Region’s Competitive Commercial-loan Market Poses Plenty of Opportunity
Banks and credit unions know all too well that the health of a commercial-loan portfolio is often dependent on the economic climate. Several years of improvement on that front has bolstered the portfolios of many regional lenders, some dramatically. But the added opportunity has brought little relief from fierce competition in the sector, both for loan business and the talent to procure it.
When asked about commercial lending, Matt Sosik doesn’t talk in terms of dollars and cents, but of relationships.
“Building long-term relationships brings value on both sides of the table,” said the president and CEO of Easthampton Savings Bank (ESB). “It allows us to transcend the pricing pressures and competitive pressures and focus on the relationship and the importance of it.”
Those relationships have become critical to banks trying to build their commercial-loan portfolio simply because, well, it’s a borrower’s market out there. A generally positive economy has businesses investing — perhaps not at pre-Great Recession levels, but close — yet the competition for those loans has only become more fierce.
“My back ground is in commercial lending, and it’s always been competitive,” said Glenn Welch, president and CEO of Freedom Credit Union. “Nobody wants to lose any deals in their portfolio. But every new loan out there … at least three institutions are looking at it. We’ve seen pricing get pretty skinny. We’ve walked away from some deals because we didn’t think they were appropriately priced for the risk in them.”
But Freedom is making plenty of deals, too. Vice President and Chief Lending Officer Jeffrey Smith told BusinessWest the credit union’s gross volume in commercial loans is currently doubling from year to year. “We’d generally average $10 to $12 million in commercial lending each year, but in the 12 months that ended in July, we had more than $23 million.” Meanwhile, he added, the business-loan portfolio has grown from $30 million to $50 million.
“That’s still really small in a balance sheet of a half-billion,” Welch said, adding that he sees plenty of opportunity to ramp up business loans even further. “Also, commercial lending is the most profitable line of business. You can grow your balance sheet much quicker because generally the loans are larger. We service the small-business market, and we’re mostly comfortable in the $2-$3 million range, but we will go up to $5 million.”
Westfield Bank is another institution seeing significant lending growth, with higher ceilings for individual loans to boot. The bank was long known mainly as a residential lender before James Hagan’s tenure as president and CEO. But over the past two decades, the bank has significantly expanded its commercial-loan portfolio, said Allen Miles, executive vice president and senior lender — a process that will continue with the institution’s acquisition of Chicopee Savings Bank, which, once approved, will increase WB’s lending capacity from $20 million to $35 million.
“We have a small-business team, a middle-market team, and a commercial real-estate team,” Miles explained. “Our sweet spot is businesses with $5 to $10 million in revenues, but we’ve done loans for businesses with $80 to $100 million in revenue. We handle everyone differently.”
While all banks were hit hard when companies pulled back on capital investments in the wake of the recession, smaller community banks were presented with opportunities as well. The nation’s larger institutions, awash in toxic debt, were having liquidity issues and pushed back on borrowers, many of whom took their business elsewhere, and community banks that had laid some groundwork and build relationships were able to take advantage.
Borrowers also appreciate locally based lenders who can make decisions quickly, Hagan explained, and Westfield became adept at turning credit applications around in 24 to 48 hours for loans up to $750,000, Miles noted. Larger loans are turned around in under a week.
“That has helped us grow,” Hagan said. “Potential borrowers appreciate that we can move things forward quickly.”
ESB, like many community banks in Western Mass., finds that lending to small to mid-size businesses is its bread and butter.
“It’s a very important part of our balance sheet and, increasingly, on most community banks’ balance sheets,” Sosik said. “Commercial lending has become a priority we focus on, and we’ve grown the commercial portfolio over the past three years in particular. We’re trying to approach a level that gives us about a 50% loan mix — in other words, about 50% of the loans in the portfolio being commercially oriented.”
But he returned again to the importance of building long-term relationships with clients, rather than one-time transactions. “It’s easier for us to do that when we focus on medium to smaller businesses and geographically local businesses, for sure.”
Freedom Credit Union’s loan growth has been aided by its designation as a low-income credit union, which allows it to avoid the cap on commercial lending — 12.5% of assets — that most credit unions must adhere to. This, and an aggressive commercial-loan push in recent years, has seen the institution recognized as a top SBA lender in the region.
“The real growth has been over the last couple of years,” Welch said. “We’ve really matured into being more of a business lender than we originally started out. We do have a low-income designation, which does not put a cap on us, and that’s a big advantage to us in the market we’re in.”
Smith called the institution’s portfolio a “nice mix,” boasting clients ranging from IT companies, a construction firm, and commercial real-estate projects to social services and nonprofits. “We have a nice niche right now in the marketplace, with so many institutions in this market, headquartered in Springfield. Many times, we get phone calls based on the fact that we are a local player in this market.”
Valley’s Got Talent
Just because businesses are borrowing these days and plenty of opportunity seems to exist doesn’t mean growing a portfolio is easy, Sosik told BusinessWest.
“Commercial lending is a focus not just here at ESB, but across the community-bank sector, even on the credit-union side. There are a lot of players all vying for a finite group of customers, and that makes for a very competitive environment.”
Indeed, Welch noted that the local lending landscape has been rife with movement, with banks poaching talent from their competitors and even, in a few cases, entire teams moving from one bank to another.
Hagan said Westfield Bank has been fortunate to retain its top talent, and with the acquisition of Chicopee Savings will have three lending teams headquartered in Westfield, Springfield, and Chicopee.
“We have not lost lenders to our competitors,” he said. “But what we’ve also done is, we’ve actively recruited at colleges and universities. We interview folks and bring them on as credit trainees and groom them in-house. They get to know our culture and our customer base, and in so doing, we’ve created a way for them to grow in their career and for us to develop our own lending team. It’s been highly successful.”
It’s one way Westfield Bank has been able to continually grow its commercial-lending team and its book of loans, especially among small to mid-size, family-owned and closely held businesses that form the core of its portfolio.
As for Welch, he certainly thinks continued growth is sustainable. He noted that Springfield was recently named by CNBC as one of America’s “10 Most Overlooked Cities,” meaning cities where economic development — and, presumably, capital investments by companies — are on the rise, though not many people outside their regions are aware of it. And Springfield is only one part of a region currently booming with entrepreneurial life.
“There’s definitely more opportunity for growth, all the way up to Franklin County,” he said. “With our size and capital, we can compete pretty well. We’re trying to get our name out now, but I think there’s a lot of opportunity up and down the Valley.”
And that’s lending a measure of optimism to the region’s growing ranks of commercial lenders.
Joseph Bednar can be reached at [email protected]