With health-related mandates in the rear view mirror for the time being, we’re all navigating the impacts of a new challenge, inflation, for the first time in a generation. We are hearing the very same business owners who so decisively weathered a global pandemic are now grappling with rapidly rising costs and how best to pass those on to their customers.
Macro Trends
With inflation, now over eight percent, comes real pressure for the Fed to tighten the screws on the economy by raising interest rates, slowing or stopping its purchase of securities (quantitative easing), or other monetary controls. Fed chairman Powell has openly signaled significant rates increases for 2022, yet four months into the year the Fed Funds rate has only increased by 25 basis points.
As Summit Bank Market President Gary O’Connell notes in his CBN contribution, markets have already adjusted to anticipate a higher rate environment signaled by the Fed — rising, for example, by more than 200 basis points for ten-year Treasuries since January and slightly inverting the yield curve for some debt terms. An inverted yield curve (short term rates are higher than long) has over time demonstrated reliability as a harbinger of economic recession. Today’s Fed leadership may be more worried about a worsening economy than its historical focus on taming inflation.
Interpreting these macro trends — when to borrow and when to pay off loans — is understandably bewildering to small business owners who comprise the bulk of our Central Oregon economy. There are other things more in their control.
As a newcomer to the banking industry, I appreciate Summit Bank’s culture to develop long-term relationships with its clients that stand the test of time, rate changes, policy swings and even the business cycle. That approach is a key element of the bank’s very low number of non-performing and past due loans. During my career in economic development, I saw disruption created by financial institutions that made sweeping credit risk decisions by company or industry at the first signs of distress. That’s not in the DNA of a small community bank, known to its clients through regular interactions.
Lending Trends
Rates at which businesses borrow money has been markedly volatile in 2022. Summit Bank CFO, Scott Goldstein recalls that it is the most variability he’s seen in the market for nearly two decades, even as rates have changed in the long term. At the same time, we’ve quickly grown accustomed to some of the lowest rates ever, historically. I recall being satisfied with an 8.5% rate for the mortgage on my first home in 1994. Today, it would feel like a fleecing. For perspective, here’s a chart of U.S. ten-year Treasury rates (an index used for commercial real estate loans) over the past six decades. While rates are on a steep rise currently, in the big picture they are still remarkably low. The 1990s were years of dramatic economic expansion and opportunity, yet rates then were on average more than double what they are today.
Business Loan Options
A number of public and non-traditional lenders have benefited from federal stimulus — particularly those that focus on providing credit where banking, a heavily regulated industry, can’t go. Business Oregon’s finance division has seen a capital influx equal to nearly 40 years of historical funding to deploy $83.5 million to businesses across the state — specifically improving the prospects of small and young firm’s future bankability.
With new money to lend, there are many changes, including to the Entrepreneurial Development Loan Fund (EDLF) which raised lending limits to small and early stage businesses from $250,000 to $1 million. The Oregon Business Development Loan Fund (OBDF) has expanded lending limits to $2 million and has rates that are again competitive with conventional loans. And newer, equity-like resources such as the Royalty Fund are being recapitalized ($12 million) and a new $30 million Venture Capital Fund created to offer businesses the ability to repay loans in other ways rather than just set principal and interest payments. Business Oregon is also launching a new construction insurance loan, a needed tool for business development projects.
In addition to having its own very active and successful SBA 7a loan team, Summit is an active partner with the SBA and its 504 program affiliate Community Development Corporations (CDCs) including Evergreen Business Capital and Northwest Business Development Association (WBDA). By sharing risk, banks are able to deploy capital where regulations would not otherwise allow.
At the end of the day, Summit Bank’s focus is to efficiently and effectively help businesses find the capital they need, when they need it — be it through our lending or a host of partners. Local business hero Les Schwab was famous for saying, (paraphrased) “Take care of your customers and everything else will fall into place.” We couldn’t agree more.
