Despite possible headwinds, community bank lenders remain optimistic about lending activity in the coming year. We asked them about their experiences with CRE, C&I and mortgage lending in the current environment.
By Beth Mattson-Teig
Lenders looking for clues on how busy they are likely to be in 2022 are seeing some hopeful signs in the economy.
Despite the lingering effects of the COVID-19 pandemic, growing confidence in the recovery is expected to unleash some pent-up demand for loans from both consumers and business customers.
“Obviously, there were a lot of capital needs that weren’t made over the past two years,” says Ron Haynie, ICBA senior vice president of mortgage finance policy. “So, there will be that need to replace equipment, expand or maybe open a new location, and community bankers are ready for that.”
The economy saw a strong rebound in 2021, with GDP growth jumping to 5.7%, and economists are predicting GDP growth will remain strong at around 4% in 2022. Commercial real estate (CRE) construction and investment sales activity are also rebounding. CRE transaction volume is expected to climb to $600 billion in 2022, just shy of the 2019 figure of $617 billion, according to the Urban Land Institute.
In addition, the boom in Paycheck Protection Program (PPP) loans and residential mortgages has helped to bolster lending activity for many community banks since 2020.
Community bankers are cautiously optimistic about lending activity in the coming year due to the strong economy and rising vaccination levels, which have helped bring back some normalcy. Bankers have worked through forbearance and deferment requests and have the capacity to lend.
Differing lending outlooks
That said, community banks have had different experiences and hold varied outlooks on the year ahead depending on their geographic footprint and lending focus.
For example, commercial lending remained strong throughout the pandemic at $1.1 billion-asset Marquette Savings Bank in Erie, Pa. In 2020, the community bank did just as much commercial and industrial (C&I) lending as it did in 2019, and its C&I lending hit its highest annual production volume ever year-to-date through July 2021.
Although some business customers had to work hard to keep their doors open during the pandemic, others have done really well, notes John C. Dill, executive vice president and chief lending officer at Marquette Savings Bank. Some of the bank’s clients saw the pandemic as an opportunity to innovate or improve their businesses, such as by adding greater capacity or developing new products.
“My expectation is that our C&I loan volume will continue to remain strong in 2022,” Dill says. As the community bank has grown, it is doing modestly larger C&I loans, which is helping to grow its overall volume.
Other community banks, however, saw flat or even negative loan origination volume in 2021. Heartland State Bank in Redfield, S.D., is predominantly an ag lender that serves customers in northeastern and north central South Dakota. The $110 million-asset bank’s ag lending dipped in this past year by about 5% as farmers took advantage of PPP loans and other government stimulus money that was available.
“We’re hoping for a flat year from our existing customers, although we’re always trying to pick up new customers,” says Joseph Lutter, chief credit officer at Heartland State Bank. “For most ag borrowers, it’s probably going to be similar to 2021, because they are still taking advantage of the extra funds that have been pushed out by the government.”
Residential boom slows
Looking at residential mortgages, the market is expected to remain strong in 2022. However, origination volumes are pulling back from record-high levels generated in 2020 and 2021 at $4.5 trillion and $4.3 trillion, respectively. Residential mortgage originations are forecast to slow to $3.3 trillion in 2022, according to September 2021’s Fannie Mae Housing Forecast. Volume from home purchases is expected to tick higher to $1.9 trillion, while refinancing is expected to drop from $2.5 trillion in 2021 to $1.3 trillion in 2022.
“The activity still seems to be there, but our expectation is that we will revert back to more historical levels in 2022,” says Dill. “With interest rates still being low, people are trying to find that right opportunity, and that will help keep that volume steady.”
“We will see what shakes out for [this] year [in ag], but we are seeing input costs increase. So, there is a need for additional lending products.”
—Ashley Hutchinson, The Citizens National Bank
The Citizens National Bank in Concordia, Kan., saw an increase in lending volume in 2021, largely due to the surge in demand for mortgages both in new homes and borrower refinancing, says Ashley Hutchinson, an assistant vice president at the $215 million-asset bank. Similar to the Fannie Mae forecast, Citizens National Bank is anticipating less mortgage activity in the coming year. “What we’re seeing in terms of things slowing down is just a lack of supply,” Hutchinson says, adding that there is a shortage of homes for people to buy, and that lack of supply also extends to other consumer loan-driven products, such as cars and trucks.
The Citizens National Bank also is an active ag lender. Hutchinson notes that one of the factors likely to affect ag lending in the coming year is increasing input costs, such as the cost of seed and fertilizer.
Ag is so much more dependent on the economic conditions,” she says. “We will see what shakes out for [this] year, but we are seeing input costs increase. So, there is a need for additional lending products.” Citizens has added more easy-to-use crop input lines of credit so that customers can use one product instead of multiple lines with different providers.
Potential headwinds ahead
Lenders are continuing to watch possible challenges ahead that could affect borrower demand in the coming year, including higher interest rates, inflation, labor shortages, supply chain issues and rising fuel prices. In its September 2021 meeting, the Fed held benchmark interest rates near zero. However, it also indicated that rate hikes could be coming sooner than expected, with the first rate hike likely to occur this year, versus 2023.
“Any time rates move up, there is certainly a psychological impact to the consumer, certainly within the mortgage business, as well as some real estate projects,” says Jeffrey A. Kesler, Dallas-Fort Worth president at $9.5 billion-asset Veritex Community Bank in Dallas. “I think with moderate increases, that psychological aspect will be overcome given the fact that rates are at historically all-time lows. So, a lot of projects still pencil out economically, even with a little bit of rate movement.”
Rising inflation could pose a risk to lending activity, as higher costs for construction materials and labor could negatively affect the feasibility of some projects, he adds.
Another issue for community bank lenders in 2022 will be increased competition. There are a lot of banks with massive liquidity that reported flat or even negative growth last year.
“They are going to come back to the market across all lending types,” says Kesler, “and they’re going to work to build their pipelines and grow again.”
Lending regulatory issues to watch in 2022
Lenders looking to stay on the right side of regulators will want to keep an eye on two issues that could create hurdles.
One issue on the mortgage servicing side is that bankers must ensure they are doing whatever they can to help people stay in their homes to minimize foreclosures. “I believe that the CFPB [Consumer Financial Protection Bureau] is going to be pretty aggressive in looking at foreclosures,” says Ron Haynie, ICBA senior vice president of mortgage finance policy. “The banking regulators also are going to be very focused on how consumers are being treated as they try to exit the forbearance process and return to making regular payments.”
A second issue is new leadership at the CFPB. “I think [the new leader is] going to be aggressive in terms of enforcement actions,” Haynie adds. “So, that will be something to watch out for as well.”
Another change taking shape in 2022 is the Section 1071 rule for small-business lending data collection and reporting, often referred to as Small Business HMDA. The CFPB will likely finalize that rule over the next year and implement it in 2023 or 2024. Section 1071 could create some new headwinds for small business lending because of the data collection and reporting process that banks will have to engage in.
Beth Mattson-Teig is a writer in Minnesota.