CBAI Banknotes Magazine, March 2019

+ March 2019 17 Bank notes Community Bankers Association of Illinois The Fed continues with gradual interest rate increases, and more are expected in 2019. That should mean good news for net interest margins, right? Not necessarily. If your bank, like many, engages in a high number of rate- sensitive commercial real estate (CRE) loans, the spreads can remain narrow. In fact, the margins may decrease as rates trend higher if developers pull back on their investments and apply pressure to get the lowest rates. In that case, 2019 might be a good time to look at commercial and industrial (C&I) loan opportunities with fresh eyes. Here’s why: Unmet Need Over time, banks have trended away from C&I loans – loans to businesses that need to invest heavily in equipment and working capital. Commercial real estate (CRE) loans are favored, and much of this is due to the time lenders have invested in mastering CRE transactions. Additionally, there is a lot of real estate business available, and a perception that the collateral for these loan opportunities is better. The opportunity cost of this focus on real estate has come at the expense of understanding the financials of C&I verticals like manufacturing or heavy construction. This causes lenders to sometimes inaccurately perceive C&I loans as too risky – despite data from the FDIC’s Community Banking Study that shows higher failure rates and lower ROE for banks that concentrate on CRE loans. This trend away from C&I loans has left a significant gap in the credit marketplace. Even in good economic times, it can be more difficult for solid C&I companies to get a conventional loan. C&I loans are outside the comfort zone of many lenders, and as a result, many outstanding opportunities are left on the table. Make C&I Your Commercial Lending Focus in 2019 Mike Slater, President, VITAL Financial Services, Clive, IA