Scarce Capital for Middle-Market America – Nightmare on Main Street?

By Andy Greenberg, CEO GF Data

— There was an interesting article in our hometown newspaper, The Philadelphia Inquirer, last week on the credit environment as portrayed in earnings reports from local banks.  It framed the serious challenges we are facing in capital availability in this country, just prior to yesterday’s dramatic changeover in Washington.
It’s a mixed bag at best.  Some banks reported slight rises in lending, others are stagnant.  Then, the article went on to say:  “Area banks are increasingly owning property used as collateral on loans.  Six [banks] that provided information for Sept. 30 and last Dec. 31 reported a 46 percent increase… in property taken over after defaults from borrowers. ” This is no different from what GF Data is seeing  and hearing from private equity groups reporting on their completed deal data, and from other deal professionals around the country. While completed deal volume is picking up, banks are still feeling the hangover effect from the last two years and are not returning to cash flow-based lending in the lower middle market with any great enthusiasm.

I’m on the board of Atlantic Central Bankers Bank, the correspondent bank owned by and serving 300 community banks in the mid-Atlantic region.  We see slack commercial and industrial (C&I) loan demand within ACBB’s membership.  Rick Morgan, the CEO of CommerceFirst Bank in Annapolis and a fellow director of ACBB sees the greatest dearth of interest in cash-flow loans in the $5 to $10 million range — too large for most community banks and too small to be of interest to the national institutions.

Who will fill the void?   Based on this cycle of earnings reports  the larger  regional banks — the ones with $10 or $20 or $30 billion in assets – are still having trouble getting out of their own way.  This week’s fire sale of Wilmington Trust to M&T bank is a case in point. Rick Morgan observed that the largest banks — the Citis and the B of As — are under pressure to build their C&I loan portfolios and are starting to reach down for smaller credits.

We see some signs of that, but it’s early and I think we are still left with a serious policy question for the new Congress to address:  in the aftermath of the global liquidity crisis and then sweeping (some would say overreaching) financial regulatory legislation, who will provide the growth and acquisition capital for middle-market businesses in America?

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