Best Commercial Lending Strategy

Best-Commercial-Lending.pngC.pngommercial lending is core to the business of banking. “A lot of banks tend to be 80 percent or more commercial,” says Chris Marinac, director of research at FIG Partners. Nationwide, the Federal Reserve reported a mixed bag for commercial loan demand as of October 2018, from “continued strong demand,” reported by the Atlanta Fed, to softening demand, reported by the Cleveland Fed. But overall, both commercial real estate (CRE) and commercial and industrial (C&I) loans trended higher in 2018.

Bank Director’s analysis of each bank’s commercial lending strategy included the size of their CRE and C&I portfolios as of March 2018, as well as the growth in those portfolios over the previous two years. Of course, these alone don’t present a full picture of a bank’s commercial lending program, as a bank could chase every loan in its marketplace, good or bad, to grow its commercial loan portfolio. This is especially true right now, given the well-seasoned credit and economic cycles. Thus, to help balance out the analysis, C&I and CRE net charge-offs as of March 2018 were also examined. The data for all of this came from the Federal Deposit Insurance Corp., and was supplemented by a more subjective analysis that incorporated the perspectives of bank analysts and public information to better understand each bank’s niche expertise, as well as anything unique to the bank’s approach.

Each bank was scored relative to its regional peers. Regional winners were then scored against each other to determine the overall category winner. Due to this second scoring, the overall winner’s final score differs from its regional score.

Remiker.pngHuntington Bancshares was the overall winner, and the regional winner in the Midwest, due to the size and growth (38 percent average over two years) of its CRE and C&I portfolios, combined with a low level of net charge-offs.

Four years ago, Huntington put a team in place to provide the bank’s commercial lenders with better information about each client’s needs. It’s difficult for a commercial lender to be an expert in every industry Huntington serves, so the bank’s research team fills a vital knowledge gap. Before, the bank would perform a needs assessment for each prospective client, with the lender asking clients to share their challenges, says Rick Remiker, Huntington’s senior executive vice president of commercial banking. Now, “instead of asking the customer what keeps them up at night, we should be telling them what should be keeping them up at night,” he says.

Health care is a big focus for Huntington, says Remiker. The sector is virtually recession proof—everyone needs medical care—and accounted for almost 17 percent of U.S. GDP in 2015, according to the World Bank. Aging demographics in the U.S. also promise growth in the sector as the need for senior living facilities increases. Franchises, energy, and food and agribusiness are other key niches for the bank. And in July 2018, Huntington hired a veteran banker to lead its technology, media and telecommunications vertical.

Western Alliance Bancorp. topped the West for its commercial lending strategy. It grew CRE loans by 46 percent over a two-year period, and C&I loans by 26 percent. Western Alliance is known for acquiring the expertise it needs to better serve its commercial clients in areas including technology, life sciences, hotel franchises and homeowners’ associations.

“If I was building a bank today, I would start to think about the [Western Alliance] model and what lines of business are less serviced than others,” says Brett Rabatin, a senior research analyst with Piper Jaffray.

In the South, South State Corp. came out on top due in large part to its significant commercial loan growth—106 percent for its C&I portfolio and 99 percent for its CRE portfolio over a two-year period.

Similar to South State, Sterling Bancorp won the category for the Northeast region due in part to its growth: 54 percent for CRE loans and 37 percent for C&I loans.

Most of the banks in the ranking exhibited a low level of net charge-offs for C&I and CRE loans. The one exception is Signature Bank, with C&I charge-offs exceeding 11 percent of its C&I portfolio on an annualized basis in the first quarter of 2018, according to FDIC data. It’s a number that’s been unusually high over the last two years, as the New York-based bank has written down loans collateralized by taxi medallions, which have plummeted in value under pressure from ride-share companies Uber and Lyft. By the second quarter of 2018, Signature’s C&I charge-offs appear to have settled at more manageable levels.

According to its 2017 annual report, Signature worked on limiting its exposure through 2017 and promoted two employees to split the responsibilities of its retiring chief credit officer, a move CEO Joseph DePaolo said “better reflects the proper credit structure for a bank our size.”

How They Ranked: Best Commercial Lending Strategy

OVERALL WINNER: Huntington Bancshares 2.04    
  1 Sterling Bancorp 2.41 $8,222,192 53.6%
  2 Webster Financial Corp. 2.70 $8,837,745 21.1%
  3 Signature Bank 2.78 $14,769,765 39.6%
  4 M&T Bank Corp. 2.85 $38,512,905 9.7%
  5 Community Bank System 3.26 $1,803,171 55.5%
  1 Huntington Bancshares
1.81 $28,547,762 38.7%
  2 Commerce Bancshares
2.56 $5,239,615 11.4%
  3 Chemical Financial Corp. 2.85 $6,401,917 106.4%
  4 Fifth Third Bancorp 3.07 $42,452,251 -9.3%
  5 Great Western Bancorp 3.81 $4,570,586 39.9%
  1 South State Corp. 1.93 $4,624,895 99%
  2 Bank OZK 2.33 $5,134,538 22.3%
  3 FCB Financial Holdings 2.70 $4,406,742 83.3%
  4 Home Bancshares 3.00 $5,982,384 63.1%
  5 BankUnited 3.48 $9,480,051 41.4%
  1 Western Alliance Bancorp. 2.00 $9,780,449 45.9%
  2 First Republic Bank 2.52 $12,210,791 29%
  3 East West Bancorp 3.00 $18,095,737 13.3%
  4 Cathay General Bancorp 3.67 $7,407,462 18.3%
  5 Bank of Hawaii Corp. 3.93 $2,355,133 18.3%

SOURCES: Federal Deposit Insurance Corp., bank analysts, bank websites, filings, press releases and other public information