Tuesday, November 1, 2011

Banks begin to open up loan spigot

Franchise owners Ted Bertuca Sr. and his son had no trouble securing a commercial loan for a McDonald’s location planned for Mt. Juliet later this year, pointing to what may be a long-awaited thaw in some sectors of local business lending.

“The timing is right to do this,” said Bertuca, who operates 21 McDonald’s restaurants in the Nashville area. “And the bank has been there to support us.”

As many regional and national banks horde cash amid lingering economic uncertainties, the lending needle may be starting to move in a positive way in Middle Tennessee, most strikingly in commercial financing.

Banks with a major presence in Middle Tennessee have posted greater year-over-year loan volumes in the third quarter and have seen loan portfolios rally with double-digit percentage gains for commercial projects and business borrowers.

Though loan growth is rather modest, banking analysts say it’s among the first encouraging indicators that the tight-fisted lending environment of the past three years has started to ease and market confidence has begun to rebound.

“Banks have been a little more proactive,” said bank analyst Chris Marinac, with Atlanta-based FIG Partners. “Banks are fed up with holding onto cash. And so they’re pushing a little harder to find some loans they can close.”

At Birmingham, Ala.-based Regions Bank, the Nashville market’s largest bank by deposits, commercial and industrial lending grew in the third quarter by nearly 13 percent and loan commitments in the commercial sector grew $700 million from last quarter.

“Everybody is out there putting money to work,” said Jim Schmitz, the bank’s local president.

Pinnacle Bank’s overall loan volume ramped up in the third quarter by 4.2 percent from the same period last year. The bank showed the strongest loan improvements with commercial and industrial projects, with lending expanding 12.4 percent over the prior-year period.

Commercial lending at Fifth Third Bank jumped almost 10 percent in the third quarter, too.

Guggenheim Securities analyst Marty Mosby said of commercial and industrial lending, “the economy is actually working the way it’s supposed to” as companies borrow to finance new machinery and expand to bolster productivity.

“Given where interest rates are, it’s a great time to invest,” Mosby said. “People don’t want to put money in stocks, so you’re going to see more deposit growth and commercial loan growth.”

Obstacles remain

For individuals and small businesses, however, lending improvements don’t indicate a return to pre-recession volumes.

Most regional banks in Middle Tennessee reported single-digit progress for consumer and small business loans — falling far short of the gains made in the larger commercial sector. Weak demand and still-stringent underwriting standards endure as prime obstacles for many borrowers.

The Federal Reserve’s most recent loan officer survey shows that banks are starting to relax underwriting requirements overall. But only about 10 percent of lenders have eased standards for residential loans and small businesses.

In addition, Pepperdine University surveyed 1,667 small businesses recently and found that among small businesses that sought loans in the past year, nearly half were denied.

Part of the explanation is that small firms tend to be riskier as borrowers. Plus, small-business lending usually recovers more slowly than the broader commercial sector, said Gerard Cassidy, a banking analyst at RBC Capital Markets.

“Banks’ primary product is loans. It makes logical sense that banks want to lend,” Cassidy said. “The problem now becomes: ‘How do you find more qualified borrowers?’ To qualify for a loan in 2011 is meaningfully different than it was in 2006,” he said.

Nevertheless, improved commercial lending will not soon boost banks’ profit margins drastically, Cassidy said, because a new raft of bank regulations and stubbornly weak consumer demand are pulling on every potential gain.

“The Golden Age of banking is over. The economic downturn really killed banks’ glory days,” he said. “We’re not going to see that kind of profitability again for decades.”