Opportunities in Infrastructure Lending for Community Banks

Community banks have an opportunity to play an active role in what is being billed as a “once in a generation” effort to modernize the country’s infrastructure.

Communities across the U.S. are starting to see the ripple effects of the more than $1 trillion in federal funds that have been allocated to infrastructure projects ranging from traditional roads and bridges to electric vehicle (EV) charging, broadband expansion and brownfield clean-up. 

The Biden administration announced last November that more than $400 billion in projects had been set forth. These funds span 40,000 projects across more than 4,500 communities in all 50 states and D.C.

“On the macro view, I don’t think it’s appreciated in both the economy and the banking industry the amount of stimulus that’s actually in our system,” says Chris Nichols, director of capital markets at $45 billion-asset SouthState Bank in Winter Haven, Fla. 

When economic pundits continue to talk about a forthcoming recession or even lower interest rates, Nichols believes it’s difficult to foresee that happening given the country’s current economic strength and the huge amount of federal dollars that will continue to be deployed over the next several years. “Big picture, the stimulus is good for the economy and good for community banks in terms of what’s happening in their areas,” he says.

Busting infrastructure myths

First, it’s important to dispel a few misconceptions that create hurdles for how bankers think about lending opportunities related to infrastructure investment.

• Myth: Funding is only going to mega-projects that are out of reach for most community banks. 

• Myth: Public funds alone will be sufficient for financing improvements. 

• Myth: The only opportunity is to work directly with government contractors.

• Myth: Infrastructure funding is only affecting C&I and not consumer lending.

In reality, when it comes to infrastructure financing, community banks are discovering a variety of entry points to assist existing and new customers across both commercial and consumer accounts.

A role for private financing

Even though the federal government has committed significant dollars, advisors and government contractors are a key part of the process in allocating these funds. Banks can provide support to contractors and C&I customers with term loans, lines of credit, equipment financing and cash management services. 

There is still a need for private financing to come alongside those public monies. The Bipartisan Infrastructure Law has the potential to be a “supercharger” to investment in local communities and new construction projects, but it’s not the full picture, says Robert Anderson, a senior vice president in the Clean Energy & Infrastructure Advisory Group at JLL, a Minneapolis-based commercial real estate agency. 

“We need a boatload more money,” he says. “That seems crazy to say when we’re talking about a trillion dollars. But it is nowhere near enough to do the work that needs to be done in America across infrastructure generally.”

In many cases, the government funding is intended to be a catalyst that drives public–private partnerships and additional financing needs. “The reality is there’s still a gap, and that’s where the private sector comes in, particularly at a local level,” adds Anderson.

Smaller-scale projects

Traditionally, government infrastructure spending went toward building mega projects. “What we’re seeing now, even in terms of what we’re thinking about with energy and with transit, is that projects are getting smaller,” says Kristy David, a senior vice president in the Clean Energy & Infrastructure Advisory Group at JLL. 

Back in 2010, for example, the typical infrastructure project might have been spending $3 billion on a new bridge, whereas today a project might involve funding for a $5 million hub of EV charging stations. 

“That is not something that the traditional infrastructure financing market is used to or even set up to provide funding for,” adds Anderson. So, those smaller local projects are where there is room for local community banks to provide financing, he notes.

“While these are big numbers, those big numbers also break down into smaller numbers for any given project,” agrees Nichols. For example, a large transportation project might have hundreds of contractors and subcontractors involved. A community bank might have one or two of those contractors as customers, or perhaps they are in a position to acquire those contractors as new customers. 

“Any bank can see who is getting the contracts, or they help their customer apply for some of these contracts [and grants] and be part of a larger project,” he says.

The ripple effects of infrastructure investment

Federal infrastructure funding is flowing down to states, counties and cities, which are then turning around and contracting with the businesses that are going to do the work. 

Those businesses cover a broad range of industries, such as road construction, excavation, broadband and IT firms. These businesses may need financing for new equipment or vehicles or other expenses to support their business operations. Every one of those groups that are getting a contract need a workforce and equipment to do the work. So, they may need working capital, equipment financing or lines of credit.

Banks also are poised to benefit from the indirect benefits of infrastructure spending. “The way that we look at it is all of that investment spurs more opportunity,” says David Feriancek, senior vice president of national lending at $3.1 billion-asset Stearns Bank N.A. in St. Cloud, Minn. 

Infrastructure investment that brings things like broadband and better roads to new areas can strengthen a community’s ability to attract new residents and businesses that they perhaps couldn’t support before. 

For example, having safer, more efficient roadways may help to attract a new warehouse or logistics company. Or perhaps a new interchange will improve access that will attract new housing or retail development. That economic development fuels demand for construction financing and other lending products. 

“So, where we see this infrastructure bill having such a positive impact is helping to grow communities with a trickle down that can really help our customers,” says Feriancek.

How to get a foot in the door

Government projects require a more formal process where all the boxes need to be checked. That said, projects in local communities—even when it involves a public–private partnership—are still very relationship-based, which does play to the strength of community banks. 

The developer, for example, comes up with the financing for the whole capital stack. “They’re looking at how they’re going to fill that gap, and I think that there’s certainly room for relationships there,” says David. 

A key starting point for community banks is simply staying informed about new projects being funded in their area, as well as educating their customers on new programs and incentives. 

For example, clean energy is a big focus of recent infrastructure funding legislation. The Inflation Reduction Act of 2022, for example, offers a variety of tax credits and rebates to residential customers, such as a 30% tax credit for residential installations of clean energy and a 30% tax credit for investments in energy-efficient home improvements, including windows and heating and cooling appliances. Such programs may fuel more home renovation and increase demand for HELOCs or other financing products. 

Certain industry segments also are more likely to benefit from President Biden’s Invest in America agenda, which has a big focus on broadband access, clean energy, sustainability and transit. Community banks can look up which businesses are qualified as government contractors in their local market and then reach out to those businesses. 

According to Nichols, education and outreach might also involve providing resources or webinars to customers on topics such as how to apply for grants or how to utilize cash management services to better manage their cash. 

“The first part is understanding what monies are being put to work, where and for what projects, and two is understanding how that translates to your community,” he says. “Once the community bank can understand the focus, then it’s a question of which customers or potential customers are involved and how to best help those customers.”

Some customers need help with how to get contracts, manage contracts and claim the grant money, as well as finance help in the form of debt. Nichols adds, “Banks can be working with customers and potential customers in their communities on all of these things to facilitate the execution of these capital projects.”