Small banks turn around on credit growth

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Community banks are seeing credit growth soar as companies seek to expand to meet the surge in consumer spending.

That is the message from a growing number of community banks reporting third quarter results this month. After a year of sluggishness, an increasing number of small lenders are reporting solid demand for business and commercial real estate loans. Many also report robust pipelines, which point to stable credit demand through 2022.

If more banks report similar results, it would be a tipping point for lenders to get over to lackluster demand out of the pandemic and into a new era of strength. Banks are rich in deposits – the result of large savings linked to a pandemic – and well equipped to fund credit growth.

“The taste we get from banks in this first wave of profits is that more markets open, companies respond and credit begins to grow,” said Robert Bolton, president of Iron Bay Capital, which invests in community banks. “The excitement we hear from management teams about their ability to grow organically is real, I think.”

However, growth is not consistent and total loan volume could be just inches ahead for the quarter, Bolton said. “But we’re seeing some very positive signs early on that we hadn’t seen in the last quarter or in a while,” he said.

For banks with assets less than $ 10 billion, commercial and industrial lending declined 13.7% year-over-year and 10.1% year-over-quarter in the second quarter, according to data from Federal Deposit Insurance Corp.

Denver’s National Bank Holdings, for example, said it had record-breaking $ 413 million in quarterly loans in the third quarter, led by $ 302 million in commercial loans and fueled by demand in a presence that Includes Colorado and four neighboring western states.

The $ 7.1 billion bank said total credit ended the quarter at $ 4.4 billion, up $ 121 million from the previous quarter after loan repayments and amortizations. Excluding the paycheck protection program loans that rolled off banks’ books in the second half of this year, total loans increased $ 174 million, or 16.5% on an annualized basis.

“Looking ahead, we are very pleased with the high level of business activity in our markets and the potential of our company for future growth,” said National CEO Tim Laney on a conference call last week about the results. He added that the credit pipelines hold the potential for steady growth through 2022.

The $ 4.4 billion asset SmartFinancial tells a similar story from its headquarters in Knoxville, Tennessee.

It increased total borrowing about 7% quarter-over-quarter to $ 2.65 billion in the third quarter, with advances partially driven by its September acquisition of Sevier County Bancshares and in part by new demand from commercial borrowers. The bank reported an annualized increase in organic credit of 9% from the previous quarter. It assumes that this number will swell into the “middle-teens” in the coming quarters.

“We’re seeing great balance in all of our markets,” said President and CEO Billy Carroll of credit demand. “We are very optimistic about where we are.”

Banks across the country are reporting similar dynamics.

Mercantile Bank in Grand Rapids, Michigan, with $ 5 billion in assets

Orrstown Financial Services of Shippensburg, Pa., Said business loan growth for the third quarter excluding PPP was $ 98.2 million, or 33% on an annualized basis. The $ 2.9 billion asset bank said in its earnings release that corporate loan production “remains robust and is expected to continue at a solid pace.”

Pacific Premier Bancorp in Irvine, Calif., Reported 11.5% annualized total credit growth from the previous quarter. The $ 21 billion asset bank ended the third quarter with $ 14 billion in loan balances, with growth fueled by both CRE and C&I loan profits.

“Our new business pipelines remain healthy and we expect them to contribute to solid organic growth,” said Steven Gardner, Chairman and CEO of Pacific Premier, in a press release of the results.

S&P Global Economics forecasts US economic growth of 5.7% and 4.1% respectively in 2021 and 2022, driven by consumer spending and entrepreneurial investment in hiring and new materials to meet demand.

Americans increased their spending in September, suggesting a surge in demand ahead of the holiday shopping season. Sales at retail stores, restaurants, and e-commerce sites were up 13.9% year over year, according to the U.S. Department of Commerce.

But potential headwinds loom.

Consumer inflation rose 5.4% in September year over year, meaning prices could skyrocket and demand slowing if increased costs persist. Inflation is linked to supply constraints imposed by the pandemic, and those pressures could affect the ability of businesses to meet demand.

Tom Broughton, Chairman and CEO of ServisFirst Bancshares in Birmingham, Alabama, cited “low inventory levels” and “persistent supply chain problems” among customers as wild cards that could make credit growth uneven.

But he said current demand and the pipelines would increase. ServisFirst, with assets of $ 14.6 billion, reported total borrowing increased $ 163 million for the third quarter from the previous quarter. Excluding PPP, borrowing grew $ 370 million, or 18% on an annualized basis.

Business expansion and other commercial real estate projects that were put on hold during the height of the pandemic are back to the fore and fueling ongoing demand, Broughton said during a conference call.

Iron Bay’s Bolton said he heard echoes of this opinion in his conversations with bank managers.

“We are pleasantly surprised with the quality of the yield to date,” said Bolton. “People are already investing in their businesses again – and working with their banks to do this – and when we get past these supply chain problems, I believe we will return to some form of normalcy and broad growth.”


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