Commercial bankers say clients’ demand for credit remains strong, although borrowers in West Michigan are carefully watching what’s ahead for the economy.
Many borrowers seeking credit today want to make capital equipment purchases and expand a facility to increase production capacity, or need to finance a merger or acquisition to drive continued growth.
Some of the credit banks are writing these days is going to companies seeking to offset the talent shortage in a tight labor market, according to bankers MiBiz interviewed for perspectives on the commercial lending landscape in West Michigan.
The talent shortage has been a persistent concern for businesses of all sizes over the last several years and acts as a restraint on growth for some companies, said Krista Flynn, regional president for Chemical Bank in Grand Rapids.
Flynn cites instances in which growing companies needed to expand capacity but were unable to find the right people to hire. They instead are investing more in technology and automation to handle the higher workloads.
“A lot of people are looking at new technologies to be more efficient,” Flynn said. “It is all about the talent. There are people, but the qualified, trained people, if they can’t find them or it’s too competitive, they’re trying to find ways to automate. Equipment and technology to automate has been a real trend.”
Overall, Chemical Bank’s commercial loan activity this year in West Michigan has gone “really well,” she said. Business borrowing at Chemical Bank has come from a “pretty diverse base” across economic sectors, including manufacturers, distributors, food processors, and health care. As well, Flynn said real estate “continues to be strong and competitive.”
Rick Dyer, president and CEO at St. Joseph-based Edgewater Bank, also has seen the trend toward more investments in technology amid a tight labor market that stretches across all industries. Many borrowers are making those investments to upgrade existing equipment, he said.
“They’re adding some technology onto existing equipment to make it more efficient, other than just scrapping equipment and just buying all new,” Dyer said. “Now they can have one person running three different machines because they’re just monitoring the machines instead of actually running the machines.”
Bankers say their business is holding up well despite concerns about the economy and what may occur in the next few years, as well as growing worries about trade tensions and tariffs.
Cautious optimism persists
The present economic conditions, along with steady economic growth for nearly a decade after the Great Recession, have led to an increasingly competitive lending environment, said Mike Hollander, Michigan market leader for Commerce Bank.
Banks are offering longer loan terms and pricing today has become “very, very competitive,” Hollander said.
“It’s quite a borrower-friendly environment today,” he said. “Borrowers have performed so well for so long, they’re in terrific financial shape. Banks have capital that they’re looking to deploy, and we’ve seen the growth rate moderate a bit. As it has, it’s become more competitive within the banking industry for those good quality assets, so borrowers are able to negotiate strong deals.”
Even with the heightened competition and the borrower’s market, many companies are looking cautiously at the future. As a result, bankers say they have seen clients carefully approach taking on debt, with many of them closely examining whether to proceed with major expansions.
“They’re being smart about what they do,” said Mike Chaffin, senior commercial lender for Fifth Third Bank, who notes that most business owners in West Michigan are “relatively conservative” and “pretty prudent” operators anyway.
Chaffin describes the market as still enjoying a “pretty healthy business environment today” where borrowers are “optimistic,” but at the same time they “are waiting to see” what the economy does.
“There’s a little bit of caution just to say, ‘What’s next?’ So it’s a cautious optimism,” Chaffin said.
Still, as the U.S. economy heads toward a record period of expansion this summer, many businesses of all sizes are incorporating into their business planning the possibility of a downturn within the next few years.
“They still see a good economy, they still see a good business environment, but they’re not going to do anything that would overextend their business because they do know that inevitably we’re going to cycle at some point,” Chaffin said. “You don’t want to take on more leverage than you need to when you’re getting ready to cycle.”
In a U.S. economic outlook issued in June, Comerica Inc. economists put the risk of a recession at 20 percent within the next six months and at 33 percent within a year. Looking further out, Comerica economists estimate the recession risk at 52 percent within two years and 60 percent within three years.
Given the higher likelihood of a downturn in the years ahead, Flynn at Chemical Bank sees clients taking a more careful approach to debt. If the economy does decline in the next few years, they want to make sure they have a balance sheet that’s in the best shape possible to weather the situation.
Major expansions that require long-term debt are garnering greater scrutiny today, while shorter-term projects are generally moving ahead, she said.
“The smaller stuff that they can get paid off sooner, they’re willing to keep investing because they see the horizon,” Flynn said. “If it can be done in the next couple years, they’re still pretty comfortable. But if it’s a long-term big project they’re building into their balance sheet, it’s ‘I want to be ready for a recession if it comes. I’m not going to go crazy now.’ There’s a lot more discussion around that.
“They’re looking down the path now and saying, ‘If I can’t see a payback quickly in the next two years or get back to a comfortable level, I’m not going to take on this project. I’m going to wait it out.’”
Even with concerns and more questions from clients about the future of the economy, bankers say a relatively good mood still prevails among business clients across the region, driving activity and loan volume.
“In general, it’s pretty positive,” said Phil Koning, president and CEO at Hudsonville-based West Michigan Community Bank.
“There are still opportunities available and people are still doing things,” he said. “There’s new projects going on all of the time.”
As an example of that activity, Koning cites the case of one commercial client, a tool and die company, that’s gearing up to transition from 40-hour shifts, where it’s been for the last six months, to 55-hour weekly shifts.
All three of West Michigan Community Bank’s markets — Grand Rapids, eastern Ottawa County and the lakeshore — continue to record loan growth, he said.
Still, commercial clients today tend to pay down debt or, if they are expanding, to put more cash into a project and reduce what they need to borrow. Koning’s seen some deals where borrowers put half down on a project.
“They’re putting more equity in and they’re paying it off quicker,” said Koning, citing concerns about the future of the economy and memories about the Great Recession a decade ago. “They’re being more careful to keep their leverage down.”
As Dave Quade, Michigan president for Horizon Bank, describes it: “If you have cash, why pay interest if you don’t have to?”
Client concerns about the economy tend to equate to their liquidity and leverage, Quade said. If they have high liquidity and low debt, “you’re not as concerned as a company that we might be heading into a potential recession,” he said.
Even with concerns about the economy, “we still have winds at our back going forward” driving commercial loan activity, Quade said, noting that some areas, such as construction, are softening because of high costs.
“We have seen people pull back from some commercial real estate projects just because the cost to build and the rents aren’t quite in line with certain types of projects,” he said.
Overall, Horizon Bank has seen “solid growth” midway through 2019, he said.
Another strong area has been M&A across the West Michigan region, where bankers say activity remains elevated.
“We’re still seeing big acquisitions getting done, and those are long-term investments,” Hollander said.