Independent Banker - January 2020 - 36

PORTFOLIO
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.
36 Q ICBA Independent Banker Q January 2020
" 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
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. "
Beth Mattson-Teig is a writer in Minnesota.
Independent Banker - January 2020

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