Despite slowdown, banks are still lending

With all the talk about a credit crunch, it would sound as if banks haven't been making loans. In fact, the opposite appears to be true.

Tennessee-based banks increased lending by about 10 percent in the third quarter, which ended Sept. 30, compared with a year earlier, according to an analysis of Federal Deposit Insurance Corp. data by Memphis-based bank consultants Mercer Capital.

Even big regional banks such as Regions Financial Corp. and Bank of America had larger loan portfolios than they did at the end of September 2007, although loan growth did flatten out this summer.

The figures show that although many banks have been curtailing loans to developers, others were continuing to lend to commercial businesses, even as Congress was debating a $700 billion bailout package for financial institutions. Still, bank analysts expect a deteriorating economy to mean fewer loans in the months ahead.

In some cases, loan growth on the books this fall reflects commitments made by bankers many months ago.

"The bank may have made a commitment for a loan in early 2007 and it's just now being funded,'' said Andy Gibbs, a consultant with Mercer Capital. "What you may see going forward is the bank isn't entering into new commitments."

Nationwide, bank loan portfolios were up 3.7 percent in the third quarter compared with a year ago. Loan growth flattened between the second and the third quarters of this year as the economy started to sour, according to data with the FDIC.

But Tennessee-based banks continued to increase their loan portfolios between the second and third quarters, with an average loan portfolio growth of 2.4 percent.

"It's clear that banks have the liquidity to make loans," said Tim Amos of the Tennessee Bankers Association. "Our Tennessee banks didn't participate in the high-risk lending that you saw at other banks."

Smaller banks grow

Some Tennessee banks have seen rapid growth in loans to commercial and industrial businesses. Among them are Franklin-based Tennessee Commerce Bank and Nashville-based Pinnacle Financial Partners. Tennessee Commerce Bank increased its lending by 35 percent in the third quarter compared to a year earlier.

Pinnacle did so by 85 percent. Although most of that growth came from the acquisition of Mid-America Bancshares in November of last year, $608 million of new loans were added to its $3.2 billion loan portfolio during the last year as Pinnacle's loan officers made new commercial loans of their own, according to Pinnacle's president and chief executive officer, Terry Turner.

"Most of our business is really moving market share from large, regional banks," said Turner, who added that the bank's plan is to increase its work force by 10 percent next year. "Our strategy is to capitalize on stress and turmoil at large, regional banks."

John Lancaster, the president and chief executive officer of First Freedom Bank in Wilson County, has a similar plan. The bank, which got started in 2006, saw its loan portfolio grow 82 percent during the year to $145 million, much of it by giving owner-occupied real estate loans to commercial businesses.

"The point is, we don't say no at the door,'' he said. "A lot of big banks will say: 'We don't do any more of a certain kind of loan. It doesn't matter if you're Rockefeller.' "

One of those added to the bank's loan portfolio is Cumberland Animal Hospital in Lebanon. Several banks rejected the veterinary clinic last year for the $375,000 purchase of a new three-acre property that would serve as its new home, said Monica Duvall, who owns the business with husband and veterinarian Josh Duvall.

But First Freedom said yes.

"I think the bank, being rooted in the community, they knew the possibilities of this piece of land,'' she said. "I think they knew what we were capable of doing."

When the couple decided recently to buy an old camper on Craigslist, the bank financed it, she said.

Big banks lend, too

Bank of America's loan portfolio grew 5 percent year over year. Regions Financial Corp. saw its loan portfolio grow 4 percent by the end of September compared with a year earlier. But both banks' loan volumes were flat between the second and third quarters.

Regions and SunTrust have been reducing loans to real estate developers and builders during the last year. Bankers say this is both because demand has dropped and because they're trying to reduce their portfolios of such loans.

"We're staying away from raw land,'' said Jim Schmitz, the president of Regions Bank in the Nashville area. "Raw land and condominium (development) are the most difficult to get financing for."

He expects loans for other kinds of commercial business to continue to grow next year, however. Others aren't as optimistic.

Weaker consumer demand will hurt businesses and slow demand for loans in 2009, said Jeff Davis, a former bank analyst in Nashville who now works for private equity investment firm Wolf River Capital.

And despite the $700 billion spending spree by the federal government to add capital to bank balance sheets, financial institutions will remain wary of lending, he said.

"The long and short of it is credit is tightened up,'' he said. "We are in a thick fog right now. Banks are in a discovery process now to see how bad the issues are."

Peyton Green, a bank analyst who follows Regions Financial Corp. and SunTrust Banks for FTN Midwest Securities Corp. in Nashville, said banks have seen annual loan growth exceed 10 percent for the better part of a decade. But those days have come to an end. In fact, during the months ahead, he wouldn't be surprised to see loan portfolios contract for some of the big banks he covers, despite the federal government injecting capital into the banks.

"Our basic outlook is that loan growth for the industry will be flat,'' he said. "A deal they may have been willing to do a year ago in a better economic environment, they are no longer willing to do. Or it requires much more equity. We have falling values on real estate, and it's tough to know how to evaluate things."

Even Pinnacle's Turner expects loan growth to slow at Pinnacle, although he doesn't think his loan portfolio will contract. "Job growth is less today than it was a year ago,'' he said. Other businesses will continue to be hurt going forward by plummeting consumer demand that started in October and November, he said.

"Largely what consumers were spending was the ever-increasing equity in their homes and 401(k) plans,'' Turner said. "That value is depleted."

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