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ECONOMY: Small business lending demand may be shrinking

By PAT MAIO | Posted: Sunday, August 14, 2011 5:00 am | No Comments Posted Small-business lending started off the first half of 2011 in the two-county San Diego and Riverside region on a flattish note, but with a financial crisis erupting across the world in recent weeks, local bankers are quivering as they begin to see demand for new loans dry up. "Our pipeline has certainly dropped off in the last month and a half," said David H. Bartram, a small-business banking expert hired by Chula Vista-based Seacoast Commerce to build up its lending unit. "It's kind of a mess out there," he said. In recent weeks, the stock market has swung several hundreds of points up or down daily; Congress came within a day of failing to raise the national debt limit ahead of a default; Standard & Poor's credit rating agency shook the global financial system when it said U.S. Treasury debt no longer was among the safest in the world; and rumors of bank failures have cropped up in Europe. Also, the Federal Reserve announced last week that it would keep interest rates low over the next two years, and Fannie Mae and Freddie Mac, secondary markets for buying mortgages in the U.S., sought billions more in taxpayer funds as they've begun to falter. "Business loan demand is blah," said Larry D. Hartwig, president and chief executive officer of Escondido-based California Community Bank. Working capital lines of credit to handle payment of bills and build inventory are on average at 41 percent of capacity. "Credit lines are underutilized," he said. "Normally, in the second quarter, you see these lines of credit pick up due to seasonal demand and manufacturing cycles. There's just nothing happening out there." In a good economy, Hartwig said that more than 70 percent of a credit line is used.

Is there growth in lending? "No," he said. "Typically, lines of credit are utilized when things are going on. " Bartram's bank has funded about $63 million in SBA loans this year versus about $48 million for the same year-earlier period. But loan demand started to fall in June. "It kind of spiked a little bit until the debt ceiling talk, and then it dropped off," Bartram said. He explained that customers have become less willing to take out a loan to buy commercial real estate. "A year ago, a lot (of people) thought they were buying real estate at the right price. Now, they are wondering if we are going into a recession and if real estate is going to fall more." He isn't alone in his concerns. "The crisis has really just boiled over in the last week or two and is affecting everything," said Gary Votapka, president and chief executive officer of Temecula-based Mission Oaks National Bank. "It's pretty scary." Votapka said it's premature to predict how the latest financial crisis might play out. "We'll know more in the next quarter or so how this affects demand for credit and people's ability to make loan payments," he said. "Loan demand is soft," said Paul Rodeno, chief executive officer of San Diego-based Security Business Bank. Rodeno's bank plans to open an Escondido branch on Monday, and build a larger business lending base across a swath of North San Diego County. "Lack of consistent trends in the market makes decision-making harder," said Rodeno, whose bank has branches in Carlsbad and Carmel Valley. SBA lending in the first half of 2011 doesn't really reflect a fall-off in lending ---- though demand is what bankers are worried about going forward, since most of the disruption in the marketplace has emerged in the third quarter, which began July 1. In fact, said Rachel Baranick, deputy district director for the Small Business Administration's Santa Ana office, the SBA may run out of money before the fiscal year ends Sept. 30 for the first time in recent memory. "It means that banks are lending more money," said Baranick, whose office oversees a broad area of Southern California lending that includes Riverside County. "I think we are OK right now." According to figures provided by regional SBA offices in Southern California, SBA lending to businesses in San Diego County fell a modest 2.3 percent to $116.3 million in the seven-month period of January to July 30, from $119 million in the same year-ago period. Lending actually rose 12.2 percent in the same period in Riverside County to $83.8 million from the $74.7 million seen a year earlier. Some SBA lending was boosted by federal stimulus money

in the past year that raised loan limits to $5 million, waived fees for borrowers and offered 90 percent guarantees to lenders. While lending has remained flat, Michael Alter, president and chief executive officer of Glenview, Ill.-based SurePayroll, a provider of payroll services to 30,000 small businesses nationwide, says hiring has fallen steadily at small firms since early 2010. In San Diego, he said, hiring has continued to fall from January 2010 when it began a tracking index for small businesses. With a base figure of 10,000, hiring is down 6.35 percent to 9,464 workers at the end of July. "The data is showing that there has been a slowdown in hiring and a slight reduction in paychecks," Alter said. "There is a tremendous amount of uncertainty among small businesses. They are sitting on the sidelines." Nonetheless, the uncertain economy hasn't deterred some from starting a business. Joseph D'Andrea and partner Paula Tasjian plan to open a dot-com dry goods grocery on Monday that will make deliveries in a five-mile radius around his East Valley Parkway store in Escondido. "No matter what happens to the economy, people have to eat," D'Andrea said. Lorette Oliver of Temecula is getting ready to launch a franchise business geared toward inhome senior and disabled adult care, called "Right at Home." "I'm not nervous," said Oliver, who has several years of experience in the senior living industry. "It's far more recession-proof than the senior living industry, where seniors who move out of their homes into senior living can find it challenging to sell their homes in this economy." Oliver plans to hire an office coordinator and begin recruiting up to 30 caregivers after she opens her business Aug. 22.
Call staff writer Pat Maio at 760-740-3527.
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