Banking executives see strong mid-year commercial lending environment

Business lending remained strong through the middle of the year despite rising interest rates and economic uncertainty raising concerns about a possible recession, regional bank executives said.

Regional and local community banks that released quarterly results last month generally saw good commercial loan growth for the April-June period, after excluding Paycheck Protection Program loans made a while ago. two years that were canceled and taken off the books.

Quarterly earnings reports indicate that – at least in the first six months of 2022 – corporate demand for credit to support growth has held up even as interest rates have risen.

“Today’s rate hikes haven’t really had a significant impact on loan demand. I expect future increases to start dampening some of the loan demands related to commercial real estate projects in particular “, commercial bank Chairman Ray Reitsma told analysts on a conference call in July to discuss quarterly results. “It would be mitigated by the fact that housing is so scarce, so this particular slice will likely have more resilience than other types of projects. I suspect this would be the first place we see this demand decrease, but I would point out that, so far, this has not happened.

Mercantile Bank Corp. (Nasdaq: MBWM), based in Grand Rapids, reported that commercial lending during the second quarter grew at an annualized rate of 11% “with the commercial pipeline remaining at elevated levels,” the president and CEO said. management Robert Kaminksi, Jr.

Mercantile Bank’s commercial loan backlog “remains consistent with prior periods as we fund this impressive level of growth,” Reitsma said. At the end of the second quarter, Mercantile Bank had $175 million in loan commitments for new construction that it expects to finance over the next 12 to 18 months.

Commercial customer usage of current lines of credit also increased from 30% to 34% in the second quarter, he said.

As interest rates rise, with another 0.50 percentage point increase expected in September following July’s 0.75% increase in the federal funds rate, Reitsma expects loan demand to slow somewhat sales in the second half of 2022.

Companies borrow heavily

As the Federal Reserve implements further rate hikes to combat high inflation, the economy will slow and likely temper business credit demand, analysts said.

In a note to clients after the Federal Open Market Committee made the latest increase in the federal funds rate on July 27, PNC Bank Chief Economist Gus Faucher wrote that despite a “very slight decline in second quarter, business investment demand remains strong.PNC expects annualized U.S. economic growth of around 2% in the second half of 2022. Economic growth will slow to around 1% in 2023 and 2024” as rising interest rate continues to weigh on the economy,” Faucher wrote.

Part of what is driving commercial loan growth today is businesses borrowing to build up inventory to avoid paying higher prices later in times of inflation or a higher interest rate. , said Tyler Thiele, chief operating officer and director of public policy and economic analysis at Anderson Economic Group in East Lansing

Thiele thinks companies may also have started to hold onto cash in anticipation of an economic downturn and choose to use credit.

“If you’re considering having a line of credit for your business, and maybe you don’t even need to spend the money tomorrow, but if you want that line of credit established before rates go up increase more, you do now,” she said.

Of the other banks based in West Michigan, those based in Grand Rapids Independent Bank Corp. (Nasdaq: IBCP) increased commercial loans by $71.6 million in the second quarter, and by $77.3 million excluding PPP payments. Minus PPP, Independent Bank reported a first-half annualized growth rate of 24% for commercial loans.

Independent Bank expects the pace of loan growth to slow in the second half “with a still-strong pipeline” that will still generate double-digit growth in the third and fourth quarters, the company’s executive vice president said. commercial bank, Joel Rahn.

Based in the Netherlands Macatawa Bank (Nasdaq: MCBC) reported total commercial loan growth of $37.1 million in the second quarter, excluding PPP payments. The bank noted in its quarterly earnings report that “the loan growth experienced during this period was the direct result of both new loan prospecting efforts and existing customers beginning to borrow more for the expansion of their activities as pandemic risks to economic conditions diminish.”

Based in Sparta ChoiceOne Financial Services Inc. (Nasdaq: COFS), the parent company of ChoiceOne Bank, reported total organic loan growth in the second quarter of $60.7 million, or 23.8%, including $42 million from commercial loans.

Evolution of credit quality

While banks large and small reported earnings and volume growth in their July reports, many noted that credit quality remains in good shape for the time being.

Bill Demchak, CEO of PNC Financial Services Group Inc. (NYSE: PNC), based in Pittsburgh, Pa., told analysts he believed the resulting rise in interest rates and slowing economy would ultimately affect credit quality. Any problem “is somewhere in the middle of next year, not anytime in the next six months,” Demchak said.

“I think you’re just going to see a slow progression with credit losses increasing over time as we enter the downturn,” Demchak said. “The overall quality of our book is actually improving quarter over quarter. Finally, it has to stop. And finally, I think the Fed needs to slow the economy down to a sufficient pace to get inflation under control, and I think that’s going to be harder to do than the market is currently assuming, and I think it’s going to take longer than what the market currently assumes. And when that happens, we’ll see credit costs go back up to at least what we would call normalized levels. But…I don’t see any particular bubbles within the banking system as far as credit goes.

Huntington Bank (Nasdaq: HBAN), the second-largest bank operating in West Michigan that merged a year ago with the former TFC Bank, grew total commercial loans at an annualized rate of 12% in the second quarter , excluding PPP.

Stephen Steinour, Chairman and CEO of Huntington Bancshares Inc., said MiBiz in a recent interview, some of the loan growth came from manufacturers now investing in supply chains after more than two years of component shortages, providing a “tailwind” to the economy.

“The demand has never been fully met. It was a skewed recovery because if we had met full demand, the economy would have been even better,” Steinour said. “There’s a lot of offshoring and onshoring.”

Even with increases, interest rates remain “very low on a historical basis,” he said. Companies are also investing in automation and equipment to offset labor shortages and increase efficiency, Steinour said.

Huntington Bank, based in Columbus, Ohio, has a “very strong pipeline” for commercial loans and set a second-quarter record for equipment financing, he said.

“We do a lot of business in this space and we definitely see it,” Steinour said.

Fifth Third Bank (Nasdaq: FITB), based in Cincinnati, Ohio, the market leader in West Michigan, last month announced what Executive Vice President and Chief Financial Officer Jamie Leonard called growth continues “robust” commercial lending in its 11 states. Midwest and Southeast.

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