In C&I, a widening gap between small and large banks

Penn Community Bank in Doylestown, Pa., is primarily a real estate lender, but lately its CEO, Jeane Vidoni, has been pushing her team to pursue more commercial and industrial loans.

Vidoni likes C&I loans because they tend to come with hefty deposits and the borrowers often need other services for their businesses, such as cash management. Down the road, those same borrowers might also turn to Penn Community for a residential mortgage or help managing their personal finances.

“We don’t have the marketing dollars to compete with the larger institutions,” she said, explaining her desire to attract more commercial clients to the $2.2 billion-asset bank.

Vidoni's efforts are paying off. At the end of 2018, the bank had $73 million C&I loans on its books, up 75% from just a year earlier.

Penn Community is hardly alone among small banks looking to turbocharge C&I lending. In fact, banks with less than $50 billion of assets, as a group, are adding C&I loans at a faster clip than their larger rivals, according to Federal Deposit Insurance Corp. call report data compiled by FedFis.

AB-CANDI-032119 (2).png

“Small banks’ growth rate is head and shoulders above big banks and I would expect that to continue,” said Scott Siefers, an analyst at Sandler O’Neill.

Smaller banks posted double-digit growth, on a year-over-year basis, in C&I loans for each quarter of 2018. The growth peaked in the fourth quarter at 12.74%.

Meanwhile, year-over-year growth at banks with more than $50 billion of assets was in the single digits during the first three quarters of 2018, though it did reach 10% in the fourth quarter, according to FedFis.

It was a different story in 2017, when C&I growth rates at small and large banks were equally lackluster. In the fourth quarter of that year, C&I loan balances increased just 2% for both large and small banks, according to FedFIS.

To be sure, a main reason that smaller banks are adding C&I loans at a faster clip than their larger rivals is the law of numbers, Siefers said.

“Given their size, the larger banks aren’t able to generate the same level of growth,” Siefers said. “Mathematically, it’s nearly impossible.”

Still, Gerard Cassidy, an analyst at RBC Capital Markets, said that the gap between smaller and larger banks’ growth rates “is about as wide as we’ve ever seen it.”

One likely explanation for the widening gap is that smaller banks have simply been more aggressive of late in pursuing midsize and family-owned businesses that are hungry for capital, Cassidy said.

A bigger reason, though, is that the largest banks appear to be tapping the brakes a bit on C&I lending due to regulatory constraints, concerns about the direction of the economy and other factors.

At JPMorgan Chase, C&I loans increased only 3% in 2018 as the bank is “consistently looking for possible signs of weakness or stress at every detailed granular level,” Douglas Petno, head of commercial banking, said last month at the company’s investor day.

“We’re continuing to be highly selective,” Petno said. “We’re focusing specifically on sectors that are undergoing change or feeling pressure, industries like auto, retail and energy.”

Regulatory ring-fencing has also restricted the largest banks’ C&I growth, Cassidy said.

“The [Comprehensive Capital Analysis and Review] process puts those guardrails up and the larger banks will be called out by regulators during stress tests” if their commercial lending appears to be overheating, Cassidy said.

“Big banks are probably passing on some credits that, pre-financial crisis, they probably would have booked,” he said.

There are rumblings, too, that small banks are loosening terms to win business.

While executives at banks of all sizes routinely say that they walk away from potential new business because competitors offer pricing and terms they won’t match, Clarke Starnes, chief risk officer at BB&T, said small banks are engaging in “higher risk-taking” in C&I lending.

"I think some of the smaller institutions are clearly taking more risk than what you see the large regionals or big banks taking," Starnes said on a conference call with analysts late last year.

But even executives at smaller institutions complain about how they’re losing business to competitors who get too aggressive on pricing.

Last year, the $7.2 billion-asset WSFS Financial in Wilmington, Del., was chasing a $19.5 million C&I credit and offered a rate tied to Libor plus 250 basis points, Steve Clark, chief commercial banking officer, said during an October conference call. An unnamed rival swooped in and offered Libor plus only 100 basis points, he said.

Banks covet C&I loans since they open the door to cross-sales of treasury services, deposit management and other fee-based products for business customers, said Darren King, chief financial officer at the $120 billion-asset M&T Bank in Buffalo, N.Y.

“The C&I customer has to have a broader relationship than just the loan,” King said at an investor conference this month. “You need the deposit and the treasury part of the relationship to make the whole return work,” King said.

Community bankers say they are capturing more business not by loosening terms, but by hiring teams of lenders, expanding into new markets and making acquisitions.

Penn Community, for example, has recruited experienced commercial lenders from other banks who are tapping their networks to bring in loan business.

The $12.5 billion-asset WesBanco has bulked up in C&I lending through “an expansion of lending teams across all of our markets, with experienced talent hires and the development of a full suite of treasury management products with an interest rate swap program,” CEO Todd Clossin said at an investor conference this month.

The Wheeling, W.Va., bank’s C&I loan book rose 12.5% to $1.3 billion in 2018, compared to 2017.

The $2.1 billion-asset Choice Bank in Fargo, N.D., took the acquisition route. In September, it acquired Venture Bank in Bloomington, Minn., marking the bank’s entrée into the Minneapolis market.

“We’re operating out of the Minneapolis metro area now, which has a lot more C&I activity,” said Choice CEO Brian Johnson.

For reprint and licensing requests for this article, click here.
Commercial lending Commercial banking Regional banks JPMorgan Chase M&T Bank BB&T Community banking
MORE FROM AMERICAN BANKER