The art and calculus of commercial lending 2017
Commercial lending has grown steadily in the past five years, reaching record levels. But there was only one way to go after the Great Recession — and it was up. More recently, however, commercial lending in general is growing at a slower rate, despite the continuing lure of ultra-low interest rates.
Commercial lending generally refers to loans for small and medium-size businesses, most of which are privately owned with sales ranging from $1 million to $500 million. It covers such things as expansions, new equipment and commercial real estate.
At the end of May, commercial and industrial loans by U.S. banks were essentially flat nationwide compared with the same time in 2016. Separately, commercial real estate loans were up by less than 1 percent, according to the Federal Reserve. Results are varied, with some banks realizing gains and others seeing decreases in commercial lending activity.
In an April conference call with analysts, Regions Financial Corp. executives noted that the company’s gains in its consumer lending portfolio in the first quarter of this year were more than offset by declines in business lending, specifically in commercial real estate.
Part of the reason for that decline is Regions’ effort to eliminate certain lending risks. “Although expanding our loan portfolio is part of our long-term growth agenda, we are committed to doing so in a thoughtful and disciplined manner,” Regions Chairman Grayson Hall notes in the company’s annual report. “To that end, we have tempered our risk appetite in certain sectors and have deliberately limited loan production while focusing on increasing risk-adjusted returns.”
The other side of that story is that many businesses also are risk averse in the wake of the recession. The marketplace is better, for sure, but there is a lingering caution in the air.
“In the last six to 12 months or so, the commercial customer is a lot more optimistic than they have been,” says Bill Horton, senior executive vice president and head of commercial banking at Regions Financial. “We’re all encouraged by this optimism, but we aren’t really seeing any benefit yet.”
Regions is not alone. Several other banks with a strong presence in Alabama have dealt or are dealing with decreased or flat commercial loan portfolios as of late. Increased regulatory compliance is a factor but not a deal killer most of the time. Bankers say it’s their job to increase lending, regardless of the ground rules.
“Regulation certainly impacts the process,” says David Barrentine, president of the Southeast Region for Mississippi-based BancorpSouth, which has 26 locations in Alabama. “There are more regulatory requirements to meet, more information required, and more time devoted to making sure all the regulatory boxes are checked.
“The whole process can be intimidating and frustrating to business owners. Frankly, it can feel that way to lenders, as well. But while overregulation is a factor, it has certainly not stifled business lending at BancorpSouth.”
Most businesses should be able to get a loan these days, although the process might be more tedious.
“If you’re a business with a strong balance sheet and good sales and you can’t get a loan, you’re talking with the wrong lender,” says Paul Schabacker, executive vice president and commercial sales manager at Birmingham-based ServisFirst.
“There is a misperception in the marketplace that bankers put numbers into a computer program and a decision pops out. Commercial banking is as much art as science. Sometimes the best service that we provide is when we decline a loan but tell the borrower why and how to turn that no into a yes. I would advise people to be open minded about the strengths and weaknesses of your business and seek out and listen to sound advice from competent advisors.”
In the past five years, ServisFirst has more than doubled its non-real estate business and construction lending and tripled its commercial real estate portfolio. Schabacker says the technology sector has been a source of growth, and that is not expected to change.
Cullman-based Peoples Bank of Alabama generated double-digit growth each of the past five years in both commercial and commercial real estate lending. “Obviously, the commercial real estate market suffered greatly during the recession,” says Dick Lee, executive vice president of commercial banking at Peoples Bank. “We have seen a nice rebound in both the investment property segment of our business, as well as the owner-occupied segment.
“The investment property segment has seen growth in hotel/motel properties, office/warehouse and student housing. While retail is having its problems nationwide, we have seen strong retail activity in several of the markets we serve. Within the owner-occupied segment, we are seeing increased optimism by business owners translating into plant expansion and increased production capacity. This has spurred not only growth in our real estate portfolio but also in our portfolio of machinery and equipment loans as businesses expand production and delivery capacity.”
Lee says that Peoples Bank has benefitted largely from growth in machine and fabrication shops, construction materials demand and trucking/transportation businesses, as well as opportunities within the poultry and egg production industry.
Banks are utilizing government-guaranteed and sponsored lending programs such as those available through the Alabama Department of Economic and Community Affairs and U.S. Small Business Administration. They also place a premium on using technology to their advantage and making solution-based information available to customers across all sectors.
More than anything, perhaps, the key to commercial banking is developing relationships at the local level. Regions, much larger than Peoples Bank, ServisFirst or BancorpSouth, still has essentially the same game plan for doing that. “We aren’t going to rely on the traditional type of marketing things, or let’s say image-type advertising, that are probably more often done in the consumer world,” says Regions’ Horton. “Our commercial business is more face-to-face, feet on the street.”
Horton says that uncertainty is a contributing factor behind the caution in the market. “What we hear from our customers are questions about the tax law changes, changes to the health care law, and what those changes will mean to their businesses,” he says. “We really don’t know the answers yet, and those are viable questions that people have to deal with. I wish we had the answers, but we don’t know.”
Charlie Ingram and Cary Norton are freelance contributors to Business Alabama. Both are based in Birmingham.