Regional banks report strong loan demand from midsize corporate borrowers facing a wave of refinancing. Lenders are holding rates competitive despite upcoming debt resets from pandemic-era loans.
Commercial Borrowers Confront Five-Year Resets
Midsize lenders such as KeyCorp, Mercantile Bank, and Atlantic Union Bank avoid heavy exposure to major corporate mergers or stock and bond trading desks. Instead, these regional institutions focus their balance sheets on commercial loans directed at large regional employers and prominent local health care organizations.
“Typically, commercial loans have a five-year reset period,” said Nate Tobik, founder of CompleteBankData. “And so, that enormous bubble of initial financing that happened right after COVID is all coming up on its reset right now.”
Those business borrowers originally took out financing immediately following the pandemic when interest rates were low. Now, corporate borrowers face the necessity of refinancing those older obligations at significantly higher borrowing costs.
Lenders Maintain Competitive Rates Despite Rising Risks
Despite higher borrowing costs, corporate demand for credit remains stable. Lenders continue competing to secure new customers by keeping financing terms attractive for qualified businesses.
“Which suggests that banks are willing to take on a little bit of that risk, and seeing that the demand is stable, and the corporate sector is stable,” said Jeffrey Roach, chief economist at LPL Financial Research. He added that steady consumer demand and low unemployment protect corporate income statements from immediate distress.
By contrast, big banks recently posted softer revenue figures from their trading desks and merger advisory divisions. Those business lines experienced volatility through the year, separating the earnings drivers of those institutions from regional lenders.
Federal Reserve Rate Trajectory Threatens Future Loan Demand
Current third-quarter results capture operations prior to the full economic impact of recent monetary policy adjustments enacted by the central bank.
“It didn’t fully incorporate the effects of the Federal Reserve raising rates,” said Mayra Rodríguez Valladares, managing principal at MRV Associates, which advises lenders on risk. “If the Fed continues to raise rates — even if it doesn’t do so before the elections, let’s say it does so afterward, or in 2027 — you’re going to start to see loan demand going down.”
As financing costs climb further, Rodríguez Valladares noted that banks will likely grow much more selective regarding prospective commercial borrowers.