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Sunday, 06 August 2017 15:53

Commercial lending volumes rise as borrowers reach capacity

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Among the commercial and industrial borrowers at Lake Michigan Credit Union, about one-third are expanding or buying new equipment that’s needed to grow their businesses.

That’s triple the rate from as recently as the beginning of 2016 and serves as one signal of the strength of West Michigan’s economy, which in turn drives lending volumes in the commercial and industrial segment.

For years after the Great Recession, many companies sought to shed or avoid debt and hold off expansion or capital purchases for as long as possible, according to local lending executives. As those companies near or reach peak capacity, they have been coming forward in the last 12 to 18 months seeking credit.

“The floodgates in the last 18 months have really opened up on capital expenditure projects and financing for them,” said Jim Maskell, senior vice president of commercial lending at Grand Rapids-based Lake Michigan Credit Union.

A number of lenders say the commercial and industrial sector is one pocket of strength right now for lending in West Michigan, although banks are experiencing it to varying degrees.

Lenders generally say the market has not seen any major swings in the last year in lending terms or how loans are structured. The market has been following the same pattern it has for the last few years, except for the acceleration of borrowing for expansions and capital purchases.

Dave Quade, Grand Rapids market president for Horizon Bank, said borrowers in the commercial and industrial segment do seem a lot less tentative today to take on debt to expand and grow than they were 18 to 24 months ago.

Bankers also report decent activity in commercial real estate, particularly for multifamily projects, although borrowing for land development generally remains low.

“The confidence of the business community is strong,” Quade said.

At Mercantile Bank, companies are using their lines of credit “a little more heavily” and commercial and industrial lending has picked up somewhat to support equipment needs, said President Ray Reitsma.

“I wouldn’t say it’s a profound change but a slight uptick in the willingness to borrow for equipment,” Reitsma said.

Mercantile Bank recently reported strong overall loan growth for the second quarter, although Reitsma still sees some lingering reluctance to borrow. Amid a national economy that’s been growing at a moderate rate and has been “bumpy for quite some time,” Reitsma said some clients are still holding off financing their expansions.

Despite that market dynamic, Mercantile Bank had $152 million in new commercial loan originations during the quarter from new and existing borrowers. At the end of the quarter, Mercantile had $111 million in unfunded commitments for commercial construction and development loans that it expects to “largely fund” within 12 to 18 months.

“There seems to be good, steady progress in most corners of the economy,” Reitsma said.

LEAN STRATEGY

Many business owners that came through the economic period of 2009-2010 took a view that they were going to operate much leaner than before, bankers say. That meant paying off or deferring debt and building liquidity that they used to grow or can now implement as part of a finance package for an expansion or capital purchase.

“Coming out of the Great Recession, a lot of businesses wanted to be very careful about how they were going to spend in the future and maybe they were a little more deliberate in terms of when they would start spending money,” said John Porterfield, regional president in Grand Rapids for Comerica Bank. “Maybe they had a lean operation in terms of expense structure, so it enabled them to build more liquidity than you might see in a pre-recession type of economy.

“When they decided to expand, some customers didn’t need the bank as much as they might have in the past. A lot of these expansions are funded with bank debt and current liquidity of the borrowers.”

Still, Porterfield reports “real good” commercial lending volumes at midyear for Comerica in the West Michigan region he oversees.

Sean Welsh, regional president of PNC Bank, sees a similar trend taking shape as borrowers deploy their liquidity first and then seek to borrow for a project. He describes the present conditions as a “natural kind of deployment of capital with balance sheet cash being the first one and the second step being to borrow to go forward.”

Part of what’s driving the present uptick in industrial lending is a lack of skilled workers, which leads some employers to look to invest in automation and technology.

“There’s just a real shortage of talent, so companies are using more automation,” he said. “They’re almost forced to do it.”

COMPETITION RISES

As West Michigan’s economy performed well the last few years, competition among lenders has intensified, especially as more community banks moved into the Grand Rapids-area market in the last year to target commercial borrowers.

“Competition is fierce, especially for well-run, well-managed companies,” Maskell said. “Everybody is fiercely competitive over commercial and industrial lending. It’s good for the borrower.”

New players in the Grand Rapids market include: Farmington Hills-based Level One Bank, which opened an office on the city’s southeast side; Commercial Bank based in Ithaca, north of Lansing, which opened downtown; Kansas City, Mo.-based Commerce Bancshares Inc., which opened downtown; and Michigan City, Ind.-based Horizon Bank, which has been in Kalamazoo for five years and opened a full-service bank office in May on Pearl Street. ChoiceOne also added a commercial lending office downtown.

All of them elevated the competitive landscape as banks look for good companies that need credit for expansions, capital purchases or acquisitions.

“If you’re going to take that plunge in expansion, it’s a good time because there’s capital available in the banks,” Horizon’s Quade said.

DOWNTURN AHEAD?

Although the economy keeps expanding in West Michigan and nationally, some bankers say there is a growing recognition that the next downturn is getting closer.

“We’ve been in a pretty long recovery,” notes Brad Henion, chief lending officer at Sparta-basedChoiceOne Bank. “We’re already past historically how long recoveries last.”

Comerica’s clients don’t expect another recession or meaningful downturn in the next year or two. According to Porterfield, there’s “not any doom and gloom out there that we’ve been seeing in our discussions with our customers. However, borrowers “intend to be fully prepared for it when they get a good feeling that perhaps things are going to slow down,” he said.

“We’ve had a few customers or some who are saying the sales growth they’ve experienced for five or seven years in a row, that’s beginning to diminish,” Porterfield said. “Maybe they’re not growing in their current business model, but they’re certainly doing just fine from an overall perspective.”

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