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With a renewed appetite to expand lending, big banks are said to be actively courting borrowers much smaller than their typical midmarket clients. The banks are wooing potential clients with very competitive rates and loan structures, much to the concern of smaller banks.
November 15
Business lending has a guerilla combat feel to it these days.
Small-bank executives say they have become resourceful out of desperation. Big banks have been poaching their commercial and industrial clients, but C&I is one of the few loan segments that offers growth prospects.
Community banks' countermeasures include swiping teams of loan officers away from recently merged banks, and focusing on borrowers who are too small even to appeal to a hungry big bank.
"For big banks to really move the needle in C&I, they've got to focus on companies with $50 million (in yearly revenue) and up to make it material to their revenue," says William H. W. Crawford IV, the chief executive of $1.75 billion-asset Rockville Financial Inc., in Rockville, Conn. Crawford is one of those targeting customers — and their bankers — on the rebound from recently acquired banks.
The numbers suggest big banks are having more success in luring commercial clients than community banks. C&I loans at large banks increased 2.6% in the fourth quarter through Nov 9, according to a recent Raymond James & Associates report that cited Federal Reserve data. They rose only 1.5% for the same period at small banks.
Big banks can price small banks out of the market, Raymond James analyst David Long says, and some community bankers have confirmed that is what happening in their markets. "Some of the larger banks are offering unbelievable rates to our largest customers," Mark Long, the CEO of $117.9 million-asset First Commercial Financial Corp. in Seguin, Texas,
The big banks' tactic makes little financial sense, says Thomas A. Broughton III, chief executive of $2.26 billion-asset ServisFirst Bancshares Inc., in Birmingham, Ala.
"When big banks throw out the pricing that they're throwing out, they don't have the same return-on-equity goals that we do," Broughton says. "They're just trying to show the analysts that they're growing loans, They're not looking at the profitability."
Small banks are still making some inroads. The Raymond James report noted that small banks' 1.5% quarter-to-date growth in C&I lending has already passed the 1% growth rate posted in that for the fourth quarter of 2010.
"The smaller banks that are consistently underwriting C&I are taking business away from the larger banks," David Long says.
In the Chicago market, for example, JPMorgan Chase & Co. has been focusing on larger clients, "so they're giving up on smaller credits to local or regional banks," David Long says.
For Richard J. Gavegnano, the chief executive of $1.94 billion-asset Meridian Interstate Bancorp Inc., in East Boston, Mass., any opening is a good one, even if it is narrow.
"Banks have been enjoying good deposit growth, but how are you going to make money if you don't have the other side of the equation — lending?" Gavegnano says. "You've got to put that money out to earn."
East Boston Savings Bank, a unit of Meridian,
"There is a significant amount of low-hanging fruit for us to capture and pick in the lending arena, because of consolidation in the banking sector and bad publicity for the megabanks," Gavegnano says.
Rockville Financial is trying the same tactic. In July, Rockville Financial opened a commercial lending office in New Haven, Conn., and hired the former head of commercial lending at NewAlliance Bancshares to run it and two of his colleagues to join him. In September, Rockville Financial hired five more bankers away from NewAlliance. First Niagara Financial Group Inc.
"The NewAlliance merger gave us some good opportunities," says Crawford, who was named Rockville Financial's CEO in April.
Gavegnano, of Meridian, says he's told his C&I lenders to focus on "low-tech, manufacturers of cookies and muffins, of packaging material, something that consumers use daily."
Broughton of ServisFirst described his preferred C&I borrower in similar language: "We look at what wears out," he says. "An office building doesn't wear out. But trucks and machinery do."
With those guidelines, ServisFirst's C&I lending has primarily been in the industries of mining, agribusiness, trucking and railroads, Broughton says.
"They all use things that wear out."
Some banks, like the $16.3 billion-asset Fulton Financial Corp. in Lancaster, Pa., are benefiting from regional economic improvement.
"We have a lot of customers in south and central Pennsylvania, in the Marcellus Formation shale region [where natural gas reserves have been discovered], road builders and engineering firms, and the demand in that shale region has skyrocketed," Craig Roda, a senior executive vice president at Fulton Financial, says. "We've benefited from our customers' increasing lines of credit or getting term debt to expand plant equipment."
Still, he says he is anxious.
"We're seeing pricing pressure no matter if it's a big bank or a small bank or a midsize bank. A lot of it has to do with the fact that a lot of banks are focused on the C&I business," Roda says.
