What does 2020 have in store for lending?

Southern New Mexico is seeing growth thanks to incoming retirees and expanding local employers, says Kiel Hoffman of Pioneer Bank.

Varying interest rates and a mixed outlook for the economy kept community bankers on their toes over the past year, but what can they expect lending to look like this year?

By Beth Mattson-Teig

Community bankers are trying to read the tea leaves on expectations for lending activity in the coming year in the wake of a sharp drop in interest rates over the past year, along with mixed economic signals. Many bankers are hoping that the momentum they built in the second half of 2019 will carry over into 2020.

Low rates fuel borrower demand

The low interest-rate environment continues to stoke borrower appetite for capital across all types of loan products. The Federal Reserve cut the federal funds rate by 25 basis points in July 2019, for a second time in September and for a third time at the end of October.

During its final gathering of the year in December, the Federal Open Market Committee held rates steady. Many economists have predicted that the Fed is most likely to hold rates where they’re at throughout 2020 due to the upcoming presidential election.

“The Fed maybe hiked up interest rates a little too fast and that slowed things down. So, the outlook is good now that rates are coming back down,” says Joshua H. Prejean, senior vice president of loan production at $239 million-asset Bank of Zachary in Zachary, La. “When rates were on the rise, the outlook was less clear, because we didn’t know what that was going to do to the buying power of consumers.”

Falling interest rates did help push some borrowers off the fence in 2019. “Certainly, the low rates do help to spur some people to activity,” says Anthony F. DeSenzo, head of commercial lending at nearly $2 billion-asset SB One Bank in Paramus, N.J. The community bank saw generally steady lending volume last year, along with increased interest in refinance requests in the second half of 2019 that likely will spill over into 2020.

The common theme for many community banks in 2019 was a fairly stable pace of lending activity. “The decline in long-term interest rates has made it more attractive for some businesses that are looking at expanding operations,” says Greg Boudreau, chief lending officer and chief credit officer of $650 million-asset Regent Bank in Tulsa, Okla. That business expansion activity runs the gamut from buying machinery and equipment, to refinancing real estate, to expanding an existing facility or buying a new facility, he adds.

Positive for consumers

The low interest-rate environment is giving consumers more buying power in the residential market. As of October 2019, the secondary market rates on a 15-year mortgage rate were hovering at 3.16% and the 30-year rate at 3.64%—about 100 basis points lower than a year ago. “That is extremely cheap capital,” Prejean says. The low rates also help to make homeownership more attainable for low- and moderate-income homebuyers who may not have been able to afford to buy a home when rates were higher, he adds.

Another positive indicator for community bank consumer mortgage lending is the latest Fannie Mae Housing Forecast from October 2019, which is projecting that new single-family home construction starts will have risen 2.7% in 2020 to 903,000 units. In addition, total home sales, which were relatively flat in 2019 at 6 million, are forecast to edge 0.8% higher in 2020 to 6.06 million.

Local economies influence opportunities

Yet in some markets around the country, interest rates have been less of a driver as compared with general economic growth. “I think interest rates were at a level that was good for community banks before we started lowering rates,” says Kiel Hoffman, market president for Las Cruces at $830 million-asset Pioneer Bank in Roswell, N.M. “So, I’m not sure we’re seeing an impact from folks jumping out because of rates.” Rather, steady lending activity is coming from economic growth occurring in Pioneer Bank’s region of southern New Mexico and West Texas.

Despite some signs that the national economy is slowing, business and consumer confidence levels remain high, along with relatively solid job growth and low unemployment. In September 2019, the unemployment rate dropped an additional 20 basis points to 3.5%, its lowest level in nearly 50 years. In addition, the post-recession recovery that started out in larger metros is accelerating in secondary and tertiary markets.

For example, says Hoffman, southern New Mexico historically has been one of the last to get into a recession and last to come out of a recession. “So, we’ve seen a little bit slower growth than the rest of the country,” he adds.

The region is now experiencing moderate growth due in part to the strength of the oil and gas sector in West Texas, as well as growth coming from local employers. Notably, Virgin Galactic, a tenant at Spaceport America outside of Las Cruces, is adding more staff as it gears up for its first commercial space flight.

“We’re like a lot of community banks in that we love CRE [commercial real estate] loans and we have seen some good increases in multifamily and hotels,” Hoffman says. New home construction has also grown in Las Cruces thanks to demand from retirees moving into the area for its warm climate. Activity in the housing market is almost on par with the housing boom of 2007 and 2008, he adds.

Note of caution creeps in

Some community banks are cautiously optimistic about posting another good year of loan originations ahead in 2020. Many bankers are leaning into relationships in what remains a highly competitive lending market. In addition, there are a number of potential wild cards that could shift the playing field in the coming year, notably geopolitical issues and the upcoming presidential election, as well as slowing economic growth.

“I think 2020 will still have good activity, as borrower confidence remains high,” DeSenzo says. In particular, SB One Bank mainly serves clients in New York and New Jersey, where commercial real estate markets are likely to remain hyper-competitive into 2020. This should provide some sustained ability to provide financing in the coming year, he adds.

“I think 2020 will still have good activity, as borrower confidence remains high.”
—Anthony F. DeSenzo, SB One Bank

However, some property sectors may see some weakening ahead. For example, SB One Bank is cautious in underwriting multifamily assets at record-high rent levels, large cashouts and lower margins.

“The real question is how much new capital is going to continue to be devoted to commercial real estate,” DeSenzo says. Although there is still plenty of investor equity targeting commercial real estate, investment sales during the first half of 2019 were up only a slight 1% year-over-year, according to Real Capital Analytics. So, there could be some slowing in CRE transactions and construction loans in 2020 that could overall impact bank lending.

In addition, rate increases in 2018 and early 2019 helped contribute to an inverted yield curve, where short-term rates were higher than long-term borrowing rates. The yield curve has since dropped back to a relatively slim margin, where the 10-year is slightly higher than the 2-year treasury. Historically, an inverted yield curve has preceded a recession by 18 to 24 months.

For many banks, that inverted yield curve is injecting an additional note of caution into lending decisions, credit quality and underwriting.

That being said, economic growth and low interest rates will likely keep the economy chugging along, Prejean says. “I think capital is available for companies that are looking to grow or expand or if investors are looking for financing,” he adds. “Banks have an appetite to make good loans to good borrowers.”

“I think capital is available for companies that are looking to grow or expand or if investors are looking for financing. Banks have an appetite to make good loans to good borrowers.”
—Joshua H. Prejean, Bank of Zachary

Beth Mattson-Teig is a writer in Minnesota.