The loan types that soared (and suffered) this year

Community banks are expanding loans and exploring new opportunities to respond to the needs of a growing economy.

By Carol Patton

Signs of a recovering economy are everywhere. The unemployment rate hit 4.4 percent earlier this year, the lowest it had been in a decade. The stock market has hit subsequent all-time highs several times this year. Even consumer borrowing reached a milestone—$12.7 trillion—in the first three months of the year, according to the Federal Reserve Bank of New York. This is all good news for community banks, many of which have expanded their loan activities throughout the year to reap improved loan and deposit ratios. To capitalize on an improved economy, more community banks are involved in a wider variety of lending, ranging from commercial development loans to participation loans.

One clear sign of an uptick in lending is that the amount of liquidity community banks have on hand has declined this year, says Rodney Rushing, executive vice president for correspondent banking and credit cards at the $6.5 billion-asset ServisFirst Bank in Birmingham, Ala. ServisFirst is a wholesale bank that works with companies and downstream banks, including 320 community banks, mainly in the southeast.

“That money has gone to work in two places: the loan or bond portfolio,” Rushing says. “In general, the improved construction and housing market, and general business economy has [stimulated] bank loan demand, and consumer loans have clearly picked up.”

Even the Texas Ratio—a measurement of a bank’s overall health—has improved. The ratio has since fallen from 19.95 percent in June 2016 to 15.84 percent 12 months later, better positioning community banks to make loans, expand and finance diverse commercial developments ranging from hospitals to historical properties.

Other trends include community banks getting involved in more commercial loans or commercial real estate (CRE) lending. Rushing says changing banking regulations—and the difficulties they present—such as those affecting home mortgages are behind the shift. “It’s been difficult,” he says.

However, it seems many super-regional banks have also pulled back on CRE lending, paving the way for community banks to snatch the leftovers, adds Henry Abbott, chief credit officer, correspondent banking division of ServisFirst Bank. (See the November 2017 issue of Independent Banker for more on this topic.)

“In 2018, I think we’ll see [community banks] continue to focus on commercial and industrial [C&I] lending and getting aggressive to land C&I deals and not just CRE loans,” Abbott says. “A C&I loan has a longer sales cycle but is more profitable for [banks] because you’ve got a core relationship that will be with you for a long time.”

“A C&I loan has a longer sales cycle but is more profitable for [banks]because you’ve got a core relationship that will be with you for a long time.”
—Henry Abbott,
ServisFirst Bank

A political effect?
Bob Jones, CEO of $600 million-asset United Bank in Atmore, Ala., credits a Republican-controlled White House and Congress for building consumer confidence during the first half of 2017. “Coming out of the election last November, there was a noticeable and immediate uptick in activities across almost all of our lines of business from consumers,” says Jones. “The election gave them some reason to feel optimistic, that finally things were going to be resolved.”

However, Jones says that optimism has waned, largely due to political uncertainties surrounding issues like health care, and a shortage of skilled tradespeople that has slowed commercial development in some areas of the country, such as California.

Overall, demand for loans has dropped, he says, causing banks to be on the lookout for niche consumer products. When consumer buying picked up for pickup trucks, recreational vehicles and boats, United Bank introduced loans with more flexible pricing and terms.

“There was enthusiasm among consumers,” Jones says. “We’ve been more successful in the consumer space than we’ve been in prior years.”

Since United Bank is a Community Development Financial Institution and a Community Development Entity, Jones says 60 percent of its loans are given to those in low- or moderate-income communities. In 2017, his bank began using $65 million in new market tax credits, making loans for a range of building projects that include new hospitals and schools.

Throughout this year, community banks nationwide continued to adapt to the micro-markets they serve. Consider another Alabama bank, the $535 million-asset First Bank of Alabama in Talladega. Two years ago, it introduced a new type of consumer equity loan, says Chad Jones, the community bank’s president and CEO.

“We brought on a product suite for our home equity lines of credit that allows us to go up to 100 percent of the equity in the home,” he explains, adding that the bank buys a private insurance policy on the loan that secures its equity position. “It also allows us to do home improvement loans up to 133 percent of a home’s appraised value.”

Of the bank’s $200 million loan portfolio, these lines of credit represent roughly 10 percent or $20 million. “It’s a small percentage, but it allows us to service local communities that aren’t being serviced in other ways,” Jones says. “It gives the opportunity for our clients to utilize their home equity and really put it to work even after depressed prices occurred throughout the credit cycle.”

Commercial lending rises
Like many other community banks this past year, First Bank of Alabama has ventured outside of its market to grab commercial deals in larger cities like Birmingham and Mobile. Jones says the bank has shifted its focus from consumers to commercial lending, increasing its lending portfolio from $149 million several years ago to $217 million in 2017 due to C&I and CRE loans.

“We started out as a consumer bank but morphed more into a commercial bank, realizing that our loans are going more for commercial deals than consumer deals,” Jones says, adding that the local credit unions are handling more auto and personal loans.

“We tend to stick to doing what we understand and know. We built our pipeline for next year to replicate what we’re doing in lending outside our market to grow our loan portfolio.”
—Chad Jones, First Bank of Alabama

Next year, he believes community banks will face increasing competition from larger financial institutions, which are moving away from CREs and toward C&Is in rural markets. While mobile banking has enabled community banks to capture customers outside their markets, he says they typically can’t compete with loan rates offered by large banks.

“We tend to stick to doing what we understand and know,” Jones says. “We built our pipeline for next year to replicate what we’re doing in lending outside our market to grow our loan portfolio.”

Carol Patton is a writer in Nevada.

Innovative systems

The digitization of lending is happening across all asset classes, says David Reiling, CEO of Sunrise Banks, a nearly $1 billion-asset community bank and national charter that supports six branches in St. Paul and Minneapolis, Minn.

New or upgraded technology is enabling community banks to make faster, better, easier and cheaper loan decisions. Reiling points to new systems that help bankers efficiently conduct periodic quality credit checks on small loans and download customer data directly from sources, such as tax information from the IRS.

“We offer a small-dollar loan as an employee benefit through employers that can be underwritten in less than five minutes,” Reiling adds. “These systems allow us to capture valuable data from customers so that we can really refine [and] define who [are] our best customers, who we want to market to and target.”

Next year, he anticipates that more consumer lending platforms will help bankers grab additional market share. He says retailers will also use such platforms to give consumers more credit options to buy products they sell.

Still, some community banks tend to be slow adopters of technology. “The banks that have gotten into the game and tried it [and] are experimenting and moving forward are going to excel even faster,” Reiling says. “Those sitting on the sideline will fall [farther] behind.”

—Carol Patton