Business Lending: Finally on the Comeback?

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Seth Perlman / AP

The First National Bank in Staunton, Ill.

Rusty Cloutier's billboards are finally starting to pay off. In 2008, Cloutier's MidSouth Bank erected giant roadside signs proclaiming the bank had $200 million and was looking to lend. For nearly two years, the signs made little difference. The number of individuals and companies going to the Lafayette, La.–based bank continued to drop. But in the past two months that has started to change.

"I am hearing from customers we haven't heard from in months," says Cloutier, who is the chief executive of the bank. "We have gone from nothing to some serious demand for loans."

And Cloutier is not alone. A number of small and community banks say that demand for loans after more than a year of a slump is finally coming back. Despite 3.2% growth in economic activity in the first quarter, many economists have continued to be concerned about the slow pace of business lending. Businesses often need to borrow to expand, buy equipment and hire workers. Without loan growth, many have argued, we can't have a sustained rebound.

So it is a promising sign for the economy that more and more businesses and individuals seem headed back to the bank. PayNet, which tracks lending activity, says small-business lending rose in March from the year before. It was the first yearly jump in lending activity since October 2007. April data is not yet available.

"The lending business is starting to turn around," says Paul Merski, chief economist at trade group Independent Community Bankers of America. "Small-business owners often use their homes as collateral. So as [home] prices are stabilizing they have more ability to borrow."

Not all bankers are seeing the turnaround. On Monday, the Federal Reserve released its April survey of senior loan officers from banks around the country. According to the survey, lending demand continued to drop during the month. Last week, the Federal Home Loan Bank of New York, which serves other banks, said falling demand for loans had caused its members to borrow less money from the congressionally chartered bank in the first quarter of this year. And lending continues to fall at many of the nation's largest banks.

Nonetheless, a number of smaller banks are seeing a pickup in demand. Community banks around the country make about a third of all loans to small business that are $1 million and below. At Trinity Bank in Fort Worth, Texas, lending was up 13% in the first quarter, and bank CEO Jeffrey Harp says activity has risen even more in the past two months. Harp, though, says that while the increase in lending is a good sign for the economy, most of the loans his customers are requesting are for buying commercial real estate properties. He said his bank, which lends mostly to businesses, is not yet seeing demand for loans to finance equipment purchases or hire employees.

Mark Schroeder, chief executive officer of German American Bancorp in Jasper, Ind., says things do seem to have changed in the past four to six weeks. His bank is not seeing an increase in demand yet, but he is getting a lot more calls from his small-business customers about possible deals. "They are calling to find out how to price out transactions they are thinking of completing later this summer or later in the year," says Schroeder. "We are hearing from a lot of customers that we haven't heard from in many months."

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