Demand for commercial loans has been higher this year than for several years, but rising interest rates could dampen business growth in 2006, bankers here say.


A strong local economy and improved credit quality have contributed to growth in commercial lending this year, bankers say. The growth follows a sluggish period for business loans between 2001 and 2003, although demand started to pick up steam last year.


Yes, absolutely our commercial loans are up this year, says Peter Stanton, chairman and president of Spokane-based Washington Trust Bank. Every market we do business in is having a robust year, and its the first time Ive seen all of the markets hitting on all cylinders.


Washington Trusts major markets are Spokane, North Idaho, Boise, the Wenatchee area, and the Seattle area, Stanton says. Its total loans through October were $2.3 billion, up 19 percent from the year-earlier period. Its standard commercial loans, which make up a majority of the banks total loans, were up 17 percent, compared with 15 percent growth in the first 10 months of 2004. Its real estate-related loans had risen 15 percent, and construction-related loans had jumped nearly 25 percent.


The past few years have had growth, but 2005 has been a real standout, Stanton says. Its just a strong economy in the commercial sector.


Spokanes economy had been stagnant for a number of years, but low interest rates, abundant real estate investments in the Spokane area, and construction activity have helped rev up the economy and have increased demand for business loans, Stanton says.


Spokane-based Inland Northwest Banks commercial loans were up 20 percent, or $30 million, through October compared with full-year growth of 6 percent in 2004, President and CEO Randall Fewel says.


All the growth is coming in our commercial area, Fewel says, although its tempered by the fact that competition is stronger as well, because there are a lot of good banks in Spokane and were all vying for good deals. Most commercial loans are for equipment, construction activities, and accounts receivable, he says.


Improved credit quality has contributed to INBs strong business-loan growth, and the bank has suffered fewer loan losses this year, he says. Fewel explains that when Spokanes economy hit bottom three years ago, demand for commercial loans fell, and when that happens, banks can fall in the trap of booking deals that arent as good a quality.


Credit quality was particularly low a few years ago, but now our commercial loan growth indicates a healthy economy, particularly because credit quality hasnt suffered, Fewel says.


Cliff Lawrence, Wells Fargo Banks Spokane-based regional manager for commercial banking, says Wells Fargos commercial loan growth here has mirrored solid growth companywide for the big San Francisco-based bank, although it doesnt break down dollar figures for specific markets. Systemwide, Wells Fargos commercial loans for the first three quarters were up $13 billion, or 14 percent, from the same period last year, says Lawrence.


Were very busy and having a hard time keeping up with our activities here, Lawrence says.


Wells Fargos Spokane-area customers have sought commercial loans primarily for real estate development, business expansion, and capital expenditures, and credit quality has been very strong, although banks credit standards are competitive, which contributes to a liberal credit environment, he says.


This is a buyers market, so its a good time for businesses to finance competitively, Lawrence asserts.


He adds that credit unions, as well as hedge funds owned by major corporations such as General Electric, also compete for commercial lending business.


While rising interest rates could put the brakes on business growth, right now rates still are relatively low by historical standards, and demand for commercial loans should remain strong next year, Lawrence says.


Fewel says INB doesnt expect quite as robust a year in 2006 for commercial loans, but still is hoping for double-digit growth. Hes concerned that the Federal Reserve will keep raising interest rates on short-term loans, and that will dampen demand for business loans.


The Fed has been raising rates slowly since June 2004 after drastically cutting them in 2001 to revive the economy. The Feds actions to alter interest rates affects banks because they tie their prime rates, which they charge their best customers, to the Feds rates.


Banks are seeing their net interest margins getting squeezed, Fewel says. Ours is up a little bit, but if rates go up too fast, our margin will be shrunk also, so were being cautious about our 2006 budget.


Net interest margin, one of the indicators that financial institutions watch closely, is the difference between interest income and interest expense, typically stated as a percentage of assets.


Washington Trusts Stanton says that Spokanes status as a safe place to live, with a low threat of terrorist attacks and natural disasters, also has contributed to increased investment here.


Stanton, too, cautions that rising interest rates for short-term loans might contribute to a slowing of the economy both nationally and here. Yet, while he doesnt expect that Washington Trusts commercial loan growth will be quite as strong in 2006 as it has been this year, he still anticipates it will be about 15 percent.


The Fed might be done raising rates, but certainly if they go up a lot, demand will fall, Stanton says. If they stay where they are, the economy will still have a pretty good run.


Increased competition also will be a factor in 2006, Stanton says. For example, a new Spokane-based bank, called RiverBank, plans to open next year.


Well just put our heads down and keep working at it, Stanton says. Our region has a bright future, and well welcome good bankers to the mix.