Six Reasons Banks Are Consenting to C-PACE Financing


lending-8-13-19.pngBanks looking to stay abreast of emerging commercial real estate trends should consider an innovative way to fund certain energy improvements.

Developers increasingly seek non-traditional sources to finance construction projects, making it crucial that banks understand and embrace emerging trends in the commercial real estate space. Commercial Property Assessed Clean Energy (C-PACE) financing is one of the fastest-growing source of capital for new construction and historic rehabilitation developments throughout the country, and banks are jumping on board to consent to the use of this program.

C-PACE financing programs allow for private funders, like Twain Financial Partners, to provide long-term, fixed-rate financing for 100% of the cost of energy efficiency, renewable energy and water conservation components of real estate development projects. This financing often replaces more expensive pieces of the construction capital stack, like mezzanine debt or preferred equity. Currently, over 35 states have passed legislation enabling C-PACE; new programs are currently in development in Illinois, Pennsylvania, New York, among others.

C-PACE financing can typically fund up to 25% of the total construction budget, is repaid as a special assessment levied against the property and is collected in the same manner as property taxes. Like other special assessments, a lien for delinquent C-PACE assessments is on par with property taxes. Due to the lien priority, nearly all C-PACE programs require the consent of mortgage holders prior to a C-PACE assessment being levied against the property.

C-PACE industry groups report that over 200 national, regional and local mortgage lenders have consented to the use of this type of financing to date. While there are many reasons mortgage holders consent to C-PACE, below are the top six reasons banks should consider consenting:

C-PACE Financing Cannot be Accelerated. In the event of a default in the payment of an annual or semi-annual C-PACE assessment obligation, only the past due portion of the C-PACE financing is senior to a mortgage lender’s claim. For example, assume Twain Financial provided $1 million of C-PACE financing to a project, with a $100,000 annual assessment obligation due each year over a 20-year term. In the event of non-payment of the C-PACE assessment in year 1, Twain could not accelerate the entire $1 million of C-PACE. Rather, Twain’s lien against the property is limited to $100,000.

C-PACE Financing Does Not Restrict a Senior Lender’s Foreclosure Rights. Unlike other forms of mezzanine financing, C-PACE funders do not require an intercreditor agreement with a senior lender. Rather, the senior lender can foreclose on its mortgage interest in the property in the event of a default on the senior lender’s debt, in the same manner as if it was the sole lienholder on the property. The C-PACE lender does not have any right to prevent, restrict, or otherwise impact the senior lender’s foreclosure.

Senior Lenders May Escrow the C-PACE Assessment. In many cases, senior lenders will require a monthly escrow of the annual C-PACE assessment obligation, in the same manner as property tax and insurance escrow requirements. The C-PACE escrow serve to further mitigate risks associated with the failure to pay the C-PACE assessment when due.

C-PACE Funds Fully Available as of Date of Closing. C-PACE financing typically closes simultaneous with the senior lender. At the closing date, all C-PACE funds are deposited into an escrow account, to be withdrawn as eligible costs are incurred. Senior lenders have the reassurance of knowing the funds are available to be drawn as of the date of closing.

C-PACE Financing May Increase the Value of the Senior Lender’s Collateral. In most states, a threshold requirement for C-PACE financing is that an engineer establish the savings-to-investment ratio is greater than one. In other words, the savings achieved by the financed improvements over the term must outweigh the cost of the improvements. PACE projects directly reduce a building’s operating costs, increasing its net operating income and valuation.

Relationships matter. Nearly every C-PACE project involves a lender’s customer who wants or needs to complete a project. C-PACE funded projects make good business sense for the building owner and the building’s mortgage lender.

How to Build Shareholder Value When Economic Growth Slows


shareholder-12-4-18.pngBanking has been on an impressive run since the end of the 2009 recession. Now, as the industry finds itself with sky-high valuations, the market is wondering what banks can do for an encore.

Whatever comes next must be defined by a clear strategy for building shareholder value. That’s because the next 12-18 months are likely to show some level of marketplace pullback. A recent Wall Street Journal article reported that the U.S. economy has likely peaked and that we should expect slower growth on both the consumer and business sides. This means that formulating a strategic plan is increasingly vital.

These six ideas offer some places to start:

1) Balance CRE exposure with C&I growth
One of the commercial growth engines has been the commercial real estate space. But as the demand cycle begins to flatten, many small and mid-size banks are refocusing their attention on the commercial and industrial loan sector. Although it’s a slower, relationship-oriented build, there is an opportunity for a more sustainable, mutually beneficial relationship that could span several years. As a result, we expect continued demand for high-performing C&I lenders over the next 18-24 months who can drive the right kind of volume for the banks.

2) Bolster non-interest income businesses
Non-interest income has always been a big topic. But the banking industry needs to go beyond simply focusing on service-fee opportunities. That can mean creating new businesses around payments, treasury management and areas of wealth management. It can also include non-traditional businesses like insurance, which can offer a nice annuity-based income stream.

3) Play hard in the talent wars
Nearly 60 percent of employers struggle to fill job vacancies within 12 weeks—and by 2030, the global talent shortage could reach upwards of 85 million people. For banks, this means emphasizing three basic strategies that go beyond monetary compensation: a) Develop and enhance career development and retention programs; b) create an emotional bond between employees and the bank itself; and c) involve human-resource executives in formulating deliberate talent-search strategies.

4) Ensure value realization in a pricey M&A market
Banks need a clearly defined strategy around managing mergers and acquisitions. Where will banks find targets and opportunities? Whether the strategy is opportunistic or deliberately acquisitive, banks must create a structured playbook that more than earns back the premium paid by the acquirer.

5) Develop a deliberate deposit strategy
There is no single answer to the deposit funding challenge facing most banks today. But here are areas worth exploring: a) Make sure retail checking and money market products are positioned to retain loyal checking customers; b) bolster treasury management solution capabilities and develop industry niches to grow specialty deposits; and c) align sales team goals and incentives to reflect the priority of deposit growth and retention. The key is putting together a detailed funding plan–and executing a deposit strategy that balances deposit growth with overall cost of funds in 2019.

6) Execute on the channel delivery shift
Make plans to keep moving into a digital world and navigate the world of tech. This really comes down to ensuring a significant return on your channel investments. When making any investments in delivery channels—whether brick-and-mortar, contact centers or a digital strategy—they have to be looked at in three areas. How much will the investment help with customer acquisition? How much will it help to retain profitable clients? And what is the cost?

Building a great strategic plan is actually creating a great story—for the board, for investors, for the employee base and for prospective talent. Then, when looking at financial rigor and value, embrace the idea of relentless execution with milestones, key performance indicators and focus. Success is derived not just from the plan, but also from the notion that everybody has their fingerprints on it by the time the process is done.

No matter the focus over the next three to five years, break it down into its basic parts, create a story and execute on it. Because in the end, success comes down to relentless execution.

Nine Strategic Areas Critical to Your Bank’s Future


strategy-6-30-17.pngHow should banks determine the best way to proceed over the upcoming quarters? While no one can predict the future, there are several critical developments that anyone can keep an eye on. These are the areas that are most impactful to banks and for which they need to strategize and position themselves.

Rising Rates: Obviously, rates are rising but by how much? Banks should position for moderate hikes and a slower pace of hikes than the Fed predicts. The Fed predictions on rate hikes have been overstated for several years running. The yield curve for the 10-year Treasury is flattening as of late, which also indicates fewer hikes are needed. A reduced duration for assets and reduced call risk makes the most sense; but practice moderation and don’t overdo it. Too many banks had their net interest margin crushed by being too asset sensitive and waiting for rates to increase while we had eight years of low rates. Check your bond portfolio against a well-defined national peer group of banks with similar growth rates, loan deposit rates and liquidity needs. Very few banks perform this comparison. They just use uniform bank performance reports or a local peer group. Every basis point matters, and there is no reason to not be a top quartile performer.

Deposits: Buy and/or gather core deposits now. Branches provide the best value. Most banks overestimate what deposits are core deposits, meaning they won’t leave your bank when rates rise. Like capital, gathering core deposits is best done when it is least needed.

Mergers and Acquisitions: If you are planning on selling in the next three years, sell right now, as optimism and confidence are at 10-year highs. If you are a long-term player, go buy core deposits, as they are historically cheap and you are going to need them. They are worth more now than perhaps ever before.

Get Capital While You Still Can: Solve your capital issues now. Investors are probably overconfident, but banks have done well the last seven years and finally, they aren’t taboo anymore. Investors want to invest in banks. That always happens before something bad in the economy occurs, so get it while you can.

Real Estate Carries Risk: With regulators mindful of capital exposure and real estate deal availability being spotty, it’s best that banks be wary of deals in this area. Commercial real estate linked to retail is more and more being viewed as extremely risky. There is an all-out war being waged on store retailers by online retailers. Since retail is a huge sector of the U.S. economy, investment will follow the online trend. Industrial real estate has become “retail extended” with the least amount of real estate risk.

Beware of Relying on Credit Scores: Banks need to be careful of the credit cycle. Consumers are loaded full of debt. Cars and homes are too expensive relative to wages and affordability. Credit scores probably don’t capture the downside risk to the consumer.

Get Ahead of Your Risks: Cyber-risk is a major and very real risk. Get ahead of the curve. Two other areas bearing risk are 401(k) plans and wealth management areas as they are especially exposed to litigation and are a nightmarish mess to be addressed. 401(k)s are overloaded with too many choices, fiduciary risk, performance issues, excessive fees and conflicts of interest. Get help now or you may be painfully surprised.

Marketing: Your bank had better get creative with digital marketing opportunities for your website as well as mobile devices. Why? Billions are being invested into financial technology companies and it’s easier for fintech to learn about banking than it is for bankers to learn about fintech.

Millennials: Surveys from The Intelligence Group and others show that finding young, motivated workers, and then retaining them, may be a challenge.

  • 45 percent of millennials believe a decent paying job is a right, not a privilege.
  • 64 percent would rather make $40,000 at a job they love versus $100,000 at a boring job.
  • 71 percent don’t obey social media work policies.
  • Millennials are proving to be more loyal to employers than previous generations, and are better at multi-tasking than previous generations.

Hopefully, some of these items provide bankers strategic ideas to incorporate over the next two or three years.

Now is the time to chart your course.

To Better Understand Bank Real Estate Credit Concentrations, Give Your Portfolio a Workout


stress-test-4-19-17.pngBy now, the vast majority of banks with credit concentrations in excess of the 2006 Interagency Regulatory Guidance have discussed this with regulators during periodic reviews. To underscore the importance of this to the regulators, a reminder was sent by the Federal Reserve in December of 2015 about commercial real estate (CRE) concentrations. The guidance calls for further supervisory analysis if:

  1. loans for construction, land, and land development (CLD) represent 100 percent or more of the institution’s total risk-based capital, or
  2. total non-owner-occupied CRE loans (including CLD loans), as defined, represent 300 percent or more of the institution’s total risk-based capital, and further, that the institution’s non-owner occupied CRE loan portfolio has increased by 50 percent or more during the previous 36 months.

While the immediate consequence of exceeding these levels is for “further supervisory analysis,’’ what the regulators are really saying is that financial institutions “should have risk-management practices commensurate with the level and nature of their CRE concentration risk.” And it’s hard to argue with that considering that, of the banks that met or exceeded both concentration levels in 2007, 22.9 percent failed during the credit crisis and only .5 percent of the banks that were below both levels failed.

So the big question is: How to mitigate the risk? Just like the idea of having to fit into a bathing suit this summer can be motivation to exercise, the answer is to give your loan portfolio a workout.

And in this context, that workout should consist of stress testing designed to inform and complement your concentration limits. In other words, the limits you set for your bank should not exist in a vacuum or be made up from scratch, they need to be connected to your risk management approach and more specifically, your risk-based capital under stress. What’s necessary is to take your portfolio, simulate a credit crisis, and look at the impact on risk-based capital. How do your concentration limits impact the results?

For our larger customers, we find that a migration-based approach works best because the probability of default and loss given default calculations can come from their own portfolio and they can be used to project forward in a stress scenario (1 in 10 or 1 in 25-year event, for example). For our smaller banks or banks that do not have the historical data available, we use risk proxies and our own index data to help supplement the inevitable holes in data. Remember, the goal is to understand how the combination of concentrations and stress impacts your capital in a data-driven and defensible way.

Additionally, the data repository created from the collection of the regulatory flat files (the only standardized output from bank core systems) can be used for a variety of purposes. This data store can also be used to create tools for ongoing monitoring and management of concentrations that can include drill down capabilities for analysis of concentrations by industry, FFIEC Code, product/purpose/type codes, loan officer, industry and geography (including mapping), and many others. The results of loan review can even be tied in. The net result is a tool that provides significant insight into your portfolio and is a data-driven road map to your conversation with your regulators. It also demonstrates a bank’s commitment to developing and using objective analytics, which is precisely the goal of the regulators. They want banks to move past the days of reliance on “gut feel” and embrace a more regimented risk management process.

When the segmentation and data gathering is done well, you are well positioned to drive your portfolio through all sorts of different workouts. The data can be used for current allowance for loan and lease losses, stress testing, portfolio segmentation, merger scenarios and current expected credit loss (CECL) calculations, as well as providing rational, objective reasons why concentration limits should be altered.

And just like exercise, this work can be done with a personal trainer, or on your own. All you need is a well thought out plan and the discipline to work on it every day as part of an overall program designed for credit risk health.

Did Regulatory Concerns Torpedo the New York Community/Astoria Merger?


merger-1-6-17.pngIt’s highly unusual for the partners in a bank merger to terminate an agreement that they’ve already made public, so the recent announcement that New York Community Bancorp in Westbury, New York, and Astoria Financial Corp. in Lake Success, New York, would abandon their proposed $2 billion deal led to immediate speculation that the regulators had secretly torpedoed the proposed transaction. The banks did not give a reason in their joint statement in December 2016.

Announced in October 2015, the deal was supposed to close in December 2016. But New York Community issued a statement in November 2016 that “based on discussions with its regulators, it does not expect to receive the regulatory approvals required to consummate the proposed merger …by the end of 2016.” Instead, the banks agreed to terminate the merger agreement effective January 1, 2017.

The voluntary termination of a publicly announced bank merger because of regulatory complications is unusual because acquirers generally do their best to anticipate any possible roadblocks before entering into a formal merger agreement. This generally includes informal discussions with their primary regulator about any potential issues that could be problematic. Although these discussions should not be construed as a kind of pre-approval, it would be unusual for an acquirer to proceed with a proposed merger if its principal regulator expressed serious concern about any aspects of the deal in private.

It is unknown whether New York Community and Astoria decided to pursue their merger despite concerns that might have been voiced privately by their regulator, or if serious regulatory issues surfaced later upon a formal review. However, according to the investment banking firm Keefe Bruyette & Woods, the percentage of M&A applications to the Federal Reserve that have later been withdrawn have been on the rise in recent years, jumping from 15 percent in 2013 to 23 percent in 2015, and to 22 percent in the first six months of 2016. This increase occurred while annual M&A deal volume was growing at a much slower rate, which would suggest that the Fed has been taking a more critical perspective during its review process.

Issues that could have complicated the New York Community/Astoria deal include a high concentration of commercial real estate assets that would have comprised the combined entity’s balance sheet. New York Community is one of the top multifamily housing lenders in the country, while commercial real estate, multifamily and residential mortgages account for the majority of Astoria’s total loan portfolio.

Another factor that most likely complicated the deal’s regulatory approval process is that the combined bank would have crossed the $50 billion asset threshold level—New York Community had $49.5 billion in assets as of September 30, 2016, while Astoria had $14.8 billion. At this point, it would have become a Systemically Important Financial Institution, or SIFI, which would have exposed it to higher capitalization requirements and tougher regulatory scrutiny than are applied to smaller banks. The regulators generally require banks to have a SIFI compliance plan in place before crossing the $50 billion threshold, so New York Community most likely had already been preparing for this transition. However, the elevated SIFI requirements, combined with the bank’s significant commercial and residential real estate concentrations, might have made it difficult to gain regulatory approval in a timely manner.

In a research report published subsequent to the announced termination, KBW expected both banks to continue to seek out a merger combination. New York Community would seem to face the greater challenge in terms of finding an acceptable partner that won’t magnify its own commercial real estate concentration issues, and also because the bank’s organic growth trajectory will probably take it past the $50 billion threshold in 2017. Life as a SIFI grows more challenging—merger or no merger.

New Factors Impacting Bank M&A


As the industry heads into 2017, new factors including commercial real estate concentrations and a potential rise in interest rates could affect the pace of mergers and acquisitions. In this video, Jim McAlpin and Jonathan Hightower, both partners at Bryan Cave LLP, detail the drivers of M&A.

  • What is driving M&A in today’s environment?
  • What could shift M&A expectations in 2017?
  • What was the best deal announced in 2016?
  • What makes a successful deal?

Bank Boards Should Focus on Commercial Real Estate Concentrations


risk-management-10-10-16.pngBank boards should make sure they are reviewing their policies and practices related to commercial real estate (CRE) lending. Regulators have made clear that CRE concentration risk management will be a focus at exam time.
While many banks are approaching the CRE limits that trigger regulatory scrutiny, they are often not following best practices for managing concentration risk, particularly in stress testing, Comptroller of the Currency Thomas J. Curry warned recently in a speech.

As a result, the Office of the Comptroller of the Currency elevated CRE concentration risk management to “an area of emphasis” in its latest Semi-Annual Risk Perspective. The Federal Deposit Insurance Corp. also reports that CRE-related informal enforcement actions known as Matters Requiring Board Attention are increasing.

The OCC says that CRE portfolios have seen rapid growth, “particularly among small banks.” The decision to emphasize CRE concentration risk management follows a statement from all three prudential regulators late last year that they would “pay special attention to potential risks associated with CRE lending” in 2016. Regulators said they could ask banks to raise additional capital or curtail lending to mitigate the risks associated with CRE strategies or exposures.

At the same time we are seeing this high growth, our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices,” Curry said in announcing the new emphasis.

Proper stress testing is crucial to managing CRE concentrations—but stress testing is the right tool for the job, it’s not the job itself. Too many banks think they can solve the CRE problem with stress testing alone. Here’s how they are doing it wrong:

  1. Only the CRE loan portfolio is being stress tested, which does a disservice to parts of the bank that are strong.
  2. Data gathering for stress testing each loan is a nightmare. Most banks don’t have it centralized. This will be an issue for banks when the Financial Accounting Standard Board’s new Current Expected Credit Loss standard (CECL) is implemented as well.
  3. Banks are treating the stress tests as a check-the-box exercise, without including top management to guide the process or use the results to position the bank for success.
  4. Management doesn’t understand the results, so they are not in a position to have effective conversations with examiners about why the tests are important.
  5. Most banks are not applying the stress test results toward strategic and capital planning.

Banks should use a combination of top-down and bottom-up stress testing to demonstrate to examiners that they can be trusted with elevated levels of CRE concentration. Key to that analysis is using loan-level data to analyze performance of the portfolio by vintage—e.g. the risk factors affecting loans change depending on the economic and market conditions on the date of origination—another lesson that will be important for banks when they implement CECL.

CRE concentration risk management best practices also include global cash flow analyses, an understanding of lifetime repayment capacities, proper appraisal reviews and ongoing monitoring of supply and demand. Banks must ensure that they have the right policies, underwriting standards and risk management policies to allow the board to monitor the concentration risk and understand the CRE limits. Appropriate lending, capital and allowance for loan and lease losses (ALLL) strategies are crucial.

Many banks are making the same mistakes when it comes to CRE concentration risk management, the FDIC reported in a recent teleconference. Besides insufficient stress testing, common weaknesses include:

  • Outdated market analyses that conflict with the bank’s strategic plans, either because the market data is wrong or not unique to the bank
  • Excessive limits
  • Poor concentration reporting and board documentation
  • Lax underwriting and insufficient loan policy exception programs
  • Appraisal review programs without sufficient expertise or independence
  • No CRE contingency plans
  • ALLL analyses that fail to consider CRE risks
  • No CRE internal loan review
  • Limited construction loan oversight

M&A can be an attractive solution to CRE issues for some community banks. Acquisitive banks, however, need to take special notice of the CRE concentration regulatory warning. Many potential acquisitions will result in concentrations that trigger special regulatory scrutiny, especially if they are cash-heavy transactions and are dilutive to tangible book value. Acquiring banks must be prepared to demonstrate that they have the capital management infrastructure to manage concentration risk.

Why Loan Participations Still Work For Banking


community-banks-9-19-16.pngOne consequence of the relaxation of branching restrictions in recent decades has been the near demise of correspondent banking, and specifically “overline lending,” where a community bank looks to a larger, geographically distant bank to extend credit to a customer of the community bank in excess of that bank’s legal lending limit.

The spread of branch banking, though, has enabled larger banks to compete for customers once the sole province of community banks. Further, large banks are under increased regulatory pressure to lend to smaller businesses. Consequently, traditional overline lending has largely disappeared. Community banks must now look elsewhere to place that portion of a loan exceeding the bank’s lending limit.

At the same time, technology is leveling the playing field between large and small banks in assessing and managing credit risk of business customers. Although customer relationships are still at the heart of community banking, not only does computerized process-based lending reduce costs, but it can lead to better lending decisions when, for example, data analysis provides a defensible rationale for rejecting a loan request from a customer who has a strong relationship with the bank. Community banks should utilize this technology to strengthen their relationship with existing customers as well as to attract new customers.

The Transformation of Community Bank Lending
Today, community banks find much of their traditional business lending imperiled by changes in banking technology, structure and regulation:

  • Credit-risk evaluation techniques have become more sophisticated;
  • Branching restrictions no longer protect local lending markets;
  • Computerized, process-based lending increasingly drives small-business lending, reducing the importance of relationship banking;
  • Business customers can still outgrow the lending capacity of their community bank;
  • Overline lending through correspondent banks has largely disappeared; and
  • Regulatory compliance costs have risen while becoming more complex, increasing compliance risk.

Because of these irreversible trends, much traditional business lending has left community banks, with the consequence that they have become more dependent on commercial real estate (CRE) and construction and development (C&D) lending than is the case at larger banks.

Community bank CRE and C&D lending usually is limited to a bank’s immediate market area, leading to a concentration of geographical credit risk that can be dangerous, if not fatal, to the bank during an economic downturn. CRE and C&D loan losses were a major factor in the failure of many community banks following the 2008 financial crisis. Although community banks have been increasing their commercial and industrial (C&I) lending, they still are too heavily concentrated in CRE and C&D lending.

How Community Banks Can Compete More Effectively Today as Lenders
A major challenge facing many community banks today is how to reduce their dependency on CRE and C&D lending while profitably attracting and retaining other types of business customers and borrowers. Community banks, though, still have many advantages they can capitalize on?proximity to their customers, local market knowledge, the ability to develop and maintain personal customer relationships, and speed and flexibility in tailoring banking solutions to a particular customer’s needs.

Community banks must implement new techniques to increase their non-real estate business lending, especially when a customer’s credit needs outgrow the bank’s balance-sheet capacity to accommodate all of those needs. Selling participations in loans that the bank has originated represents an effective way to retain customers with growing credit needs; loan participations are the modern-day equivalent of overline lending. At the same time, buying loan participations represents an effective way for a community bank to diversify its loan portfolio, both geographically as well as by customer type.

Key, though, to selling and buying participations in business loans is efficiently evaluating credit risk as well as monitoring and servicing a loan over its life. Working collaboratively with third-party providers of specialized banking services who are not competitors represents an excellent way for a community bank to profitably and safely engage in both buying and selling loan participations.

Conclusion
Community banks have been burdened in recent years by increased regulation while technology has enabled large banks and some emerging non-bank firms to divert business lending away from community banks. Nonetheless, relationship banking still is a valuable service that community banks can and do provide. However, they need to collaborate with other community banks to create the scale necessary to compete against the big banks by utilizing new technology to make their lending processes more efficient and to enhance the banking experience for their customers. Using technology in buying and selling loan participations represents an important way to accomplish that objective.

How CRE Lending Has Evolved


growth-strategies-9-17-15.pngFor most banks, organic growth comes from loans. Commercial real estate (CRE) lending is the top source for loan growth, according to the executives and board members responding to Bank Director’s 2015 Growth Strategy Survey. With financial institutions continuously looking for organic growth opportunities, Bank Director asked our program members: “How has your bank’s commercial real estate lending strategy changed or evolved for your institution in recent years?” 

Here is a selection of their responses.

“Our CRE strategy remains in place in that we seek opportunities that fit within our risk appetite. We have evolved in that we are adding talent to the organization for commercial & industrial (C&I) banking as well as specialty finance. This broadens our profile and puts less dependency on CRE as the only source of commercial revenue.”

“We are going longer for term loans, focusing more on owner-occupied real estate, and doing employee lift-outs to take advantage of loan officers’ contacts.”

“Our strategies related to commercial real estate lending have evolved over the last five years. We are much more focused today on maintaining more diversity in the portfolio, and paying close attention to concentration levels in the portfolio relating to geography and purpose. We have lowered our ‘hold’ levels significantly, and tend to participate out larger levels of credit exposure to partner banks. We underwrite to stricter standards, including debt service coverage, and very rarely, if ever, approve any policy exceptions.”

“We have not really changed any of our philosophies regarding commercial real estate over the last several years. We do insist on seeing leases for new construction of strip centers that will show a minimum of 75 percent occupancy to start. Owner-occupied [real estate] requires a lower loan-to-value [ratio].”

“One thing we have not done in order to grow our CRE portfolio is compromise our underwriting standards. Two strategic things we changed is [to] raise our self-imposed lending limit, and how we aggregate relationships with similar ownership. Both of these changes provide us with a greater ability to meet the borrowing needs of commercial customers, reduce our outbound participation activity and provide growth in the portfolio.”

“The bank whose board I sit on hasn’t changed much, other than adding a new business line, quick-service franchise restaurant financing. Our focus is still on relationships, which generate core deposits.”

We hope this spirit of sharing provides insight and value to your bank’s board. If you have a question you need answered, please send your inquiries to mking@bankdirector.com. We also encourage you to comment below if you would like to share how your bank’s CRE lending strategy has evolved.

C&I and Commercial Real Estate Lending Still Growing for Community Bankers


12-13-13-Emily.pngJames Tibbetts, vice chairman and former president and CEO of $260-million asset First Colebrook Bank, based in Colebrook, New Hampshire, credits a strengthening New Hampshire economy for the growth he’s seeing at his bank. The bank has locations throughout the state, and the rural economy at the bank’s home in northern New Hampshire depends on tourism and timber harvesting, with Tibbetts seeing increased investment in property and equipment purchases among the small businesses that comprise the core of the bank’s customer base. “Our growth is coming from commercial real estate and C&I lending,” he says. “We do quite a bit of equipment lending.”

With competition for loans and deposits stiff, many community bank executives and boards are looking for the right formula for growth. Many banks are sticking to mortgages, despite rising interest rates and lower volume, instead vying for an increased share of the mortgage market. Still others are focused on the growth they are seeing in commercial real estate and commercial and industrial (C&I) lending.

Industry-wide, C&I loans grew 8.1 percent in the third quarter compared to the same period a year ago, according to the Federal Deposit Insurance Corp. Meanwhile, residential loans secured by real estate fell by .8 percent. Home equity lines of credit fell 8.8 percent.

In November, Bank Director informally polled over 30 bank directors and executives by email to get their views on lending and saw similar trends. In what areas are institutions seeing loan growth? Most of those polled, 73 percent, reported growth in commercial real estate in 2013 and 65 percent reported growth in commercial and industrial lending.

In contrast, the mortgage market remains stagnant, with many reporting a flat market for home mortgage purchase loans in 2013 and almost half seeing a decline in home mortgage refinancing. Looking ahead to 2014, how will the new ability-to-repay rule and creation of “qualified mortgages” impact the mortgage business? Most bankers polled that already offer mortgages indicate that they will continue to be part of their banks’ business in the near future, though some may no longer consider it to be a core part of the business.

Kevin Lemke, a director at Grand Forks, North Dakota-based Alerus Financial Corp., a financial holding company with $1.3 billion in assets, says that while mortgages have slowed a bit, it’s still a strong business for his company, which as of the third quarter of 2013 reported an increase of 4 percent in mortgage originations and loan servicing from the previous year. “I don’t know if we’ll have a record year in originations this year,” says Lemke, “but it will be close.”

Alerus’s broad geographic reach, in Arizona, Minnesota and the bank’s home base in North Dakota help the bank take advantage of strong demand in some areas even as the mortgage business wanes in others. The Minneapolis/St. Paul area of Minnesota is strong for mortgages, and Alerus plans to expand in Arizona.

Lemke feels that his bank is prepared for the qualified mortgage rule, and doesn’t expect an adverse impact on business at his bank. He’s more concerned about rising interest rates. “I think interest rates will have an impact, and already are. I think we will see a decrease in our volume,” he says. “There’s no doubt about it.”

Competition with other banks for loan business continues to be a key concern. To address this, many are hiring new loan staff, offering more attractive loan terms or looking to technology to make the loan process more efficient for clients.

Tibbetts says his bank doesn’t see a lot of competition in northern New Hampshire, but the southern part of the state is a tough market. Pricing is competitive. “It’s all about developing relationships, and that’s how we’re able to grow the amount we have grown,” he says. “We’ve developed those relationships and we price competitively.”

First Colebrook, like many banks, is emerging from a challenging four years. A lot of the bank’s business development and commercial lending staff was stuck tackling problem loans, Tibbetts says, but now the bank can devote more personnel to growing business. “We’re now able to focus on the future and the strengthening economy,” he says.