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Strong Consumer Confidence Elevates Demand and Competition among Community Lenders

By Russ Rivard | September 19, 2018

As the economy continues to gain steam, consumers are gaining more confidence and continue to seek investment opportunities. “In August 2018, consumer confidence increased to its highest level since October 2000, following a modest improvement in July,” said Lynn Franco, Director of Economic Indicators at The Conference Board, adding that “Consumers’ assessment of current business and labor market conditions improved further. Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018. Overall, these historically high confidence levels should continue to support healthy consumer spending in the near term.” Positive consumer confidence is very good for lenders; however, the competition among lenders is another key determinant on whether banks make their goals for the year.

Smaller community banks may benefit from the fact that larger regional banks, which have been actively lending on hotels and other commercial real estate loans in recent years, are starting to reduce their lending due to their previous focus on specific property types or areas of concentration. This decline in lending at larger institutions will benefit smaller community banks. This benefit, however, may be minimal due to a vast amount of competition that is occurring among community banks and other institutional players.

Even though there appears to be no shortage of capital to finance hotels or other property transactions, banks face an increasingly aggressive lending market as institutional capital grows more active. This competition has been especially fierce in commercial and industrial lending. “The basic takeaway is very competitive conditions, especially for higher-quality C&I credit,” said Bryce Rowe, a senior equity research analyst covering community banks at Milwaukee-based Robert W. Baird & Co. Inc. He noted “Since the financial crisis, C&I has been the primary focus of banks, and it’s what you hear a lot of the community bankers focusing on in terms of where they want their growth and where they want their loan growth.” After a rough start to the year, REITs are seeing a comeback, as well. This additional availability of capital may continue to escalate competition, but it represents a positive opportunity for borrowers.

This competitive landscape and struggle among smaller lenders should prove positive for the borrower; however, only if the borrower has the right expectations. For example, if a potential borrower has inexperience or is expecting more leverage than the underwriting supports, the borrower may find a tougher road to gaining financing opportunities. Also, location still plays a factor, and some borrowers in secondary and tertiary markets may mistakenly expect similar debt to that in core markets. Overall, the current financial market and competition among lenders should benefit borrowers throughout the duration of 2018 and into 2019.

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