Economic Uncertainty Dampens Commercial Loan Demand
Friday, April 23rd, 2010
According to Rick Stone, Senior Vice President for Commercial Lending at HeritageBank of the South, uncertainty created by high unemployment and reduced consumer spending is limiting loan demand from businesses serving Albany and the surrounding area.
Weak demand for commercial loans
Unemployment in Albany area reached 10.5 percent in December 2009, the latest local data available from the Bureau of Labor Statistics. Albany’s unemployment rate hit that level in July 2009 and has remained above 10 percent since then. That exceeds the U.S. unemployment rate, which fell to 9.7 percent in early 2010.
“Most businesses are not convinced this is the right time to hire employees, expand operations or invest in real estate,” Stone said. “And that continues to limit commercial loan demand.”
While some data indicates that U.S. commercial property values may have begun to stabilize at the end of 2009, a local rebound is not yet under way. Moody’s/REAL Commercial Property Price Index (CPPI) indicated that commercial property prices rose 1 percent nationally in November 2009 after 13 consecutive months of declines. However, according to Stone, local commercial property values remain depressed, especially in Florida and the Atlanta area.
Renewed focus on existing customers
Given the market realities, Heritage is getting creative in its efforts to revive its commercial-lending business, which has historically been an area of strategic focus for the bank. According to recent investor presentations, almost 57 percent of Heritage’s loan portfolio is invested in commercial-related loans. Its commercial-business loan portfolio has grown at a compound rate of 17 percent over past five years.
“We are working more with our existing customers to find attractive lending opportunities. These may be smaller loans than we’ve made on average in the past but they are helping us grow,” said Mary Beth Hobby, vice president of Marketing.
In fact, Heritage’s commercial lending business did grow even as loan demand decreased. Commercial lending at Heritage grew about 7 percent in 2009 and was up 3 percent in the first two months of 2010.
Problem loans stabilized
According to Stone, Heritage has not made major changes to its lending standards. Sound lending standards and strong commercial lending experience were instrumental in helping Heritage emerge from the financial crisis in a strong position.
Non-performing assets at Heritage as a percent of total assets peaked at 2.95 percent in third quarter 2009, falling to 2.33 percent in fourth quarter. In contrast, Bloomberg reported in August 2009 that more than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings.
“Our problem loans are still entirely too high, but we continue to whittle them down. And we believe our portfolio will continue to improve and grow in 2010,” Stone said.
