Business Banking Trends Challenges catalyze opportunities for 2023

By Tracy Barbour

Businesses today are coping with the cumulative effects of a slew of issues, including supply chain disruptions, labor shortages, inflation, rising interest rates, the RussiaUkraine war, and the lingering effects of the COVID-19 pandemic.

“The pandemic has drastically changed many businesses,” says Wells Fargo Alaska Commercial Banking Leader Sam Mazzeo. “The labor market tightness, excessive inflation, real estate market changes, and material supply chain issues linked to COVID are ongoing and evolving. Nobody has navigated anything like what we experienced the past three years. Banks and borrowers are forced to reconcile the risks and opportunities related to all of these things.”

The US Federal Reserve (the Fed) raised interest rates dramatically in the past twelve months, up to their highest points in more than ten years. Mazzeo says most economists are projecting further interest rate increases, as the Fed continues to battle inflation.

Wells Fargo is working closely with its clients to ensure they maintain adequate cash flow and strong liquidity positions. “Working with your commercial banking relationship manager early and often can help you avoid unwanted surprises and offer you flexibility,” Mazzeo says. “It’s a great time to conduct a thorough financial review, including cash flow projections, and have frank conversations to make any necessary adjustments to loan structures and working capital lines of credit.”

While the rising interest rate environment is disconcerting, one of the primary issues for commercial banking and all industries now is labor, says Jason Criqui, commercial lending manager at Northrim Bank. Finding qualified employees, developing people internally, and finding programs to bring young people in to replace retiring Baby Boomers will be the biggest challenge. “We’re all going to have to be creative in the way we move forward, including leveraging technology to do more with less,” he says.

Focus on Relationships

All these challenges place more pressure on managers, particularly at small companies, says Northrim President and Chief Lending Officer Mike Huston. From the banking side, it created a challenge—and opportunity— for Northrim to support companies’ management with its advice and expertise.

However, relationship banking means different things to different people, Huston says. “For us, it means having a banker that understands the market that the business engages in and being responsive to that business,” he says. “We always want to have the opportunity to engage with people.”

Huston has noticed that national banks have been looking to be more efficient with delivering services to Alaska. “Generally, that means reducing the number of people who are based in Alaska,” he explains. “They are working with regional customer service centers that manage relationships for fairly large geographical areas. Community banks are also looking for ways to be more efficient, but our approach is different. We are looking to maintain responsive, supportive, experienced people who are based in Alaska.”

For Northrim, this trend has fostered valuable opportunities for growth.

The bank recently opened a branch in Soldotna, loan production offices in Kodiak and Nome, and a branch in East Anchorage. Northrim is also opening new branches in Kodiak and Nome, bringing its total number of branches in the state to nineteen. “We’re investing in the communities that are within our economic footprint,” Criqui says. “We’re trying to service the whole state.”

Northrim’s expansion efforts are, in part, supported by the success of Alaska Native village and regional corporations. Many of these entities have diversified their workforces across the country, which creates a buffer for economic cycles in Alaska.

“We are up 12 percent on our core loan portfolio; a lot of that has come from developing strong relationships with those entities,” Criqui says.

Deposits and Loan Growth Up

Many financial institutions in Alaska have seen unusually high deposits over the last two years. Bank deposits are at record high levels for businesses as well as consumers, says Steve Lundgren, president of Fairbanks-based Denali State Bank. The economic shutdown during the pandemic combined with supply chain disruptions stifled spending and, in turn, enabled businesses to save more money. “Banking has been a kind of safe haven the last couple of years with all the volatility in the markets as well as the uncertainty around the world,” he says. “Until those uncertainties and instabilities kind of normalize, I think bank deposits will stay high—at least in the short term.”

Business banking clients at Wells Fargo are also in a strong capital position. Cash balances of commercial customers are higher than at any time in the past five years. “Most of our clients are very well capitalized and positioned for growth or a downturn,” Mazzeo says.

First National Bank Alaska (FNBA) reports a similar situation. “Many businesses have strategically held capital for unseen future events,” says Chad Steadman, corporate lending director at FNBA. “While some businesses invested this capital, others continue to hold onto it.”

Steadman is seeing an increasing number of businesses transitioning ownership—selling to another company, or more commonly, selling to internal employees. “When a business sells to its employees, it is exciting to welcome a new generation of owners in Alaska,” he says.

He also sees businesses buying property they were leasing, thanks to a program of the US Small Business Administration (SBA). “Because many of these businesses are young or the properties are expensive, the SBA 504 program is ideal and offers a low down payment of 10 percent and long-term rates,” Steadman says.

FNBA’s customers continue to look for efficiencies, such as improving workflows and eliminating repetitive tasks. Over the last few years, the bank has seen businesses integrate their accounting systems with their payables and invoicing processes, according to FNBA Senior Vice President, Treasury Management and Anchorage Branch Administration Director Elaine Kroll. “Many businesses have held more significant balances in the past two years related to federal funding from pandemic recovery,” Kroll says. “With interest rates rising, customers are looking for options to use or invest that money. We are working with customers to consider which option is best for them.”

The number of commercial loans has decreased at FNBA, but the dollar volume has increased. Many customers have opted to use their liquidity to meet small-dollar investment needs, while borrowing for larger investment needs. “These larger loans are typically for asset purchases, which is a good investment for the company long term,” Steadman explains.

At Northrim, commercial loan growth is up over last year, and demand remains strong. Criqui attributes the demand, in part, to the bank’s proactive efforts to reach out to customers to see if their needs are being met.

For Mazzeo’s team at Wells Fargo, the commercial loan pipeline is larger today than it has been in three years. However, Mazzeo notes that businesses are borrowing for defined needs, and opportunistically, as they acquire other businesses or fund capital expenditures. “Interest rates are higher, and debt is more expensive, so businesses are borrowing judiciously, and not just borrowing to put cash on the balance sheet,” he says. “Credit facilities are being extended proactively to reduce uncertainty around the economy and maturities in the near term.”

More specifically, Wells Fargo is seeing more commercial loan demand around business acquisitions and consolidation. Baby Boomers have been selling successful businesses built over their lifetimes, and Alaska Native corporations and private equity groups are acquiring them. In addition, Alaska’s tourism and oil field companies are rebounding from COVID-19 shocks.

“Alaska business leaders know that standing still is not an option for them,” Mazzeo says. “We work with them to help ensure they can operate successfully and continue contributing to the Alaska economy. Throughout it all, our goal for our clients remains the same: ensure that their financial future is deliberate, not reactive based on current market variables.”

At Denali State Bank, Lundgren is seeing some businesses delay expansion plans due to higher interest rates, larger monthly payments, and higher costs. Other businesses are pushing ahead, though. “They think that prices will never be lower, and they think that rates won’t come down for