LOC Utilization: Recent Indicators

April 13, 2020 Dallas Wells

The PrecisionLender platform help bankers at more than 150 institutions structure trillions of dollars in loan volume every year, and use our profitability engine to process hundreds of billions in commercial customer relationships. This data gives us a bird’s eye view of what is happening in the economy during the COVID-19 pandemic.

In this piece, we’re looking at the changes in utilization rates on revolving lines to see how businesses’ cash flows are being impacted in real time.

LOC Utilization Increases ... Slightly

The U.S. economy has essentially been paused for the past few weeks, so for most bank customers, their revenue has simply stopped. Therefore, we expected LOC utilization would be up in the past few weeks. 

LOC Utilization By Week In 2020

There was an increase, to be sure, and most of it has come in the past four weeks, but it hasn’t been massive (from just under 42.5% to nearly 45%). Frankly, even though it is a noticeable change from the steady trend, we expected the move to be bigger than that. 

LOC Usage Varies Widely by Bank

While the average was barely changed, there has been much more variance on the individual bank level. Different banks clearly handled their revolving lines in different ways. 

Going back to the beginning of 2020, we saw LOC percent utilizations at banks ranging from the low 20s to up into the 70s. Across that spectrum there were some banks that have continued to have a steady level of LOC usage, but others have experience a great deal of change. 

LOC Utilization Change - Institutional Level

There are a variety of factors at work that are producing variance from bank to bank - different customer bases, different industry focuses, and different bank strategies. But so far those differences at the institutional level have not led to much change in the overall industry LOC utilization numbers. 

The Bigger the Line, the More Utilization Increased 

We also took a look at LOC usage by size of credit line. And, as with overall usage, our initial assumptions were not confirmed. We expected smaller customers, with smaller LOCs to be impacted the most. Given that they generally didn’t have a lot of early alternatives (before the recent programs like PPP) for liquidity – the way larger borrowers might – we thought their LOC utilization would show the biggest increases. Instead, usage in the $0-250K tranche has actually gone down a bit since the start of 2020. Meanwhile, the largest increase was seen in the biggest category ($1MM and above). 

Usage Growth In 2020 (by LOC Amount)

Current Utilization (by LOC Amount)

Perhaps some of those businesses with smaller LOCs elected to apply for PPP instead: Why take on that debt yourself if it may be forgivable through this program? That said, it took a while for PPP to get put together and then for banks to figure out how to quickly process the applications. Another possibility – one we’ve heard anecdotally – is that some of these smaller businesses have simply put a stop to everything. Basically they’re saying, “I have no revenue coming in so I’m not writing any checks right now either. I’m not going to draw on the line and put myself on the hook for something right now."

Conversely, I don’t think bigger businesses really have the same option to just turn off the spigot altogether. There are obligations they simply have to meet, but they have those big revolvers in place for exactly this sort of thing. So they just drew them down early to get ready to weather the storm. 

Utilization Spikes in Several Industries 

Finally, we took a look at LOC utilization by industry as well. There was quite a bit of variance, but there were a few industries were the uptick in usage was noticeable. Not surprisingly, accommodations and food services had one of the biggest increases – 30% more usage (from 39% in late 2019 to 51% in early April). Other areas that saw significant increases included real estate, health care and social assistance, and professional, scientific, and technical services. 

Utilization Growth in Selected Industries

Current Utilization in Selected Industries

There were some other industries in which usage was either unchanged, or even went down. Some of those were expected – like warehousing, given how just about everything is being shipped these days. But LOC usage in the mining and gas extraction has actually been down a bit so far, which is surprising given the carnage from dropping oil prices in recent weeks.   

Got Questions? 

Our banking consultants and data scientists are combing through PrecisionLender pricing data every day. If there’s anything you’d like to know about what they’re seeing, please send along your questions to insights@precisionlender.com.






About the Author

Dallas Wells

Dallas is a writer, speaker and former consultant who has held executive roles at two banks with experience in capital planning, liquidity forecasting, investments, budgeting, financial reporting and mergers and acquisitions.

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