Tight lending market complicates business

WASHINGTON COUNTY — The news from the latest national survey of business lenders looks great.

“Is the recession truly over?” begins the press release from the National Association of Credit Management. “Most of the evidence says ‘yes’ ...”

Not yet in Washington County, however.

“I’m reading the national reports as well,” said Tim Henry, president and chief executive officer of Centra Bank in Washington County. “But I also know that foreclosures are continuing at a high rate on a month-to-month basis. The Cash for Clunkers (program) appears, at least locally, to have been a shot in the arm, but now that it’s over, you have not seen car sales continue at any kind of brisk pace.”

And, he said, for “appraised values, we are not seeing any increase in home or commercial properties. They are still well off their highs of ’06 and ’07.”

“I can’t say we’re seeing any strong — or even weak — signs of recovery in our area at this moment,” he said.

Many companies are restructuring their operations in-house to cut costs and try to balance budgets in an economy where business still is slow, Henry and other observers said.

“I’m now seeing more existing businesses who are challenged,” said Alice Growden, business consultant at the Western Maryland Small Business Development Center in Hagerstown. “It is difficult for people who want to start a business or who are in business often to get funding. I see that more now than before.”

‘The right direction’

Among the many gauges of the nation’s economy, the survey done by the National Association of Credit Management (NACM) would seem to be no lightweight.

More than 18,000 companies are members of NACM, which is headquartered in Columbia, Md. About half of its members are in manufacturing and the others are what are called service providers — selling cars, software and other products.

All are lenders in that they extend credit to companies or people buying their products, NACM spokeswoman Caroline Zimmerman said.

“We have everything from your small businesses to your major corporations,” she said.

Every month, the association surveys its members on about 10 economic indicators, “like amounts sent to collections, and filings for bankruptcy,” Zimmerman said. “We ask whether each of these is higher than a month ago, lower than or same as.”

From this, an index rating is computed. A weight of 50 means the economy is stagnant, below 50 means it is shrinking and above 50 means it’s growing.

Based on surveys returned in late October from more than 1,000 companies, the association’s combined index for service and manufacturing rose above 50 — to 51 — this month for the first time in more than a year, Zimmerman said. The service sector alone moved just above 50 in September, and manufacturing followed it in October, she said.

“The significance of these findings is hard to overestimate given the kind of analysis taking place around the improved GDP (gross domestic product) numbers,” NACM said in its press release.

America’s latest GDP — essentially, the market value of all of the goods and services produced — shows the economy in the July, August and September quarter began growing again after four straight quarters of contraction.

“The dominant theme is that four factors were at work with the third quarter GDP — the impact of the stimulus package, the ‘Cash for Clunkers’ program, the $8,000 new home-buyer credit and the Fed keeping interest rates low,” NACM said.

“Not only has there been some expansion in terms of credit availability, but there continues to be evidence that companies are catching up on their debt,” said Chris Kuehl, NACM’s economic analyst. “... The numbers are still far from robust, but the trend is clearly headed in the right direction.”

Increased lending

In Maryland, lending increased 8 percent in April, May and June compared to the same quarter a year ago at the 90 banks headquartered in the state, a top official said.

“I think that’s a hopeful sign,” said Kathleen Murphy, president and chief executive officer of the Maryland Bankers Association. Figures for the July, August and September quarter should be ready soon, she said.

Yet, that’s only part of the picture.

Murphy said traditional banks such as those her association represents have become a more minor player in the nation’s lending market.

“In 1960, traditional banks held 50 percent of the total credit market debt outstanding,” Murphy said. “In 2007, as we went into this recession, banks held 30 percent” as independent mortgage lenders and others took larger shares.

“The important thing is that the volume of credit just sort of exploded over the last 10 years,” she said. “It was $40 trillion as we went into this recession” versus about $24 trillion in 1999.

The 138 banks operating in Maryland “are continuing to lend, however, we do expect 2010 to be another difficult year for the economy,” Murphy said.

Mortgage interest rates are relatively low, but must go lower to spur the economy again, she said. In addition, she said, the home equity market is tough because home values still are much lower than a few years ago.

“And then, on the commercial side, we’re expecting to see that be challenging, particularly on the commercial real estate side,” Murphy said. With property values down, lenders “need to have certain occupancy rates” before they will grant loans to developers, she said.

“Used to be, you could build on spec,” she said. “Lenders are being much more cautious today. They want to make sure that loan is going to (create) cash flow.

“It’s about prudent underwriting. My members are traditional banks. They weren’t part of creating this environment today,” which was brought on largely by subprime lenders.

On the plus side, the federal government has helped the economy with its stimulus spending, Murphy said.

Just a week ago, she said, President Obama signed legislation extending the tax credit of up to $8,000 for first-time home buyers and creating a new credit of up to $6,500 for buyers who have owned their current homes for at least five years.

Still, the picture is complex and ever-changing.

For lenders, two factors to watch are the continued deterioration in the jobs market and “a lot of potential change in financial regulatory reform,” Murphy said.

The nation’s jobless rate jumped from 9.8 percent in September to 10.2 percent in October — the highest since 1983. The rate hit 9.4 percent in Washington County and 7.2 percent statewide in September; October’s rates aren’t yet out.

Optimism and struggle

From her Small Business Development Center office in Hagerstown, Alice Growden works to help people who want to start a business and those who already are in business.

Her agency is funded by the U.S. Small Business Administration, the Maryland Department of Business and Economic Development and other sources such as colleges.

In their fiscal 2009 year, which ended Sept. 30, Growden met with a total of 108 clients — “up a little bit” over her caseload the previous year.

But this past year, there was a sharp increase in businesses looking for financial assistance, she said.

“People are really out there looking for help,” she said.

In the past year, Growden’s office was able to help secure five business loans for a total of $1.6 million from local lenders. In fiscal 2008, it helped arrange six loans for a total of $1.1 million.

Meanwhile, companies here were getting other help from local lenders through loans backed by the Small Business Administration (SBA).

In fiscal 2009, there were 18 SBA-backed loans, valued at $2.5 million, issued to companies here for a variety of general business purposes, SBA’s district office said. In fiscal 2008, there were 16 such loans here, valued at $1.8 million in all.

In fiscal 2009, no local companies received SBA-backed loans of the type available to help buy land or equipment for expansion or modernization. In fiscal 2008, one such loan — for $622,000 — was issued here.

What such numbers indicate economically isn’t clear.

Steve Umberger, director of SBA’s Maryland district, said the change he’s seeing is that more businesses are asking for help.

“We are, through the SBA, providing more and more access to the capital that small businesses are requiring at this time,” he said. “A lot of national lenders have tightened their credit criteria, but we’re also seeing at least 15 new lenders participating in our programs last year, which were mainly community banks. They’re picking up the slack.”

Umberger, whose office is in Baltimore, said he also is seeing more confidence among business owners he meets across the state.

“They’re still optimistically cautious, but they’re more optimistic than a year ago — even as there certainly are people who are struggling,” he said.

At businesses that are struggling, Growden said, “it’s a good time for them to examine their cash flow and see if there’s a place where you can reduce your expenses in-house.”

“That’s what people look at if they can’t obtain new financing,” she said. “That’s a good opportunity for businesses to review that and look at what I can do.”

Banker Henry said lots of companies “have restructured themselves either through layoffs or reducing debt to try to put themselves to a place where they can be more competitive.”

“And some of the interim results we’ve seen, that’s working,” he said.

Doing business

Lisa Johnson knows first-hand how bad things have gotten for local business.

“I all but closed my doors last December,” said Johnson, who has owned Fox’s Pizza Den in Hancock for nine years. “It was bad last year. People just weren’t spending the money.”

To save her business, Johnson negotiated with her landlord and sought a new line of credit from a lender.

“I didn’t have any problems” getting the financing, she said. “I mean, I’ve never defaulted on anything at all. I wasn’t turned down. It was like: Application, filled it out, sent it in, it was there.”

“It has helped me out,” she said. “I’m back on my feet. I’ve cut back on my inventory. I only keep what I need here.”

And, Johnson said, she has cut back on some of her 11 part-time employees’ hours.

Now, at last, she said, it seems as though maybe the recession has bottomed out.

“I can see where my business is up a little,” she said.

“I go to Sam’s to get supplies, there’s people there shopping.” she said. “Maybe they’re not spending as much, but even food places in Hagerstown look busy.”

Roland Wagner, who owns the new Hallmark cards and gifts store about 30 miles away in Hagerstown’s North End, also is optimistic.

Wagner, who pegs himself “a numbers guy,” said he keeps track of customers’ average transactions at each of his six Hallmark stores.

According to those numbers, the recession didn’t begin hitting his business until last year.

“I’d say summer of ’08 is when it started to fall,” he said. “And it actually started to come back late summer, early fall of this year.”

“I tell you the truth,” he added. “This is my opinion and only my opinion — if this country wants to get well after having pneumonia, we need to start manufacturing some goods. Our unemployment rate would go from 10 percent to 2 percent.”

Wagner, 66, a former bread delivery driver who opened his first Hallmark store 25 years ago, now owns four in Pennsylvania.

Two years ago, he bought the Hallmark store, now known as Michelle’s Cardtique, at Long Meadow Shopping Center, and in February, opened the new one, called Michelle’s Hallmark, in Hagerstown Towne Square off North Pointe Drive.

Getting bank financing for the new store was no problem, he said.

“We just told them what we wanted to do and they said, ‘OK, no problem,’ after doing their research,” he said.

Wagner hired a manager and eight part-time workers — increasing his overall employment to about 50 people, he said.

Even with all of his good fortune, Wagner said, he is well aware of the suffering of other businesses in the area.

“I heard things and it’s very sad,” he said. “There are businesses going out of business. I hate to see it. I hate to see the little guy getting hurt,” he said, taking a verbal poke at a big retailer and then pulling back.

“I don’t want to talk about it,” he said.

Wagner said he’s certain the recession is a reason several storefronts near his new store in the strip plaza are vacant.

“Back in ’07, it would have been different,” he said. “People are a little leery right now to take a chance.”

Taking a chance

Into this kind of economy steps Lisa Wilson.

A middle-aged mother who has worked from her Clear Spring home for a medical agency for eight years, Wilson wants to open a pizza shop — her first business ever.

Are you crazy?

“You’re not the first person who has asked me that,” Wilson said, laughing. “And one was my financial advisers — ‘What would make you want to open one now?’”

Well, what is your answer?

“I don’t know if it really has to do with the economy,” Wilson said. “My twin boys are almost 11, and I’ve been working at home. I feel it’s time for mom to get out of the house. I woke up one morning and said, ‘Let’s open a pizza shop.’”

She said her husband, Scott, was doubtful at first, too.

Scott, who works as a claims manager for an area insurance company, wondered whether she was qualified.

Lisa said she was quick to answer.

“I said I have been a short order cook in this house. Three males that eat three different things,” she said, laughing again.

Ask her ‘why a pizza shop?’, and Wilson once again has no scientific or economic study, chart or marketing manual to show.

Pure and simple, she said, “I love pizza. Everybody loves pizza. If you take into account this economy, people still buy pizza. And I like to bake. I like to cook.”

Wilson will have the franchising know-how of the Fox’s Pizza Den people, a Pittsburgh-based chain with more than 220 family-owned stores, to back her up.

She and Scott, who will co-own the shop, chose Fox’s because they long ago got hooked on Fox’s pizza at Lisa Johnson’s Hancock shop.

“I gave her some tips,” Johnson said of the other Lisa.

Wilson said even as a first-time business owner in this economy, she didn’t have a hard time getting financing. She said the lenders are a local bank and the Tri-County Council of Western Maryland, an economic development organization representing Washington, Allegany and Garrett counties.

“They basically said with the economy, it could be good, it could be bad,” she said. “I think they thought it was a joke the first couple of visits.”

After realizing she was serious, “they didn’t discourage me at all,” she said.

The Wilsons hope to open their new shop soon. It will be in Hagerstown Towne Square, next to Michelle’s Hallmark.

Lisa Wilson isn’t blind to the ongoing recession. It’s just that she sees “no sense in waiting around. We just feel now’s our chance to go out there and do something, do something different.”

First though, she’s got to deal with a human side of what the recession has created — people desperate for jobs.

“I put an ad in your paper,” she said this past Tuesday. “The ad started this morning. I dropped my boys off (at school) at 8:30. First call was on voice mail before I got back. I had a ton of calls, a ton. I guarantee I’ve had at least 50 calls today.”

She needs 15 part-time workers in all, and before Tuesday already had hired eight of them.

“At 12:30, I called my husband and said, ‘I can’t take any more calls,’” she said. “I told my husband, ‘It’s really sad. I’ve got people saying, ‘I don’t have a car. I’ll be there on the next bus.’ People saying, ‘I lost my job.’

“It’s so sad.”

The thought weighed heavy on the conversation for a moment.

“The economy, I think it’s bad,” she said finally. “We can only hope that it gets better.”