Commercial lending might slow as interest rates rise

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An increase in commercial lending is a result of the area’s healthy economy. However, rising interest rates may slow businesses’ borrowing.

“We have had a good, long sustained run of about eight or nine years that’s historically one of the longest economic cycles we’ve seen,” said Ralph Miller, the vice president of commercial loans at 5 Star Bank. “It would be expected we see some potential slowing down in lending in the near future, and the increase in interest rates could also temper this economic cycle too.”

The number of business loans in the U.S. jumped from just under 5 million to about 7.5 million from 2013 to 2016, according to the Federal Financial Institutions Examination Council.

Miller said 5 Star Bank’s commercial lending is up between 11 to 12 percent year-to-date through the end of May.

“Our economy has been growing pretty steady over the past few years and we — the banks — are the recipients of some of that growth,” he said. “I think it’s reflective of business owners’ success in their business.”

Colorado’s economy continues to rank among the best in the country.

The Colorado Department of Labor and Employment reported that after seven months at 3 percent, the state’s unemployment rate fell to 2.9 percent in April.

In Colorado Springs, the unemployment rate dropped to its lowest level all year in May at 3.1 percent.

WalletHub, a personal finance website, recently rated states’ economies using a 100-point scale with three categories: “Economic Activity,” “Economic Health” and “Innovation Potential.”

The website found Colorado is the country’s second-best state for jobs and it has the fifth-best economy.

“Colorado is one of the fastest-growing states in the country, and its economy is too,” Miller said.

Commercial loans can fund equipment purchases for businesses but, in El Paso County, they typically are used for real estate.

“We do not have a lot of brick-and-mortar manufacturing here,” Miller said. “We don’t have a lot of industry like you would see in the Midwest, so probably the biggest sector of lending in our market is generally tied to real estate — both residential and retail.”

Rae Loschen, the vice president/commercial loan officer at Integrity Bank & Trust, said the bank mainly handles commercial real estate lending.

“The way that we split our loans up is non-owner-occupied, like an investment property, and then owner-occupied, where the business occupies the property,” he said. “Our non-owner-occupied is up about 8 percent since the end of March last year, and then our owner-occupied real estate is up about 11 percent.”

When a business expands or adds equipment, Miller says it has a trickle-down effect and more jobs are created.

“You see the development in the Ivywild area with Natural Grocers and all that retail activity — that’s creating jobs,” he said. “Apartment buildings are being added to downtown, which are financed by banks, and that’s creating construction jobs. It’s all tied together, so when lending increases, it’s usually a sign of a pretty vibrant economy.”

Still, Miller believes rising interest rates may slow the commercial lending market.

“It could put some pressure on some borrowers and their ability to repay their debt,” he said. “Increased  debt/increased borrowing can pose a risk if the borrower is not able to repay their loans.”

The New York Times reported the Federal Reserve raised its benchmark short-term interest rate a quarter of a percentage point June 13, with plans for two more hikes this year.

During a press conference, Jerome H. Powell, the Fed chairman, said the country’s economy is nearly at a “normal” level for the first time since its slide during the 2008 recession.

“The decision you see today is another sign that the U.S. economy is in great shape,” Powell said. “Most people who want to find jobs are finding them.”

Loschen doesn’t believe the rate increases will have an immediate impact on the number of loans sought locally.

“Rates were so low for so long I think that people got used to that but I still think the rates that are out there are good and competitive and aren’t going to be a deterrent for people looking to buy a building or expand their business,” he said. “If they continue to rise, maybe that’s a different conversation down the road, but we don’t think in the short term the interest rate increases are going to slow down loans.”

Banks work with customers to try and make sure they can handle their debt obligations before lending money.

“The worst thing you would want to do is hand somebody a loaded gun or loan them too much money that creates their downfall,” Miller said. “We always work with our customers and do prudent underwriting, which other banks also do.”

He reiterated the healthy commercial loan market is due to the area’s strong economic climate.

“We’ve got a good economy and good local leadership and those factors combined are why we are seeing increased borrowing and increased loans,” he said. “I’m sure many of my brethren and competitors are experiencing the same thing.”

Loschen added, “It’s always a little bit of the unknown as to why there is an increase in loans, but I do think it’s the strength of the local economy and low unemployment that is driving people to expand their businesses right now.”

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