Banking executives see strong commercial lending environment at midyear

Business lending remained strong through midyear despite rising interest rates and economic uncertainty that’s generating worries about a potential recession, according to regional banking executives.

Regional and local community banks that reported quarterly earnings last month generally recorded good growth in commercial lending for the April-to-June period, after excluding Paycheck Protection Program loans made two years ago that were forgiven and removed from the books.

The quarterly earnings reports indicate that — at least through the first six months of 2022 — business demand for credit to support growth held up even as interest rates rose.

“Today the rate increases have not really impacted loan demand in a material way. I’d expect that future increases would start to dampen some of the loan requests related to commercial real estate projects in particular,” Mercantile Bank President Ray Reitsma told analysts in a July conference call to discuss quarterly results. “That would be mitigated by the fact that housing is in such short supply, so that particular slice will probably have more resilience than other types of projects. I would suspect that that would be the first place that we see that demand soften, but I would emphasize that, to this point, that hasn’t occurred.”

Grand Rapids-based Mercantile Bank Corp. (Nasdaq: MBWM) reported that commercial loans through the second quarter grew at an annualized rate of 11 percent “with the commercial pipeline remaining at high levels,” said President and CEO 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 fund over the next 12 to 18 months.

Commercial clients’ use of present credit lines also increased from 30 percent to 34 percent in the second quarter, he said.

As interest rates rise, with another 0.50-percentage point increase expected in September following the 0.75-perent federal funds rate increase in July, Reitsma does anticipate some softening for commercial loan demand in the second half of 2022.

Business borrowing strong

As the Federal Reserve implements further rate increases to fend off high inflation, the economy will likely slow and temper business demand for credit, according to analysts.

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

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

Thiele believes businesses may also have started conserving cash in anticipation of an economic downturn and opting to use credit.

“If you’ve been considering holding 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 further, you’re doing that now,” she said.

Among other banks based in West Michigan, Grand Rapids-based Independent Bank Corp. (Nasdaq: IBCP) grew commercial loans by $71.6 million in the second quarter, and $77.3 million when excluding PPP payoffs. Minus PPP, Independent Bank for the first half recorded a 24-percent annualized growth rate for commercial loans.

Independent Bank expects the pace of loan growth to moderate in the second half “with a continued strong pipeline” that will still generate a double-digit growth rate in the third and fourth quarters, Executive Vice President for Commercial Banking Joel Rahn said.

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

Sparta-based ChoiceOne Financial Services Inc. (Nasdaq: COFS), the parent company of ChoiceOne Bank, saw total organic loan growth in the second quarter of $60.7 million, or 23.8 percent, with $42 million coming from commercial lending.

Credit quality shifts

As banks large and small reported earnings and volume growth in their July reports, many noted the credit quality remains in good shape for now.

Bill Demchak, CEO at Pittsburgh, Penn.-based PNC Financial Services Group Inc. (NYSE: PNC), told analysts that he believes rising interest rates and the resulting slower economy will eventually begin to affect credit quality. Any trouble “lies somewhere in the middle of next year, not any time in the next six months,” Demchak said.

“I think you’re just going to see a slow grind with credit losses increasing over time as we get into the slowdown,” Demchak said. “The overall quality of our book actually improves quarter-on-quarter. Eventually, that has to stop. And eventually, I think the Fed has to slow the economy to a pace to get inflation under control, and I think that’s going to be harder to do than the market currently assumes, and I think it’s going to take longer than the market currently assumes. And when that happens, we’re going to see credit costs go up at least back to what we would call normalized levels. But … I don’t see any particular bubbles inside of the banking system as it relates to credit.”

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 a 12-percent annualized rate in the second quarter, excluding PPP.

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

“Demand was never fully met. It was a distorted recovery because had we met full demand the economy would have been even better,” Steinour said. “There’s a lot of on-shoring and reshoring.”

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

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

“We do a lot of business in this space and we’re certainly seeing it,” Steinour said.

Cincinnati, Ohio-based Fifth Third Bank (Nasdaq: FITB), the market leader in West Michigan, last month reported what Executive Vice President and Chief Financial Officer Jamie Leonard called continued “robust” commercial loan growth across its 11-state footprint in the Midwest and southeast.

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