Risks and Rewards of Commercial and Industrial Lending for Community banks

James Walter and Corey Ross, the founders of loan automation technology provider Finagraph  and Finagraph powered BBC Easy, discuss how community banks can take advantage of the increasing popularity of commercial and industrial loans. 

In their earnings reports for the first quarter, many of the biggest banks, such as Citigroup 
and U.S. Bancorp, reported marked growth in earnings, buoyed by significant increases in commercial and industrial loan portfolios. This parallels what the Federal Reserve observed in its January 2013 survey of senior loan officers: “[L]ending standards on commercial and industrial loans had been eased over the past three months. … In addition, moderate net fractions of domestic banks reported that demand for C&I loans from firms had increased over the survey 

1. SNL Financial also reported “from 2010 to 2011, C&I loans rose to 17 percent from 15 percent of total loans.”

2. This slight loosening of lending standards and the increase in C&I lending is a welcome change for both lenders and businesses, given current low net-interest margins and the pressure to reduce mortgage lending exposure.

So, why are banks across the board increasing C&I loans now? The increase in C&I lending 
can be attributed to banks’ response to the risk involved with commercial real estate portfolios during the financial crisis. Overleveraged CRE portfolios in the last few years resulted in bank failures. C&I loans, on the other hand, have become increasingly popular because they offer relatively higher margins while reducing concentration risk. 

Banks also came under significant pressure to increase lending during the credit crunch, 
during which formally qualified applicants were increasingly turned down. The pressure from above and the slightly improved economic conditions on the ground are now converging to make a marked difference in the commercial lending space.

Since mortgage rates were and have remained at record lows throughout the recession and into the recovery, the needs of bankers and community businesses became further aligned. Mortgage loans made at low, fixed rates over a 15- or 30-year period are considerably less attractive than a commercial loan tied to the variable prime rate over a significantly shorter time period. Commercial loans, especially alternative types like asset-based loans, provide a buffer against razor-thin net interest margins on consumer and real estate loans.


Read the full article here: Westlaw - Risks and rewards of commercial and industrial lending for community banks