Published in Finance

Cautious and appropriate: Businesses slow to take on debt, even as optimism grows, bankers say

BY Saturday, July 07, 2018 12:23pm

Businesses slow to take on debt, even as optimism grows, bankers say

Despite strong business optimism and continued economic expansion, bankers say they still see their West Michigan business clients taking a cautious approach to debt.

As both the U.S. and Michigan economies continue to cruise along in good shape, some businesses — even as they grow — are keeping in mind the economic pain of nearly a decade ago. They are using their production capacity to the fullest before expanding a facility, building new plants or making major capital equipment purchases, as a result delaying adding debt to their balance sheets.

Some are even using cash first to finance expansions or to pay off their loans early.

“In many situations, they’re taking a good long look and they’re making sure they’re utilizing current capacity and current capabilities before they look to make a move,” said Robert Kaminski, president and CEO of Grand Rapids-based Mercantile Bank Corp. “If they’re having to buy something to expand, they’re wanting to put down liquidity as opposed to borrowing, and I think that’s a good thing. That’s smart.”

Kaminski’s thoughts echo what many bankers have stated for a number of years following the recession. As the present economic expansion continues, some business clients also believe the next slowdown or downturn perhaps isn’t too far off, and they want to make sure they’re prepared for it.

“Many of those folks, and to their credit, they remember some of the challenges many companies went through during the recession, and they’re just saying, ‘When the next recession does come, I don’t want to be overburdened with debt,’” Kaminski said. “It’s a good way to run your business. Those are the people we want to partner with because they’re running their business in a smart way.”

Kaminski was among a trio of executives at West Michigan-based banks that MiBiz contacted for perspectives on present commercial lending demands. Each exec expressed a similar perspective that’s prevailed for the last few years: Loan demand remains solid and consistent with the state of the economy, although tempered somewhat by a continued sense of caution by some prospective borrowers.

“There is optimism out there, but businesses are making prudent decisions based on their own businesses,” said Matt Hoeksema, chief commercial banking officer at Holland-based Macatawa Bank.

Hoeksema describes the present commercial borrowing environment as “cautious and appropriate.”

“Although loan demand is strong, we don’t see some of that reckless optimism that we saw pre the Great Recession,” he said. “Businesses are taking a cautious approach to borrowing money and are making sure that they’re making decisions that are appropriate for the needs they have and are not just jumping on the ‘everything’s great, we’re going to build it and they will come’ approach.

“They do see good demand out there and they’re investing in capital assets where they see that demand continuing and have a need internally to support that growth.”


Amid that environment comes intensifying competition among banks for commercial borrowers, said Eric Seifert, the owner of Left Coast Capital Resources LLC in Muskegon who works with small businesses to secure capital and credit.

Banks are “very aggressive” right now in their pursuit of commercial borrowers to drive growth, said Seifert, who generally works with businesses with $10 million or less in annual revenue.

“It’s a good time to look for credit because banks are really hungry for deals,” he said.

Upcoming mid-year earnings reports will provide a further look at the present loan demand and growth rates at banks based in West Michigan.

At Macatawa Bank, total commercial loans at the end of the first quarter were essentially flat from the prior three-month period and grew 4.5 percent from a year earlier to $1 billion. Commercial and industrial loans grew 5.2 percent year-to-year to $477.0 million, and commercial real estate loans grew 4.1 percent to $529.8 million.

Overall, Macatawa Bank (Nasdaq: MCBC) at midyear has been experiencing what Hoeksema calls good demand for commercial loans that he expects to continue through the rest of the year.

“We’re happy with the demand and the loan growth we’re seeing, and it’s appropriate and consistent with the industry that we have here locally,” he said. “(In the second half of 2018) we see consistent demand with what we’ve seen in the first half of the year. We haven’t seen any slowdown in our pipeline with regards to requests, both from new customers and existing customers.”

Grand Rapids-based Independent Bank (Nasdaq: IBCP) has experienced what President and CEO Brad Kessel terms “pretty good” loan growth through the first half of 2018. Loan demand has been consistent in the last 12 months, Kessel said.

The bank in the first quarter recorded annualized net loan growth of 10.4 percent from the prior period, or $52.6 million, across all lending categories. Commercial loans grew slightly from the fourth quarter of 2017 to $857.4 million, and by 5.1 percent from the first quarter of 2017.

Kessel expects to see similar loan growth in the second half of 2018 as the economy remains sound with low unemployment and strong job growth.

“We think we’re going to continue on that track the balance of the year,” Kessel said. “Macroeconomic numbers continue to be pretty robust.”


Business confidence is high as well. The latest semi-annual Michigan business sentiment survey by The Accident Fund registered an alltime high in June. Eight out of 10 executives at small and mid-sized business surveyed said they were satisfied with the state of the economy, an increase of seven percentage points from December’s survey results.

Bankers say the commercial loan demand tracks the economy, although other factors can temper growth rates.

Mercantile Bank (Nasdaq: MBWM) recorded $111 million in commercial loans during the quarter to new and existing clients, and at the end of the quarter had $133 million in unfunded construction and development loans that it expects to fund within 12 to 18 months.

Yet the bank’s commercial loan portfolio overall contracted during the first quarter by $10 million from the fourth quarter of 2017 to $2.19 billion because of what Kaminski called an “unusually high” level of loan payoffs. That includes $21 million paid off from borrowers on the bank’s “watch list” of loans in non-performing status, plus another $21 million from clients selling their business or the collateral behind the loan.

“Because you have an economy going pretty well, you have businesses that are selling their assets on their project,” he said. “And some are selling their company and creating a cash event for themselves and paying off and paying down their loan.”


Kaminski expects Mercantile’s loan pipeline to remain strong through 2018, with an annual growth rate in the mid-single digits.

Kessel and Hoeksema report similar trends in loan payoffs by businesses after they sell, or owners using excess cash — if their businesses are performing well — to pay down their debt.

That so-called churn, along with the normal amortization of a loan portfolio, does temper the net loan growth on a bank’s quarterly balance sheet from one period to the next.

“We do see healthy companies taking an aggressive approach toward repaying debt and deleveraging their balance sheets,” Hoeksema said. “All of those things do come into play. Sometimes you have good loan production and you don’t see that growth on the balance sheet as a result of that churn.”

While the elevated level of payoffs tempers the quarterly net loan growth that shows up on the balance sheet, Mercantile’s Kaminski said he’s fine with the present state of business.

“It’s hard to quarrel with good times, that’s for sure,” Kaminski said.

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