written by Blair Groves
This is our second article about growing your loan portfolio. Click here to read article one.
Community banks are continually searching for ways to grow their loan portfolio. Competition is high with midsize and large banks offering low fixed rate loans for extended maturities, primarily on commercial real estate (CRE). Community banks have a difficult time beating, or even matching, these terms since they do not play in the derivatives market. Due to this, many community banks are struggling to grow their loan portfolio at a decent pace, particularly those that are in rural communities. Below are three things that could help banks in this position cultivate loan growth.
A fairly easy way to grow your loan portfolio is by purchasing participations. Rural banks can team up with banks in a metropolitan area, who naturally have more loan demand, to increase, and sometimes diversify, their loan portfolio. These banks typically have limited options to lend in the CRE arena, as their demand is primarily for agriculture loans. This scenario can work both ways with a metropolitan bank purchasing participations of agricultural credits from rural banks. It can be a win, win situation for both banks. If a bank has hit their legal lending limit with a borrower, but still wants to fully service their customer’s needs, selling participations is the best option.
One thing to keep in mind before purchasing participations is that examiners will expect underwriting and monitoring of these relationships to match your policies and loan files to include all documentation. If you are diversifying your portfolio and getting into an area of lending you have not been involved in, ensure that before purchasing these participations, the bank’s loan policy has established portfolio limits and specific underwriting criteria. This will show that management has put forethought into the bank’s growth strategy and have taken a pro-active approach to risk management.
Another way to grow your loan portfolio is to analyze denied applications. During this study you might identify a pattern or segment of loans that could have been made if underwriting standards were adjusted slightly without taking on additional risk. While most community banks have conservative underwriting criteria, changes can be made that don’t increase the portfolio’s overall risk, but allow for additional loans to be originated. Management can carve out portions of their loan portfolio that they are willing to underwrite at the new terms, in order to keep the volume of these loans within the bank’s risk tolerance.
Many community banks have a small C&I portfolio, but this segment could hold potential growth opportunities if correct focus is placed on it. It is a more challenging portfolio to underwrite and manage; however, it can add more to a bank’s net interest margin than your typical CRE loan. These loans are more relationship-based and therefore, allow loan officers to develop strong rapport with their clients. Most C&I loans are short term and variable rate, which can bode well for the bank’s interest rate risk position.
Contact us if you have any questions about growing your loan portfolio 417-881-0145. Click here to read more about what we do for Community Banks.