The Commercial Lending Trend That's Affecting Your Profitability

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Many community bankers are unaware that a significant trend has changed the landscape of commercial lending. It’s not that they aren’t paying attention. The trend has happened gradually, over the last 65-plus years, so this changed approach to commercial lending is all they’ve ever known. 

And it’s costing them millions. 

In 1950, 40% of a community bank’s commercial loans were to commercial and industrial companies for equipment loans, operating loans, business acquisitions and the like. Today, community bank commercial loan portfolios have shifted dramatically toward real estate. 

C&I loans now make up only about 25% of commercial loans, and even then, about half of the loans in the C&I category are for owner-occupied real estate. The percentage of true C&I loans is more like 12-13%. 

Gradually, since 1950, commonly-held beliefs have taken root in banking communities that real estate lending is better because of the collateral. This belief has grown so strong that banks now dismiss many C&I lending opportunities in favor of real estate deals – even when the evidence shows that it may be to their detriment. 

Consider this:

  • Banks with a commercial real estate focus have the highest failure rate. In a  2012 comprehensive study of the community banking industry, the FDIC looked at the performance of community banks from 1985-2011. The banks that specialized in commercial real estate lending had the worst performance and highest failure index.

  • Low real estate rates mean high opportunity costs. Even despite recent moves by the Fed to raise interest rates, they remain at low levels, and there is fierce competition to offer bank-shopping real estate borrowers the lowest rate. Real estate loans made at the expense of C&I loans – which based on current averages garner about a half-percent less than C&I loans – can cost a bank millions of dollars over time.

  • Millions have been left on the table. Research by PayNet, Inc., shows C&I clearly outperforming C&D and CRE lending pre- and post-financial crisis. Had banks maintained their share of C&I lending, they would find $2.6 billion in additional net income between 2008 and 2016, at a higher risk-adjusted return.

  • Reduced profitability has other ramifications. The millions of dollars in opportunity cost means less retained earnings, smaller dividends to stockholders, and less funds to expand services and compensate employees.


Commercial real estate is an important element of community bank portfolios, but an overemphasis could prevent your bank from realizing valuable opportunities in the C&I space.


We understand that even given the compelling data, lenders can’t shift their portfolios overnight in favor of C&I loans. There is unique expertise required to be successful. That is why community banks partner with VITAL.


We are skilled in the specific lending needs of C&I businesses, particularly in the manufacturing, wholesale, heavy construction, mining and trucking industries. With our support, lenders can confidently pursue C&I lending opportunities that strengthen balance sheets and transform income statements.


Stay tuned for more in the C&I series. In the meantime, are you ready to do more now? Contact us any time.