These most recent survey results show some easing of inflation and recession concerns; 86% of respondents predict inflation to fall or stay about the same over the next six months, compared to 76% of respondents in the prior survey conducted at the end of 2022. Pessimism is fading as only 48% of respondents predict the economy to worsen over the next six months, compared to 72% of respondents at the close of 2022.

“Wisconsin bank CEOs have unique knowledge of their local market dynamics, given their economic expertise along with their relationships with businesses, community organizations, families, and individuals in their areas,” says Oswald Poels.

Among the economic bright spots cited by CEOs in the survey were high employment and wages, demand for goods and services, strong industries — summer tourism, construction, agriculture, and manufacturing — and in-migration from the Twin Cities and Chicago. Top economic concerns reported by bank CEOs were inflation and labor — particularly in service-related industries, deposit growth, and compressing interest rate margins.

Credit unions predict slower loan growth

Following a successful 2022, when loan growth topped 19%, credit union lenders face a less certain future about the 2023 credit outlook, according to Bill Merrick, deputy editor of Credit Union Magazine.

Lenders do seem apprehensive as they think about the credit market outlook in 2023, notes CUNA Senior Economist Dawit Kebede, but that may be born out of caution rather than real fears.

“There are macro risks driven by high inflation, tight monetary policy, and a slowdown in economic activity with some chance of recession,” explains Kebede. “On the upside, a record-low unemployment rate, a buffer of excess consumer savings despite a downward trend, and pent-up demand for some consumer goods and services could provide some respite.”

Kebede admits it’s not easy to predict with absolute certainty how these factors may play out in the near future.

“When people worry about an economic downturn, they’re less likely to take out loans due to uncertainty about their future financial stability,” Kebede says. “Higher interest rates make it more expensive to borrow, and reduced affordability almost always lowers demand for loans.

On the other hand, a strong labor market can boost loan growth. Employed people with steady incomes are more likely to take out loans.

“The net impact on this year’s credit outlook depends in large part on whether the Federal Reserve will succeed in its attempt at a soft landing — reversing inflation without recession,” Kebede continues. “And if it doesn’t, the timing of when the risks outweigh the upside influences consumer demand for credit. Some forecasts push the timing of recession toward the end of 2023 or early 2024. CUNA economists project that a recession, although more likely than not, will be mild without large losses in employment compared to previous downturns. The impact on credit union lending will be slower growth compared to last year but increases converging with long-run trends.”

Impact of the debt ceiling deal

What impact, if any, might the legislation passed by both houses of Congress and signed into law in early June by President Biden have on the stock market and the availability of credit for small businesses and consumers? The answer is very little.

According to Brian Andrew, chief investment officer for Johnson Financial Group, the deal assuages investors’ concerns after several weeks of intense uncertainty as investors wondered if this could be a repeat of 2011 (or even worse). That year, a debt ceiling crisis led to rising bond yields and a significant stock market decline. One of the bond-rating agencies reduced the U.S. government’s debt rating, a lower rating that remains today.

“In this case, short-term bond yields have risen, but we didn’t see the kind of market drama as in 2011,” notes Andrew. “Now, we’re likely to see investors return their focus to corporate earnings and stock valuations.”

The key provisions in the debt ceiling deal include:

• Government spending to stay flat through 2024 while raising it 1% in 2025;
• Additional work requirements for some government aid programs;
• Additional benefits for veterans;
• Reduction in available funds from past COVID-19 relief; and
• The ceiling won’t come up again until after the 2024 election, in the first quarter of 2025.

“With respect to government spending levels, the debt ceiling discussion — which relates to the government’s ability to pay its past bills — is actually less important than the budget discussion that will take place between now and the end of the fiscal year, Sept. 30,” Andrew explains. “If there is a desire for real debt reduction, it must take place here.”

Leading up to the legislation passing, bond yields had risen by more than 0.5 percentage points on the two-year and 0.4 percentage points on the 10-year Treasuries, says Andrew.

The stock market, mostly unfazed by the turmoil, traded sideways and after the debt ceiling relief rallied another 4% — up more than 11% for the year in early June.

Because the reduction in spending is modest, the impact on sectors of the market benefiting from government largesse was almost nonexistent, says Andrew.

“Investors worry most about government tax and spending policies when they create uncertainty, like we [saw in late spring],” notes Andrew. “With the debt ceiling issue behind us, investors are likely to refocus on more familiar issues, such as the Q2 earnings season and how its news may affect stock prices.”

Getting a small business loan

According to the U.S. Small Business Administration (SBA), to increase your chances of securing a loan, you should have a business plan, expense sheet, and financial projections for the next five years. These tools will give you an idea of how much you’ll need to ask for and will help the bank know they’re making a smart choice by giving you a loan.

SBA loans have low rates and long terms, making them a desirable option for small business owners. The SBA does not lend small businesses money directly. Instead, it sets guidelines for loans that are made by its partners, which include banks, credit unions, community development organizations, and microlending institutions.

With an SBA loan, the SBA regulates the amount of money you can borrow and guarantees certain interest rates that are lower than what a bank would typically offer. For some borrowers, the lender may have been unwilling to provide a loan initially. However, when the government is backing a major portion of the loan, the lender may decide the risk is more acceptable.

Some of the different routes you can take to get an SBA loan include the following:

1. Apply through your local bank

This is one of the most common ways to apply for an SBA loan. Working closely with your local bank allows you to quickly get in touch with the SBA, as banks often have a designated employee or representative who deals directly with the agency and can help you get the process started.

If you’re working with a bank that you do business with regularly, it’ll be easier to get your documentation submitted and work on the next steps. If you don’t already have a relationship with a local bank, and the banks you’ve visited can’t provide you with a loan option, there are other routes to finding the right lender for your small business.

There are two main types of SBA loans you can get through a local bank: 7(a) and 504 loans. The 7(a) loans encompass standard business financing, while the 504 loans are geared more toward long-term real estate purchases. Within both these types are a few different loan products. You can talk with your lender about which one is right for you.

2. Visit a small business development center

Use the SBA website to find your nearest Small Business Development Center. These centers provide small businesses with more than just lending help, but it’s often a great first step toward finding the right lender.

3. Use lender match

Sometimes you may not be able to work with a local bank or make it to your nearest Small Business Development Center. If that’s the case, the SBA still has you covered.

The SBA provides an online tool called Lender Match that processes your claim and matches you with several SBA-approved partners. You can find a match in as little as two days and start the funding process immediately afterward.

However, before you use Lender Match, gather some documentation and information about your business. While the program is quick and easy, it doesn’t guarantee you’ll be matched with a lender. Make sure you have the following ready for your potential lender:

• Your business plan;
• The amount of money you need and how you’ll use the funds;
• Your credit history;
• Financial projections;
• Some form of collateral; and
• Industry experience within your field.

A lot of this documentation and information will be required when you apply for an SBA loan, whether or not it’s online. Lender Match is a great tool for small business owners looking to quickly connect with funding options and evaluate their choices.

The SBA requires extensive financial documentation before you can get approved for a loan. This is because SBA loans are usually the main option for small businesses that can’t otherwise qualify for loans from traditional banks.

The SBA guarantees a portion of the loan with the bank you’re working with. That means it wants a comprehensive picture of your business’s finances, how your company has performed in the past, and where your business is headed in the future.

It also means the SBA requires personal financial information from you and the major stakeholders in your company. This is because many of these loans require the borrower to sign a personal guarantee for the loan.

Sources: U.S. Small Business Administration and Business News Daily.