We are very excited to have our first guest blog post. Stephen Friedman with Regents Bank presented to our firm a few months ago about the changes in the banking environment. Hopefully this is the first of many guest blog posts to come. If you are interested in contributing to our blog, you can e-mail Mary at firstname.lastname@example.org for more information. Thank you!
Stephen Friedman, SVP, Regents Bank
A recent report by TowerGroup indicated that in 3Q10 for the first time in four years, the supply of commercial and industrial loans (C&I loans), measured by a loosening of bank credit standards, and the demand for business loans by all sizes of companies, is back in equilibrium. While I don’t know if I fully buy into those statistics, the pendulum is definitely swinging back to normalcy in the commercial lending arena.
On the bank side of the equation, the past two years of negative growth can only last so long. After wrestling with regulatory issues and troubled loans during the recession, bank shareholders and boards now expect growth from their management teams. Banks currently have too much cash invested in Treasury Bills earning .25%, instead of in loans earning 6.0%. Commercial loan balances at San Diego banks will drop organically just from loan repayments by approximately $2 billion over the next year. Therefore local banks have to book at least this much in new credit extensions just to stay even.
On the company side of the ledger, every month that takes surviving business owners further away from the eye of the financial storm, 9/08 – 6/10, the more credit worthy these companies are and the more prepared they are to re-invest again in their business for growth rather than funding losses. However, regulators are encouraging banks to wait to see at least one year’s worth of profitability and positive cash flow before considering an extension of credit. Accordingly, businesses should consider preparing trailing twelve month financial statements, so that they can potentially access bank credit sooner than if they wait until they achieve satisfactory fiscal year end results. Businesses can further improve their chances of qualifying for credit by improving the quality of their financial reporting, to help banks get a clearer picture of their financial position.