Despite persistently high inflation and dramatic jumps in interest rates, local lenders have reported strong loan growth during the second quarter.
Recent studies suggest that many business leaders remain optimistic about their companies’ growth potential. While businesses continue to seek out loans, the rapid pace of changing economic conditions has added to the challenges prospective borrowers face.
“Most people in businesses don’t like when there’s a lot of uncertainty,” said Brian Bullock, executive vice president and chief commercial lending officer at Lowell-based Enterprise Bank. “It causes people to pause for a minute and say, ‘What does this mean? Should I buy that piece of equipment? Should I buy that property?’”
Firms Upbeat About Their Prospects
Business activity both nationwide and in Massachusetts remained healthy in the second quarter despite declining compared to previous quarters, Citizens Bank found in its second quarter Citizens Business Conditions Index.
“We are seeing several cross currents in the environment,” Eric Merlis, managing director of Global Markets at Citizens, said in a statement announcing the results. “Concern levels are high, but individual outlooks are still good.”
The CBCI dropped from 59.5 in the first quarter – a record high since Citizens launched the index in 2014 – to 52.9 in the second quarter. In Massachusetts, the index fell from 57.5 to 52.9.
Citizens Bank uses public information and proprietary corporate data to create the index measuring business conditions. An index value greater than 50 indicates positive business activity for the next quarter.
The change in business conditions from the first quarter could point to an economy that is returning to a more sustainable level, Citizens said in the statement, or to conditions that could soon worsen.
“Companies are still experiencing growth and maintaining positive momentum, and consumers are showing resilience,” Merlis said. “We see markets trying to calibrate expectations with these conflicting signals.”
A survey from JPMorgan Chase found conflicting signals among middle-market business leaders, who mostly had a negative outlook on the economy while remaining confident about their own companies.
JPMorgan Chase’s 2022 Business Leaders Outlook Pulse survey, conducted between May 25 and June 10, found that only 19 percent of leaders at midsize businesses were optimistic about the year ahead for the national economy, while 71 percent were optimistic about their company’s performance. Last year, 88 percent had an optimistic view of the economy, and 82 were optimistic about their company’s performance.
All respondents did say they were facing business challenges, including a higher cost of doing business and labor issues.
Rick MacDonald, the region manager for JPMorgan’s corporate bank in New England, excluding Connecticut, said while midsize businesses’ leaders have experienced challenges with supply chains and finding employees since last year, inflation had not yet taken hold.
“The new element is: Now all of this stuff costs me a lot more money, and so not only do I have trouble finding qualified people, now I need to pay more to retain the people I have,” MacDonald said about problems facing business leaders. “Now my supply is starting to flow, but it’s a lot more expensive than it was before, and now I have to continually look for ways to adjust my pricing.”
Loan Deals Still Out There
Despite the uncertainties, commercial lending has remained strong, MacDonald said, with companies finding lenders willing to compete on interest rates as they look to make deals.
“In this environment where there’s less deals to look at, that even makes it a little more competitive,” MacDonald said. “Rates are going up for sure, but if you are going to do something strategic, a couple points of interest is probably not going to make or break that decision.”
While some companies still have plenty of working capital, rising costs tied to inflation have also increased some firms’ borrowing needs over the past six months, MacDonald said.
Not all lending deals bring in new business, MacDonald said. The use of revolving lines of credit has started to increase after reaching low levels throughout much of the pandemic, he added.
Mark Ruggiero, Rockland Trust’s chief financial officer, said during the bank’s second quarter earnings call that line usage had increased among the bank’s clients during the quarter, though it still remained below pre-pandemic levels. With much of the bank’s second-quarter commercial loan production coming from industries, such as construction, that use lines of credit, Ruggiero said recent loan activity could be favorable for increased line utilization going forward.
Real Estate Lending a Bright Spot
Like other Massachusetts-based stock banks that had reported second quarter earnings as of publication time, Rockland Trust saw loan growth during the quarter.
Ruggiero said the bank continues to see lending opportunities in commercial real estate and construction activity, particularly for one- to four-family buildings, condominiums and larger apartment buildings. He added that the retail trade industry has been an ongoing source for commercial and industrial loan deals.
Enterprise Bank, which also saw loan growth during the second quarter, continues to see demand for loans as companies look to invest in their businesses, said Bullock, the bank’s chief commercial lending officer.
Lending opportunities have included apartment buildings, as rising mortgage rates price out some prospective homebuyers and keep them in rental units, Bullock said. Other lending opportunities have included warehouse flex space, particularly for e-commerce businesses, and property conversions aimed at life science companies.
While borrowers remain active, Bullock said, the rapid pace of rate increases has caused some customers to pause and consider challenges they could face. Particularly with commercial real estate deals, rising rates could affect how borrowers measure their estimated return on an investment property and raise questions about what to do if appraisals, environmental reports and other factors extend the window for a deal to close.
“Nobody likes uncertainty,” Bullock said. “When rates are moving, it’s hard for borrowers to project or put a pro forma together if they’re buying a property or they’re looking to buy a piece of equipment and understand, ‘What does it mean if rates keep moving, and I’m not closing for another 60 days?’”