Given all that’s occurred in the past 20 months, Krista Flynn considers the present lending environment a pleasant surprise.
While year-over-year net growth remains flat or low for many lenders as federal Paycheck Protection Program loans are forgiven and clients pay off debt and deploy cash, Flynn and other bankers describe a West Michigan market in which commercial loan originations have been strong in the latter half of 2021.
A growing economy and the ability of companies to adapt to the circumstances of an ongoing pandemic have driven commercial loan originations, particularly for expansions and capital purchases, lenders say.
“Pipelines are robust. Lending has been strong for good investment reasons, and there’s more confidence from the commercial space than I would have expected at this point,” said Flynn, the Huntington Bank regional president who oversees a market that spans the Indiana state line north to Ludington and east to Ionia.
“COVID is lasting much longer than everybody thought it would, we’re all having to readjust, and think of our businesses differently. We’re having supply issues and chip shortages and those types of things, but companies are making it through and doing quite well,” she said. “I just thought the uncertainty of COVID, the headwinds of labor shortages, people not getting the labor they want, and supply issues would have a much bigger impact. But people are finding a way. I think one thing COVID’s taught is innovation: Figure it out.”
Commercial lenders are generally seeing businesses with strong balance sheets use more cash along with credit to make needed equipment purchases or pay for expansions.
Not borrowing as much when they need credit for an expansion or capital purchase reduces their leverage, putting them in a better position should the economy sour.
“Some people are putting more cash down and borrowing less. Some are borrowing, but hoarding the cash knowing, ‘Well, I can pay it down the road if I’m not needing it,” said Rick Dyer, the community president for St. Joseph-based United Federal Credit Union who leads commercial lending in Southwest Michigan and Northern Indiana. “In both cases, I think it gives them a little more comfort.”
Dyer reports “pretty strong” commercial loan originations and a “solid” pipeline for United Federal Credit Union, which operates in six states and had nearly $350 million in total commercial loans at the end of the third quarter.
More businesses today are considering refinancing existing debt while interest rates remain low in anticipation that they will rise in 2022.
“Borrowers are very interested in locking in rates in this environment,” said Mercantile Bank Chief Lending Officer Mark Augustyn.
Steve Owens, chief lending officer at Kalamazoo-based Consumers Credit Union, describes cases in which clients who are three or four years into a five-year flexible-rate commercial loan now want to refinance for another five years to lock in today’s low interest rates.
“We’ve had that conversation more often lately,” he said. “It’s mutually beneficial for us to give them a great rate.”
Consumers Credit Union’s commercial loan originations are “at an all-time high” and are on track to reach $65 million in 2021, Owens said.
Commercial borrowers at Consumers Credit Union — which had $170.1 million in total commercial loans at the end of the third quarter — have been seeking credit to finance expansions and support growth, Owens said.
“We’re lending into new projects across quite a few sectors and businesses that have found a way to grow and thrive in this environment,” said Owens, who cites residential property development as an area of strength right now.
As well, clients are building inventories because of supply chain bottlenecks, according to lenders.
“We see many companies where they’re trying to err on the side of carrying more inventory than they normally would to have a bigger cushion to compensate for supply chain interruptions,” said Joel Rahn, executive vice president for commercial lending at Grand Rapids-based Independent Bank Corp.
That drives higher use of operating credit lines by Independent Bank’s commercial clients, Rahn said.
The use of operating credit lines, which normally runs at about 50 percent, hit an all-time low of about 27 percent in the fourth quarter of 2020, Rahn said. That rate since mid 2021 has moved back to about 37 percent, he said.
“It’s just common sense. When the stimulus dollars were flowing to local businesses, they didn’t need to borrow as much on their lines of credit. Now we’re starting to see that trend reverse,” Rahn said. “It’s starting to migrate back to the historical average, but we’re still not there yet.”
Another recent driver of commercial lending has been businesses investing in automation and robotic equipment, a growing trend the last few years that has accelerated with the tight labor market.
Dyer at United Federal Credit Union cited a client who recently installed a robotic paint line that’s run by one person who now does the work that previously took five. Some companies are “investing in technology instead of the workforce because of the challenges,” he said.
“All businesses have moved down the road of how they can get more efficient and effective in what they do, and how can they produce more with less? Robotic equipment is one of the answers to that question,” Dyer said. “You add to that some of the workforce issues or challenges over the last year, and we’re seeing a lot of companies that probably sat on the sidelines for about a year not knowing exactly what was going to happen now saying, ‘It’s time to move. Let’s go with robotic equipment.’”
Businesses looking to grow through an acquisition also have contributed to commercial loan activity. At Mercantile Bank, M&A activity “has been high,” Augustyn said.
“There are a lot of people that have a lot of liquidity that would like to do something,” he said. “There are a lot of people running toward acquiring a business, and we’ve been very active in that space. We’ve had some customers sell, but we’ve had more customers buy, and that’s kept us busy.”
The Grand Rapids-based Mercantile Bank grew net core commercial loans by $162 million in the third quarter for an annualized rate of 25 percent. Through the first nine months of the year, the bank’s commercial loans have grown by $298 million, or at an annualized rate of about 16 percent on the year.
In an October conference call, bank President Ray Reitsma told investors that much of the growth has come from new clients, and that Mercantile Bank had a “very strong” backlog going into the present fourth quarter.
CORRECTION: A previous version of this story incorrectly identified the number of states in which United Federal Credit Union operates. The company operates in six, not seven, states.