Small banks are originating commercial loans at a faster pace than many larger lenders.
Commercial loans at the nation's top 25 banks rose by 2.3% over the 12-month period that ended Oct. 3, based on data compiled by the Federal Reserve. In comparison, commercial portfolios at all other banks increased by 9.4% over the same period.
The regulatory environment for big banks, including CCAR stress testing, could help explain what has been going on over the past year, industry experts said.
Still, there is a concern that smaller banks, which are not required to stress test their loan portfolios, are growing too fast. Some industry observers say they should tap the brakes to avoid taking on too much risk.
“Big banks are not taking those risks" because of the Comprehensive Capital Analysis and Review, said Gerard Cassidy, an analyst at RBC Capital Markets. "Therefore, in the next downturn the credit performance of bigger banks should be better than smaller banks [that] are growing loans so rapidly today."
Commercial and industrial lending has become a larger focus for community banks that once relied primarily on commercial real estate, a sector that is heavily monitored by regulators. While many banks have poached commercial lenders to add heft, Cassidy expressed concern about those that are making more C&I loans with insufficient expertise.
“We sometimes scratch our heads [and think] that what regulators are encouraging the banks to do to diversify revenues may actually expose them to greater credit risk in the next credit cycle," Cassidy said.
A handful of community banks have already reported large year-over-year increases in commercial loans.
Pinnacle Financial Partners in Nashville, Tenn., reported at 26% increase in C&I loans from a year earlier, to $5 billion. Part of the increase was tied to an effort to hire commercial lenders in North Carolina, where the $25 billion-asset company bought BNC Bancorp in June 2017. Pinnacle added 23 lenders in the third quarter.
The increase in C&I lending helped lower Pinnacle's ratio of commercial real estate to total risk-based capital below 300%, a level that often gains lenders increased regulatory attention.
"Our model of hiring experienced bankers to produce outsized loan and deposit growth continues to work extremely well," Terry Turner, Pinnacle’s president and CEO, said in the company's quarterly earnings press release. "We believe our recruiting strategies are hitting on all cylinders and have resulted in accelerated hiring in our markets, which is our principal investment in future growth.”
LegacyTexas Financial Group in Plano reported a 15% increase in C&I loans, excluding energy credits, with $2.1 billion in loans outstanding at Sept. 30. Commercial loans increased by 5% at both Hancock Whitney in New Orleans and Mercantile Bank in Grand Rapids, Mich.
Banks looking to book more commercial loans must be mindful of concessions to avoid credit and interest rate risk.
About a fifth of community banks usually lower interest rates in response to competition, according to a survey of 521 institutions conducted by the Federal Reserve, Conference of State Bank Supervisors and the Federal Deposit Insurance Corp. About 14% usually lower fees.
Only 5% of the bankers said they usually extend the maturity on a small-business loan; less than 3% usually lower collateral requirements. Two-thirds said they rarely allow more borrower leverage or require fewer covenants.
Hancock Whitney is trying to avoid major credit issues by focusing on smaller loans across a broad range of industries.
"We still feel good about the ability to produce a more granular portfolio," John Hairston, Hancock's president and CEO, said during a Wednesday conference call to discuss quarterly results. "And the amount of business we're doing at the smaller segments is pretty dramatically up, year over year. And we would expect to continue making progress in that space."
To be sure, all banks are fighting for the best clients.
"It's an environment that everyone's at hand-to-hand combat for a good, high-quality deal with a decent yield," Hairston said.
Markets disrupted by bigger acquisitions could also present opportunities for smaller banks, said Chris McGratty, an analyst at Keefe, Bruyette & Woods. In those situations, smaller banks, known for solid service and consistency, could snag disenchanted lenders and clients.
Several community banks have gotten big enough to make loans that were once the exclusive domain of larger lenders, said Nancy Bush, an analyst at NAB Research. At the same time, Bush said smaller banks seem to be taking business away from bigger competitors in markets like Nashville and Atlanta.
“It’s happening more because community banks are getting bigger and are able to encroach upon that type of loan that was thought of as a large bank loan,” Bush said. “It’s not happening across the board, but in select markets.”
Cassidy has been asking leaders of big banks to discuss the slowdown in C&I loan growth.
During the earnings call for JPMorgan Chase, Chief Financial Officer Marianne Lake noted that all banks have their own business mix and appetite for risk. She said JPMorgan, like other big banks, is “increasingly bound by standard risk-weighted assets” and faces pressure to keep the quality of its loan book pristine.
“On some level, we have to generate a positive return and shareholder value,” Lake added. “And on these very high-credit-quality loans that we’re producing, it’s expensive.”
Paul Davis and Kristin Broughton contributed to this report.
