Best Lending Strategy

Eagle Bancorp Montana’s lenders started reaching out to commercial customers in early March 2020 to understand their needs during the pandemic-induced slowdown. Later, they focused on loan modifications and issuing Paycheck Protection Program loans.

“We’ve seen a lot of those come back to normal” in terms of repayment, Eagle CEO Peter Johnson told Bank Director in October. As of June 30, Eagle issued 742 PPP loans, totaling $44.9 million, through its subsidiary, Opportunity Bank of Montana.

Lending is fundamental to banking, and those institutions that excel at it balance growth with the prudence needed to produce long-term profitability and create lasting value through the entire economic cycle. In examining each high-performing bank’s lending strategy, we examined loan growth, both overall and within the key components of most banks’ loan portfolios: mortgage, commercial real estate (CRE) and commercial and industrial (C&I). Average net charge-offs and nonperforming loans, from December 2014 to December 2019, as well as average net interest margin (NIM) and growth in pre-tax pre-provision (PTPP) income, were incorporated into the algorithm used to rank the banks in this category.

To excel at lending, “you have to have a strong credit culture to be able to take risk-adjusted bets on various types of loans and niches,” says Rick Childs, a partner at Crowe. “You need a high degree of talent and good lending teams, and you also have to have a culture that knows when to walk away from a loan.”

To better understand the near-term impacts of Covid-19, Bank Director also analyzed loan deferral volume and the issuance of PPP loans as a percentage of the banks’ total loans, both as of June 30, 2020.

A combination of growth, profitability and caution earned Eagle Bancorp Montana the top rank in the Best Lending Strategy category, based on its high level of growth in total loans (139%), particularly in CRE and C&I, over the five-year period we examined; it also averaged a 3.99% NIM. Its NCO and nonperforming loan ratios were also low, averaging 0.08% and 0.32%, respectively.

Loan growth and health are intertwined, says Crowe Partner Kara Baldwin. “If you only worry about dollars-and-cents growth, you can do that — but you’ll be stretching beyond your capabilities and beyond a sound credit culture,” she explains. “If you want good growth, you have no choice but to then make sure it has the underpinnings of solid credit management.”

Eagle’s mortgage loan volume has accelerated due to the drop in interest rates. Recent acquisitions — three over the past three years — have increased Eagle’s concentration of agricultural loans, helping to diversify its portfolio. These banks were also rich in core deposits. “That’s enabled us to keep our funding costs low and help with additional liquidity,” Johnson says.

Ranking second, Meta Financial Group posted the highest level of loan growth, exceeding 500% over the five-year period we examined, and growth in PTPP income, at 689%. Meta sold its community bank division in March to focus on its more profitable core areas, including its national lending platform. This includes the C&I capabilities it acquired through its purchase of Crestmark Bancorp in 2018, as well as products like its tax advance loans.

Bank OZK’s loan growth, at 242%, comes second only to Meta’s. It scores third and boasts the highest average NIM, at 4.92%. OZK generates loans through its national real estate specialties group (RESG) and its Arkansas-based retail branch footprint.

Horizon Bancorp ranks fourth, reporting 163% total loan growth and a high level of growth in PTPP income (211%). It also reported a high level of mortgage loan growth over the five years we examined, at 158%.

Rounding out the top five, Glacier Bancorp demonstrates a high level of loan growth, at 111%, and the second highest NIM, at 4.24%.

Glacier funded 15,291 PPP loans, totaling $1.43 billion as of June 30 — the most issued by any of the banks in this ranking. Going forward, CEO Randall Chesler plans to build on the new relationships Glacier established by lending PPP funds to borrowers that were not customers of the bank. “[T]hat’s one of the things we have on our to-do list for the next year, [is to] further deepen those relationships and pull over the good business that’s sitting at another bank right now,” he explained in the bank’s July 24 earnings call. “And if you think about it, it’s like a small acquisition for us. It’s 3,000 new customers into the bank.”

How They Ranked: Best Lending Strategy

SCORE TOTAL LOAN GROWTH
DEC. 2014 -DEC. 2019
NIM (AVG.)
DEC. 2014 – DEC. 2019
CATEGORY WINNER: Eagle Bancorp Montana 6.23 139.32% 3.99%
2 Meta Financial Group 6.66 547.13% 3.62%
3 Bank OZK 7.07 241.90% 4.92%
4 Horizon Bancorp 7.33 162.94% 3.66%
5 Glacier Bancorp 8.25 111.30% 4.24%
6 Southside Bancshares 8.39 89.54% 3.77%
7 WSFS Financial Corp. 8.51 162.94% 3.99%
8 Prosperity Bancshares 9.36 103.86% 3.36%
9 Independent Bank Corp. 9.71 78.94% 3.67%
10 Stock Yards Bancorp 10.27 52.42% 3.70%
11 Greene County Bancorp 10.47 100.90% 3.07%
12 First Financial Bankshares 10.54 43.74% 4.12%
13 Hingham Institution for Savings 11.06 79.71% 3.03%
14 Community Bank System 11.17 62.61% 3.66%
15 Southern Missouri Bancorp 12.18 63.39% 3.29%
16 First Capital 12.53 54.93% 3.84%
17 Lakeland Financial Corp. 12.97 47.27% 3.33%
18 Auburn National Bancorp. 15.03 14.37% 3.28%
19 City Holding Co. 15.66 36.37% 3.65%
20 The First Bancorp 15.67 41.38% 3.20%

SOURCE:S&P Global Market Intelligence, bank websites, filings and other public information