Local lending climate is more competitive
The financial market was in a bit of chaos and business loans weren’t being made by most lenders when Grand River Bank opened in April 2009. Grand River, however, was an exception to that rule: It was making commercial loans because it was new to the lending industry and it didn’t have the bad debt that others in the local field were dealing with as they put lending on a hiatus.
So, in a sense, Grand River Bank was the only loan arranger for a goodly portion of its short history. But that situation has since changed. Now more banks are making commercial loans and the competition to lend has risen.
“In probably our first year, competition was relatively nonexistent. There were only a few banks that were actively lending in the market because of everything that was happening within the banking industry. And then we started to notice that certain banks, as their balance sheets were beginning to heal, started to enter into the market during the summer of last year, and lending became more competitive,” said Mark Martis, senior vice president and chief lending officer at Grand River Bank.
In addition to healing balance sheets, Martis said those banks noticed that the economy was beginning to nurse itself back to health. Even though growth wasn’t great, there was growth, and that became an encouraging sign for banks, at least with certain industries.
“It became extremely competitive right away for the commercial-industrial type of lending — the C&I lending, as it’s called — and banks became very aggressive on pricing and structure during that time. So I’d say the lending activity in western Michigan really started to pick up over those qualified types of loan transactions,” said Martis.
“I think what’s happened over time — and I think all lenders sense this — is lending opportunities for quality borrowers are relatively low and there’s not a lot of expansion going on with the economy, and we’re all chasing a smaller piece of that pie. For a while, more of the market was open to us. Then we noticed last year we were running into more competition, and now I would say that has intensified as more banks have gotten into the market and are actively lending,” he added.
Martis said most of that lending is still being made in the C&I owner-occupied market, with few loans being made in the commercial real estate market. He noted, however, that more banks are starting to show interest again in the CRE market, which includes investment properties, retail strip malls, student housing and apartment complexes.
“I haven’t seen a lot of direct competition there, but there is more talk in the industry that there are banks that are now getting back into that market, as well,” he added.
Martis said Grand River Bank has lent to all markets since it opened, including the CRE. In contrast, other banks have tried to shed CRE loans made prior to the recession in order to clean up their portfolios.
“We kind of picked and chose what we felt fit with the type of risk that we were willing to take, and we were able to grow from there,” he said.
One CRE loan made by Grand River Bank went to Locus Development for its renovation of the downtown Flat Iron Building.
“So it will be interesting to see if we actually start feeling some competitive pressure in that area. But we’ve definitely felt it in other areas when it came to owner-occupied real estate, medical and dental practices, and also manufacturing,” he said. “It definitely heated up in the past year.”
Still, the amount of money willing to be lent locally is greater than the number of borrowers who are considered by banks to be risk worthy. Martis said the risk margins are small for lenders because the profit margins on loans right now are also small, and that risk-to-profit ratio has limited banks to working with a small pool of qualified borrowers.
On top of that, Martis said all the banks are going after that limited pool because all lenders have the same risk profile and same margin of error to absorb losses, especially when risk is compared to the lower interest rates that are now being offered.
Martis also pointed out that he isn’t seeing a lot of potential borrowers coming to Grand River saying their businesses have grown and they want to expand. Instead, he said, he is seeing owners whose businesses have survived the recession and are profitable, but at a smaller sales volume than before the economy tanked. Most haven’t leveraged their businesses because there isn’t a reason to do that as their competition is down, and they’re running after fewer dollars as demand is also down. And because they’ve maintained a decent degree of profitability, they’ve become qualified borrowers, most of whom are manufacturers.
“What they’ve done is they’ve reduced their overheads to a certain level that now, on this new sales volume, they can make a nice profit. But they’re not reinvesting in new equipment or buildings because the revenue isn’t there yet to really grow into those things,” said Martis.
“Some of them are just sitting on the sidelines waiting to see what is going to happen. So what they’re doing is they’re beefing up their balance sheets. … There has to be demand here first, and if there is greater demand in volume, then I think that’s going to lead to job-growth gains, too, which we haven’t seen.”
Martis said he thought the economy has stabilized recently but growth remains very sluggish. He said some industries are doing well right now. Compared to a few years earlier, though, the companies in those industries are smaller today.
He also said most banks have larger deposits now than a few years ago, but many are sitting on their cash deposits and getting very little in return for taking that position. Outside of making loans, Martis said that banks, like individual savers, don’t have good options to net strong returns because most investments aren’t providing a worthwhile yield.
“So they’ve got all these dollars that are parked, and we’ve noticed that some of the banks in this area have definitely decided to flip the switch and are starting to lend those dollars in areas that it’s safe to lend,” he said.
Martis felt that interest rates were being compressed now as more local banks have decided to go after the limited number of qualified borrowers that are available, and that chase has pushed margins even lower for lenders.
Where rates will go in the near future isn’t certain; Martis said he has had some forecasters point upward and others predict rates aren’t going to move because inflation isn’t a concern now. And because inflation isn’t a concern, the Federal Reserve has kept its lending rate to banks at 0.25 percent for nearly three years.
“The sense from a lot of people that we’ve talked to is that they weren’t anticipating the Fed really changing rates in all of 2012.”