Smaller banks have sharply stepped up lending for commercial real estate development and business expansion, an important sign that the economy is shedding the last vestiges of the Great Recession.
These loans underwritten by smaller banks – regional banks with assets below $50 billion and community banks with assets below $10 billion – are growing almost twice as fast as those underwritten by the biggest banks.
The growth “is proof positive that the economy is off and running,” said Mark Zandi, chief economist for forecaster Moody’s Analytics. “The fact loan growth is strong at small banks indicates that small businesses are kicking into gear.”
Over the last three quarters for which data is available, regional banks boast double-digit growth in the broad category that regulators call commercial and industrial loans. From last April through December, regional banks averaged 24.55 percent growth in these loans.
That’s about twice the growth rate for the nation’s big banks, whose lending in these categories has tapered off since 2012.
Regional banks are also seeing strong growth in the category of commercial real estate, which encompasses malls, stores, warehouses and development projects. They saw 22.54 percent growth for commercial real estate loans over the final months of 2014.
Community banks, by definition smaller, are also seeing the best loan growth since the recession’s end. For the final nine months of last year they averaged 6.07 percent growth in loans for business expansion and 5.48 percent growth in commercial real estate loans.
Commercial lending climbing back above pre-recession levels
Nationally, regional and community banks have increased lending to small businesses – approaching pre-recession levels.
Small business loans are generally considered a lagging economic indicator, meaning growth in this area comes only after economic recovery is already taking place.
Read below to see how growth between change over time (in blue) compared to 2009, pre-recession lending (in orange) at a variety of banks:
“Most of what we are seeing being put on the books now is good quality,” said Bryan Kennedy, president of Park Sterling Bank in Charlotte, N.C. “We’ve seen many companies whose sales levels might not be back to pre-recession levels, but they are now more profitable and more efficient, making more money on less business.”
In California, for example, Fresno First Bank has seen its commercial lending increase by more than 20 percent since 2009.
Unlike with mortgage lending, most commercial loans stay on the banks’ books. That means the banks have skin in the game and a finger on the economy’s pulse.
“Once we close a loan, commercial loan borrowers are constantly required to give us their financial information into the future, at least on an annual basis,” said Lee Reed, Fresno First’s executive vice president and chief credit officer.
In the Washington city of Walla Walla, business has returned to previous levels for Banner Bank.
“Our assets were comparable at year-end 2014 as they were at year-end 2009, at more than $4.7 billion,” said Dianne Larson, senior vice president of marketing. Earnings in each of the past three years “surpassed pre-crisis levels,” she added.
About 58 percent of Banner’s loans last year were for either commercial real estate lending – acquiring or developing a property for business – or commercial lending to companies that were expanding operations or product lines. That beat the 2009 figure of 51 percent.
Lending for residential mortgages remains ho-hum nationwide, so banks are turning to companies that are looking to expand or retool in a growing economy, where hiring has averaged well over 200,000 a month in the past year. It’s all made commercial real estate attractive again.
The flip side of improved lending is more borrowing, especially by companies that are more creditworthy.
“We’re seeing credit balances grow, which is good. And we’re also seeing delinquencies fall. They’re paying their bills lots faster,” said Dan Meder, who tracks small-business credit trends for Experian, an information services company. “These are all healthy signs for the economy.”
Particularly encouraging is improvement in the hard-hit construction sector.
“It just feels like the construction companies are paying their bills,” said Meder. “They were the industry segment that had the largest drop in outstanding delinquencies.”
Things are getting so hot in commercial lending that some smaller banks are bumping up against limits that invite regulatory scrutiny, said Rob Ashbaugh, a Raleigh, N.C.-based consultant for Sageworks. The company provides data on privately held companies, and he works with smaller banks on risk management.
“In general, most of those banks are really in line with what is going on along Main Street,” said Ashbaugh, adding that he’s “still seeing a lot more growth here in the South. The growth markets are where you’ve seen it: the South and the Southwest.”
Data compiled by Sageworks hints at the hot commercial real estate lending. It shows that sales for private nonresidential construction rose nationwide by 13.36 percent last year, roughly the inverse of the 13.61 percent decline in 2009 at the end of the Great Recession.
Could the new lending surge reflect a bubble, where banks lower underwriting standards to win business?
“There’s nothing out there that tells me that we are way out in front of our skis,” said Steve D. Martin, the managing principal in SDM Partners, a commercial real estate investment firm in Atlanta.
Martin is this year’s chairman of NAIOP, the Commercial Real Estate Development Association, and he said that most of the commercial real estate lending had been for acquisitions, which are less risky than new development. Over time, that will change and bubble risks will grow.
“The banks are shifting from playing defense to playing offense,” he said. “Will we create another bubble? We always have, but we’re not there yet. . . . How much we will remember from last time remains to be seen.”
For now, the Great Recession still lurks in the muscle memory of smaller banks.
“I would say bankers are, at least I am, still remembering the issues that we had during the financial crisis,” admitted Todd Leger, senior vice president and commercial banking manager for Columbia Bank in Tacoma, Wash. “Banks have to be careful that they don’t price loans so low that they are not achieving appropriate incremental returns for their shareholders.”