When demand for commercial loans began to tail off last year, many bankers insisted it was because borrowers were waiting for Congress to come through with long-promised tax cuts before they would take on new debt.
Now that tax reform is a reality, some bankers say that they are indeed receiving more loan requests or inquiries from commercial clients.
Though it’s too soon to draw broad conclusions about the tax cuts’ impact, Stephen Fleming, the CEO at the $2 billion-asset River City Bank in Sacramento, Calif., said he believes loan demand has hit “an inflection point.”
“The changes in the tax law are having a positive impact on most business owners,” Fleming said. “That optimism is translating into growth and investments in inventory and equipment.”
Specific examples have trickled out recently, as companies large and small have gone public with their plans to expand operations.
FedEx announced last month that will it invest about $1.5 billion at its Indianapolis airport hub over a period of seven years, the Indianapolis Star reported. FedEx provided limited details about the expansion and has not identified its bank lenders for the project.
The consumer health products maker CCA Industries said on Feb. 5 that it obtained a $6 million credit facility from PNC Bank to help it “focus on growing top line sales,” according to a news release. The cybersecurity provider Identiv on Feb. 8 expanded a loan agreement with East West Bank from $10 million to $12 million to pursue corporate growth.
TD Bank has seen an uptick of similar activity, said Bill Fink, the chief lending officer and head of credit management in U.S. commercial banking. TD Bank’s restaurant franchise group, for example, closed a $26.5 million financing deal for Gold Coast Holdings Restaurants in January, helping the company acquire 15 Wendy’s locations in Florida.
“We’re seeing more of a focus now on businesses positioning themselves for infrastructure or technology improvements,” and for acquisitions, such as the Gold Coast deal, Fink said.
It may still be too early, however, to gauge the true impact of the tax cut on C&I demand. That’s because some banks may be lowering loan rates or cutting prices to win C&I business after months of stagnation in that segment, which would create a misleading impression about demand, said James Ford, CEO at the $1.7 billion-asset Central Valley Community Bancorp in Fresno, Calif.
“Many of our competitors are more willing to loosen standards on terms and pricing,” Ford said. “But they had less conservative standards to begin with. My board isn’t interested in us growing loans just to grow loans.”
Ford’s observation lines up with the Federal Reserve’s survey of senior loan officers from late December and early January. Lenders said that they eased lending standards to large and middle-market firms through decreased loan-rate spreads, raised the maximum size of credit lines and eased loan covenants.
Still, it appears loan pipelines began to fill in late 2017, as companies noticed the improving chances of the tax cut’s approval. Small businesses, in particular, started to indicate increased demand for loans to finance inventory, accounts receivable, mergers and investments in plants and equipment, according to the Fed’s loan officer survey.
The yearly growth rate for C&I loans plunged from a peak of 10.5% in April 2016 to a nadir of 0.9% in November 2017, according to data from the Federal Reserve Bank of St. Louis.
Those numbers started to tick up, ever so slightly, at year-end, rising to 1.1% as of Dec. 1 and 1.2% at Jan. 1, the most recent data available.
Demand has improved in almost all of TD Bank’s industry sectors where it does C&I lending, for all of the same reasons cited in the Fed survey, Fink said. TD Bank has also seen an uptick in C&I lending for investments in research-and-development projects, he said.
Other banks that issued fourth-quarter results in late January made similar remarks.
At the $12.2 billion-asset First Interstate BancSystem in Billings, Mont., total loans grew 3.3% in the fourth quarter from a year earlier, largely fueled by C&I lending, CEO Kevin Riley said during a Jan. 31 conference call.
“Our pipeline is strong, which gives us great optimism for 2018,” Riley said. “We’re feeling better about the upper-single-digit loan growth for the year.”
Business owners had become more active in inquiring about new loans late in the year at the $1.3 billion-asset Community Bankers Trust in Richmond, Va., CEO Rex Smith said during a Jan. 30 conference call. Those now appear to be moving to the application phase.
“We had a good pipeline,” Smith said. “When the tax-law changes hit, we had a lot of folks that pulled the trigger.”