Commercial and industrial lending might be the phoenix rising from the ashes after the financial downturn of 2008, but not all are heralding the rebirth of ready credit as an unequivocal good omen for the economy.
For some, the trend points to a looming disaster, not totally unlike the recent fallout in real estate.
According to the FDIC’s recent quarterly banking profile, commercial and industrial (C&I) lending has increased almost 12 percent across FDIC-insured banks over the first quarter of 2012. In Massachusetts alone, C&I lending was up 14 percent over the first quarter of 2012.
Rating agencies Fitch and Moody’s both expressed concerns that this boom could soon turn to bust, with the former writing in an opinion that “competitive pricing and easier terms offered by U.S. banks on commercial and industrial loans likely signal weakening asset quality for many commercial lenders.”
Federal regulators share those concerns. And the Fed’s April loan officer opinion survey indicated a sizable percentage of those surveyed had eased their pricing or underwriting on C&I loans to compete for more of those loans.
But for banks, ramping up C&I lending is a way to diversify their loan portfolios, broaden customer relationships and lean a little less on real estate.
“At times, the real estate business becomes soft,” said Gerry Nadeau, the executive vice president of commercial lending at Rockland Trust. “But right from the downturn in 2008, we’ve had steady growth in C&I lending.”
Nadeau told Banker & Tradesman that approximately 45 percent of Rockland’s new commercial loan closings last year and into the first quarter of this year were specifically commercial and industrial loans.
Businesses coming out of the recession are now looking to C&I loans as a means to purchase more inventory, buy new equipment (solar panels are big these days) or in some cases, acquire their competitors who were weakened during the downturn, Nadeau said.
Big Bank Territory
John Carusone, president of the Hartford, Conn.-based Bank Analysis Center, said that commercial and industrial lending is largely occurring in banks with more than $1 billion in assets.
He offered his own interpretation of the numbers: “Most likely the larger institutions in Massachusetts are hungry for wider margins from business lending and believe they have the capital adequacy and adequate loss reserves to begin to build this element of their loan portfolio.”
“Certainly, capital adequacy and loan quality hace dramatically improved during the last several years. Smaller institutions however, namely those under $1 billion in assets, appear to wish to take a wait-and-see attitude until the uncertainties in the economy clarify themselves,” Carusone added.
Of course, commercial and industrial lending is not the sole province of banks over $1 billion. Some smaller banks are making their own careful forays into that territory, too.
First Trade Union Bank, with about $600 million to its name in assets, has carved out its own piece of the C&I pie by determining the niches it can best fill, CEO Michael Butler told Banker & Tradesman.
First Trade concentrates much of its C&I lending in Small Business Administration loans and in taxi medallion lending, and Butler said his bank experienced a growth of about 40 percent last year in C&I lending.
And the similarly sized Provident Bank, headquartered in Amesbury, has also ramped up its C&I lending in recent years, executive chairman Charles Cullen said. While Provident’s C&I lending is not concentrated in any particular niche outside of small businesses, Cullen notes that around 75 percent of the bank’s lending happens in neighboring New Hampshire.
Provident Bank has partly increased its C&I lending through a participation loan network called BancAlliance. Out of Provident Bank’s total $75 million in C&I loans, about $15 million of that was procured through BancAlliance, Cullen said.
And Cullen says he’s comfortable with Provident’s modest, but significant participation in lending through BancAlliance, coupled with direct C&I lending in the bank’s immediate markets.
Bankers are well aware of the concerns surrounding C&I lending, but they say they’ve done their due diligence, especially here in Massachusetts where many still remember the bank failures of the late 80s and early 90s.
“Any time you have an over-competitive situation, you’re going to have players willing to turn their backs on good structure and price,” Butler said. “But with all that said, I don’t see anything in the market that looks over the edge or dangerous. If I had to say, what’s crazy is not the structure or the underwriting, it’s the pricing.”
The potential for risk is there when inexperienced banks and bankers jump into C&I lending, Nadeau says.
“This is what happened to commercial real estate, this is what happened to construction lending in the past,” he explained. “When you have new entrants into an industry without the experience, controls and staff to properly manage it, you can have excessive credit being granted at unreasonable terms and conditions which may lead to a bubble.”
Email: lalix@thewarrengroup.com
