Business Trend Lines

Photo by Getty Images / Henrik Sorensen

Photo by Getty Images / Henrik Sorensen

Expect participations and loyalty pricing to grow, top lenders say

By Cheryl Winokur Munk

As in past years, community bankers will continue to contend with a dynamic, highly competitive lending environment in 2016. Several trends have arisen that are likely to continue shaping the commercial lending market. To better understand them, Independent Banker took the pulse of several top-performing commercial and consumer lenders that we’ve profiled in the past.

Here are five commercial lending trends from some of the industry’s top commercial lenders. Look for insights from top consumer lenders in the April issue of Independent Banker.

1. Increased competition from online lenders. Mark Vis, a real estate and commercial loan officer with First State Bank Southwest, a $250 million-asset community bank in Worthington, Minn., has seen more competition from online lenders. This ups the ante for banks courting certain business owners, particularly those managing startup companies.

The trend might require more effort from community banks to help such business owners understand the importance of building a long-term banking relationship, Vis says. Quicker but more expensive nonbank online lenders can be particularly enticing to smaller startup businesses or those that are rapidly expanding and need money quickly, and sometimes the economics don’t always allow a community bank to lend money to a particular company, Vis says.

But it’s still important to stay in close contact with those business owners, he says. The goal is to keep the lines of communication open so as new businesses become more established and need more assistance in the future, the community bank stays at the top of their minds.

“We want to show that we can be a partner for them over the long haul and not just an immediate funding source that steps into the shadows.”
—Mark Vis, First State Bank Southwest

2. Growth in participation lending. Farmers & Merchants Bank in Miamisburg, Ohio, is being asked more often to participate with other community banks in commercial loans with unfamiliar companies in other markets, according to Clint G. Morton, a senior lender at the $120 million-asset community bank. In 2015, 11 percent of the bank’s new commercial loans came from participations, whereas the bank engaged in no such pooled lending in 2014.

“Participations give us the opportunity to join other banks on deals that we otherwise wouldn’t hear about,” Morton says.
Participation lending is sometimes shadowed with a risky reputation—with bankers and with regulators—because of the additional risk involved in tying into another bank’s lending underwriting as well as into a little-known customer. Regardless of how the loan opportunity is discovered, however, Farmers & Merchants maintains strict underwriting standards, Morton points out.

“You underwrite the loan as if it’s your loan,” he says. “You don’t just do it because another bank agreed to it.”

The explosion of participation loans—including many commercial real estate loans—during the Wall Street financial crisis nearly froze participation lending for several years. Morton says a true but gradual thaw in participations is underway.

3. Loyalty pricing models. Some community banks are putting heavier emphasis on relationship-based pricing. For example, pricing models at MidSouth Bank, a $2 billion-asset community bank in Lafayette, La., in the past considered only the deposit and loan business a customer had with the bank. In the past year, the bank has started looking at additional customer relationships—like insurance premium financing, credit cards and accounts receivable financing, says Kevin Latiolais, regional president in the bank’s commercial lending division.

The more relationships a commercial customer has with MidSouth Bank, the better the pricing on loans and other products and services the bank can and will generate, Latiolais says. Look for more community banks to do the same in 2016.

“Participations give us the opportunity to join other banks on deals that we otherwise wouldn’t hear about.”
—Clint G. Morton, Farmers & Merchants Bank

4. Fewer long fixed-rate terms. Several years ago, Citizens Bank of Edmond didn’t offer interest rates that would remain fixed for longer than three to five years for a 20-year commercial loan. Sometimes, however, the bank has offered fixed interest rates on commercial loans for up to 10 years for a 20-year loan, says Jeff Odom, a vice president and commercial lender with the $253 million-asset community bank in Edmond, Okla.

With interest rates lingering at historic lows for the last eight years, competitive pressures have remained intense for many community banks to offer more exceptionally favorable lending terms to their business borrowers. “We’ve had to become a lot more creative on our structuring,” Odom says.

The competitive pricing dynamics might be changing. Commercial lenders, however, say community banks will need to begin protecting themselves and their commercial loan portfolios more against rising interest rates. Now that the Federal Reserve has begun trying to raise its Federal Funds rate target over the next few months and years, such longer interest rate terms, of course, can hinder a bank from maintaining profitable interest rate margins.

5. Growth in new product lines. Five years ago, Farmers & Merchants Bank didn’t offer construction loans. The bank realized it was passing up business as more customers asked for construction financing. “We started slowly and carefully learning the nuances. It has grown into a significant part of our business, especially as new construction has picked up,” 
Morton says.

Farmers & Merchants Bank has recently hired a lender to expand into agricultural lending, another new lending area for the bank. Remaining static is not always the best option if you want to achieve consistent year-over-year growth, Morton says.

“There are many opportunities for banks to grow commercial loans at a steady clip,” he adds. “Even in a rising rate environment, many banks expect to see strong demand in commercial lending over the next year.”

Cheryl Winokur Munk is a freelance financial writer in New Jersey.