Small-business borrowers return to community banks
Larger lenders shedding loan customers
The deleveraging spree following the 2008 economic meltdown in which big banks dropped even their most creditworthy small and mid-sized business customers has returned many, if not most, of these commercial borrowers to community banks.
Big banks snatched up these customers from their community bank lenders in the second half of the 1990s, offering lower interest rates and quicker credit decisions than the relationship bankers could provide, according to R. Michael Menzies, president and CEO of Easton Bank and Trust and past chairman of the Independent Community Bankers of America. When the economy soured, many small and mid-sized businesses no longer fit the credit formula, leading the biggest lenders to begin shedding them wholesale.
"Now that these businesses no longer fit the credit profile of the big banks, they are coming back," said Menzies, whose bank has $161.6 million in assets. "We've had some very high value credits come back to the bank."
Community banks, which rely on legwork and local market savvy to make their lending decisions, also are able to help borrowers that have suffered from impaired cash flow during the recession, something the big banks won't do, say community bankers.
"Interruption of cash flow can be understood by a community banker who lives in the community," Menzies said. "It's not a metrics decision."
Perfect' position for lending
EagleBank of Bethesda had record earnings last year, the result of a combination of careful lending in the metropolitan Washington, D.C., area commercial and residential real estate markets and big bank deleveraging.
Ronald D. Paul, CEO and chairman of EagleBank and parent Eagle Bancorp of Bethesda, recently met with a group of mid-sized business borrowers who, he recounted, "want to get back to relationship banking."
EagleBank's $1.94 billion in assets puts it in "a perfect position" to meet some of the heftier borrowing needs of these businesses, Paul said.
"If a business is a $10 million borrower, they're not going to go to either Citi or to a tiny bank," he said.
The bank's total loans outstanding rose 15.6 percent to $1.49 billion in June from $1.30 billion a year earlier, according to EagleBank information. Real estate loans outstanding rose 16 percent over the same period, to $818 million from $705 million.
Old Line Bank saw loan demand fall off in the second half of 2008 and first half of 2009, according to Joseph E. Burnett, the Bowie bank's executive vice president and chief lending officer. But the number of loans rebounded 25 percent in the first half of 2010 over the same period last year, although portfolio volume is up just 16 percent to $51.8 million.
"The deals we are getting are smaller in size, but there is definitely a demand," Burnett said.
Most of the transactions, he said, are coming from businesses leaving larger banks, a trend that "has produced some good opportunities" for Old Line, which has $408.2 million in assets.
"That doesn't mean I can make every deal; I just can't. But I try to make loans that make sense for the business and the bank," Burnett said.
Much of Maryland, especially its Washington suburbs, has escaped the worst of the housing bust and appears to be recovering more rapidly from the recession than the rest of the country, according to recent residential real estate information. But the Eastern Shore, where Easton Bank is located, is struggling overall with higher unemployment rates and softer commercial and residential real estate values.
Easton Bank, however, is in a high net-worth retirement community where restaurants, health care facilities and tourism are doing well.
"We're fortunate to keep our loan portfolio about even," Menzies said.
The bank's loan portfolio, which was $136 million in the first six months of the year, is "about what it was" in the same period last year, he said.
For Old Line Bank, the economy right now "is as good as it gets," Burnett said. "We're not recession-proof, but we don't feel it quite the same" as others.
The bank avoided making the type of commercial real estate loans now sitting like the proverbial 800-pound gorilla on the books of community banks across the country as commercial property values remain severely depressed.
"Because of our size, we haven't loaned to any strip malls or office buildings," Burnett said. "Most of our [commercial real estate] loans are to owner-occupied office buildings." Otherwise, "our borrowing base runs the gamut from government contractors to retail stores."
"No question the economy is still extremely volatile," said EagleBank's Paul, but he expects any slowdown in demand to be balanced by business transferred from bigger banks. "I think our growth will be relatively robust" despite recent poor economic data.
In addition to commercial real estate loans, EagleBank is involved in lending to a wide range of small and mid-sized business borrowers, including law firms, accounting firms, hardware stores and restaurants.
"When you drill down to the details, ours is a well-balanced portfolio; we didn't take the hit many others did," Paul said.