How to Find Good C&I Loans

It’s no secret that the last couple of years have been very challenging for community banks. Commercial lending in many regional markets has been slow to recover since the Great Recession, and there is such stiff competition for good loans that net interest margins have been compressed throughout the industry. Alliance Partners Senior Advisor Floyd E. Stoner explains how his company’s commercial and industrial (C&I) loan network for community banks can help member banks find good commercial loans outside their markets without taking on excessive credit risk.

Are you surprised that it has taken so long for the business loan market to revive itself?
Yes, I am somewhat surprised that the commercial loan market hasn’t come back more quickly. What happened during the financial crisis had an incredible psychological impact, and businesses are just more wary. Businesses are not as eager to hire full-time employees to grow their businesses, and as a result, there’s been a real lag. I certainly hope that the loan markets will return with vigor, but I think that’s something we’ll know more about a year from now.

Is there a way for community banks to deal with this slow market?
Obviously for any individual bank, they’re trying to find loans in their local communities, as they should. BancAlliance is designed to provide access to commercial and industrial loans that are bigger than the ordinary community bank’s lending capacity. This is the middle market where interest rates are often higher and the loan structures tend to have very robust documentation, typically with audited financials. Gaining exposure to these loans is a strategy that can work for some community banks.

How do you reduce the credit risk inherent in loan participations?
That’s an excellent question, and it goes to the whole design of the model. Alliance Partners is the asset manager that sources loans on behalf of BancAlliance, a cooperative of 190 member banks. Fourteen of those member banks serve on the board of directors of BancAlliance, with one representative from Alliance Partners. Those board member banks approve the credit policies and the underwriting standards, and they engage an independent loan review firm on behalf of the network. Additionally, loans are generally made based on the level of interest expressed by BancAlliance members in a particular loan. Rather than finding random loans and then pushing them down, we look for loans of potential interest to the network. When members do express interest in a particular loan—and no member has to take a loan if they don’t want to—then there’s a much more intense underwriting process. Only if the loan meets stringent underwriting criteria is it made available to members for their final approval. Alliance Partners also sends to members quarterly updates on the loans that they have sourced through the network. The members certainly have to re-underwrite the loans themselves, but they are not responsible for finding the loans.

So you could almost say that each loan participation is underwritten twice—once by Alliance Partners and once by each individual member?
Yes. Alliance Partners fully underwrites and itself owns a piece of every loan made available to members of BancAlliance, and members often reach out to Alliance Partners during their underwriting process to ask questions, request additional information, and also sometimes use fellow members as resources during the underwriting process.

Can community banks still compete in today’s market?
Absolutely. Community banks provide a level of service for their customers and communities that is qualitatively different from that provided by larger institutions. The roles are different. Community banks can handle complexity, but also with more of a personal touch. I think there’s a great opportunity going forward for community banks to become increasingly sophisticated, but also remain relevant to the communities and customers that they serve.

C&I Loans: Do Community Banks Have a Competitive Advantage?

3-14-13_CI.pngGrowth in commercial and industrial (C&I) lending is generating a lot of buzz in the industry. As reported in the fourth quarter banking profile released by the Federal Deposit Insurance Corp. (FDIC), C&I loans rose 12 percent during the last year to $1.5 trillion.  A recent phone survey conducted by Bank Director of 142 community bank CEOs and chairmen in the southern United States confirms this growth, with 64 percent revealing plans to grow through C&I lending this year, compared to 29 percent that plan to grow through consumer lending and 7 percent through specialty finance.

Paul Merski, executive vice president, congressional relations and chief economist at the Independent Community Bankers of America (ICBA) explains that while the lending environment as a whole is highly competitive, C&I lending is a growth area where community banks with the right expertise can have an advantage over larger banks.  “It’s highly competitive, and it’s really something that the community banks shouldn’t cede to the larger banks,” says Merski, as community banks have the relationships within the local business community to place themselves at a competitive advantage.  

Cadence Bank, a $5.4-billion asset privately owned regional bank based in Birmingham, Alabama, with locations across Alabama, Florida, Georgia, Mississippi, Tennessee and Texas, saw the highest growth in C&I loans in the nation for the fourth quarter, as reported by SNL Financial.  As the result of three bank acquisitions, Cadence saw overall loan growth, including the bank’s C&I portfolio, which grew 41 percent to $1.79 billion, according to Paul Murphy Jr., CEO of Cadence Bancorp and chairman of Cadence Bank.  Additionally, Cadence “hired 65 people with extensive lending experience,” Murphy says.  “That would be the formula for more growth than normal.”

According to Merski, C&I loans can offer a higher rate of return than standardized loans, like mortgage loans, as these types of loans allow for greater customization and flexibility in the terms and rates offered to the borrower.  In turn, this can help increase profitability for banks squeezed by net interest margins. At Cadence, C&I loans generate additional deposits, and the fee income opportunities that these loans provide are a significant benefit. Cadence has also seen advantages in cross-selling other products like treasury management, “which is also good business, and helps fund the bank,” says Murphy.

The focus of bankers on C&I has, naturally, raised the interest of regulators, who question whether terms are growing too flexible and rates are dipping too low. As with any product, having the proper risk management controls in place is key, says Merski, adding that a diverse loan portfolio that includes C&I can benefit a bank.  “For community banks, not being overly concentrated in one lending area” can help improve a bank’s risk profile, he says.

Murphy stresses that banks wanting to enter the C&I fray should have lenders with the right skill set.  The recent hires at Cadence hold an average of 18 years of C&I lending experience, and Murphy views C&I as the bank’s core business.  “We’re not doing it because it’s en vogue,” he says.  “We’re doing it because this is what we’ve always done.”

Bank Director also surveyed bank CEOs about plans to increase spending in branch technology, branch expansion, mobile applications and ATMs.  Fifty-two percent do not plan additional spending in any of these areas. Twenty-one percent plan to upgrade branch technology, and 19 percent plan increased investment in mobile apps.  “The mobile banking app utilization is just going through the roof,” says Murphy.  “People love it.” 

Cadence Bank is building an automated branch using video tellers near its Birmingham, Alabama, headquarters. The branch will feature one video teller, without in-person staff like tellers and loan officers. Murphy explains that video banking will allow Cadence to extend hours as well as save on man power by having one person handle transactions at several branches.  “I think we can actually do a better job for customers,” says Murphy. 

Thirteen percent of the bankers surveyed plan to open new branches, while just 2 percent plan increased investment in ATMs.

Bank Director conducted a brief survey by phone in February and March, polling 142 community bank CEOs and chairmen in Alabama, Arkansas, Florida, Louisiana, Mississippi, Oklahoma, Tennessee and Texas.  The survey focused on growth in that region in advance of Bank Director’s Growth Conference to be held in New Orleans, Louisiana, on April 30 and May 1. Ninety-nine percent of the respondents were bank CEOs; most of the respondents represented the states of Texas (29 percent), Oklahoma (25 percent) and Alabama (15 percent).