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Tough comeback for small bank business lending

Aggressive rate chops, credit union share grabs, and weak economies make renewed lending harder

Tough comeback for small bank business lending

One commonality among community bankers trying to play a part in the economic comeback is that no two markets seem to be alike. Each bears its own economic baggage and brings differing payoffs to lenders.

Bankers everywhere face certain common challenges—regulatory burden, the interest rate outlook, and more—but a great deal of local flavor remains. Earlier this year, six members of ABA’s Community Bankers Council gathered to discuss business credit and related issues. Current conditions occupied much of their initial discussion.

South Dakota’s Rob Stephenson feels a bit like that guy in the joke where one foot’s in a bucket of ice and the other’s in a bucket of boiling water. On average, his feet are comfortable, but . . .

You see, First Dakota National Bank, based in Yankton, serves two distinct markets.

“One is Sioux Falls, which is the biggest city in the state and is growing like crazy,” says Stephenson, president and chief operating officer at the $1 billion-assets bank, which concentrates on farm and commercial lending. First Dakota, founded in 1872 and historically an ag bank, has been in Sioux Falls, population approximately 165,000, for 11 years. During that time, First Dakota and other community banks in the city have done well in terms of loan growth, in part because their arrival coincided with the desire of lenders from larger banks to try out the community bank work life.

But that’s the good side of things. Stephenson says that the bank’s loan volume over the last few years has grown at a 10%-15% clip, which some bankers would give a body part for. However, he explains that “there’s 20% growth in Sioux Falls, and loans are shrinking in most of the rest of our markets. In our rural markets, it’s more or less a struggle to maintain our business volume.”

In North Carolina, an evolving economy changed the loan types Old Town Bank, Waynesville, can go after. In the $105 million-assets bank’s home county, there is still a great deal of transitioning and cleanup. Historically, the area’s businesses included mills and factories, but those industrial firms are gone, as is the commercial and industrial lending they would have needed. In its place are loans to ag concerns that branched out unsuccessfully.

“I’m talking about old family land, where the fourth generation decided it was going to develop a wonderful, beautiful mountain view, exclusive gated golf community,” says Charles Umberger, Old Town’s president and CEO. “Some of those didn’t work out as well as intended, so western North Carolina is still digging out.”

Old Town is a de novo bank that opened in 2007, and it continues to build out. Much of the commercial lending it does today, other than some C&I opportunities in nearby markets, consists of owner-occupied commercial real estate. “It’s what most of us would call ‘small investor real estate lending,’” explains Umberger. “Your docs, your vets, your attorneys, your CPAs.”

But overall, growth is weak: “The pie isn’t growing much in western North Carolina,” Umberger says. “We’re growing faster than the market’s other lenders are, but it’s just us taking loans away from other banks.”

Some of those banks are larger regional lenders that Umberger says used to be able to position themselves as the “local bank,” although they were very big. That worked until the going got rougher, during the recession and aftermath, and both organizations began to centralize decision making and processing.

“A lot of borrowers got tossed out with the bath water, and were told the banks didn’t want to work with them anymore,” says Umberger, so there has been opportunity for smaller banks to gain those relationships. Yet, he adds, it left a bad taste about all banks in the mouths of some borrowers, and that has been something Old Town and other players have had to overcome, even as they step in to take on the borrower relationships.

More optimism in Iowa

The market is more upbeat in the areas served by Waverly, Iowa’s $332.8 million-assets First National Bank, where Executive Vice-President Susan Whitson sees growth in both ag and commercial credit, the latter helped along by ag. “Unemployment has remained low in our markets, which can be a recruiting challenge sometimes,” she says. “We’ve had steady growth—most of it from relationships that we’ve been in for years.”

However, Whitson adds, the favorable local economies haven’t been exclusive for First National. It shares them, in part, with tax-advantaged competition. In its Cedar Falls market, First National competes with three $1 billion-plus credit unions, and one more that’s approaching the billion-dollar mark. In a town of 100,000, that’s a lot of lenders vying for a finite amount of credit demand.

In Madisonville, in western Kentucky, $200 million-assets First United Bank and Trust saw business loan growth of about 7% in 2013. And this was after a cleanup period. In part, this heightened lending came about as a result of hiring new faces. “We brought in some regional C&I guys,” says Karen Glenn, president and CEO. “They’re good, and they’re knowledgeable. They’ve been able to give us more of a regional perspective of a business customer base. Nothing crazy, but they brought us some different opportunities, and, as a result, we’ve grown our community real estate and C&I lending.”

This growth has been in spite of a local economy that has been improving only slightly. “Things aren’t getting worse, but there’s nothing grand going on,” says Glenn. “The coal industry, which supports the western Kentucky economy, has been kind of teetering, so that we’ve been wondering what will happen.”

In the greater Chicago-area market, in Palos Heights, John Hyland’s $42 million-assets thrift, United Trust Bank, has an advantage in being small as it pursues CRE and Small Business Administration guaranteed loans. “There’s a lot of competition,” says Hyland, president and CEO, “but one benefit of being smaller is that we receive referrals from larger banks that don’t want to touch anything that’s under $1 million. So we get a lot of good business—and on top of that, demand is coming back on the southwest side of Illinois. And it’s sufficiently so that  you can pick and choose.”

Ugly, could wind up UGLY

In rural Missouri, south of St. Louis, Dennis McIntosh, president and CEO at $208.7 million-assets Ozarks Federal Savings and Loan, Farmington, has been astonished at the cutthroat, competitive environment, which led to a discussion of the struggle for business that’s been going on over rates and terms being offered on commercial loans. “I can’t quite believe what I am observing about the competition in our markets,” says McIntosh. “It’s really intense, especially some of the rates that are being offered on CRE loans. And I’ve heard of terms being extended out to seven years—that’s not uncommon in our area. Our economies are not improving significantly, so commercial banks, particularly, are trying to steal one another’s customers.” Most players are flush with deposits, too, he says, so they are anxious to place funds in something besides investments.

“So you have all this liquidity sloshing around, and impelling people to fund commercial-side business for seven years, even ten years,” McIntosh says.

Another factor, says McIntosh, whose organization is a heavy residential lender, is that many area banks are uncertain about the ultimate impact of QM rules and are shying away from mortgages. “So they are more interested in going after CRE.”

With the inevitable rise in market rates somewhere in the distance, McIntosh worries about a reckoning to come. “When rates start going up, it is going to be ugly.”

Other roundtable bankers, some more active than McIntosh in business and CRE lending, report price and term competition that borders on the unsurvivable for anyone who would attempt to match it slash for slash.

Community bankers have long talked about the value of strong service, but there is recognition that there are some customers who will leave you over price. “It’s easy to spot those people, and you don’t have to be in the business very long to do so,” says McIntosh. “Any borrower who is rate driven, it comes out in their conversation in the first three minutes. They almost wear a sign around their neck.”

For example, North Carolina’s Charles Umberger explains how a business loan booked into Old Town at 5.5% for five years came to leave, in spite of his lender’s best efforts. It was a good credit—good enough so a competitive regional offered a seven-year loan at only 3.5%.

“We’re seeing that, too,” says South Dakota’s Rob Stephenson. “We’re seeing the bigger banks coming in and doing this by offering swaps. The spreads that they’re accepting are incredibly low. And that’s a real threat because we can’t survive on spreads of that size.”

What about fighting back with the same weapons?

“We’ve got a good cost of funds,” says Kentuckian Karen Glenn, “so we could probably do a little bit of that, but I’m just too scared to. I’m just not going to mess up our margin. If we have to let a deal go, we let it go. Margin management is critical for the future. I’m not worried about today as much as I am about the future.”

Glenn adds, “I won’t lie to you, we’ve made some rate concessions. I’m sure we all have, at some point, in order to keep certain relationships, because we do look at the customer’s overall relationship with us.”

John Hyland of Illinois says that  his bank stresses the importance of the overall relationship in building on a CRE credit, for instance. “Where we are lending on an income property, for example,” says Hyland, “nowadays, we demand the business accounts. That’s not a great benefit right now, but the spreads will improve over time.”

Value versus price

Indeed, Stephenson says that First Dakota will permit a new lender to match a competitor’s rate to win a customer. But that’s no blank check. “But we tell them that they’d better reserve that only for real relationship customers, because we will expect them to bring that rate over the next five years,” he explains.

Stephenson says his bank stresses “fit” of the prospect to the bank, too. “We ask, ‘Is this company a real match for our bank?’” he explains. “We ask, ‘Will they appreciate having relationship banking?’”

This helps to prioritize who will receive lower rates when a competitor enters the scene, according to Stephenson.

“If all they are after is rate,” he says, “they might as well shop at Walmart, and we will wonder why the lender even brought them forward for consideration.”

“Ultimately, you come back to the question of what value does your bank add to the relationship with your borrower,” says Susan Whitson of Iowa. “Rate is important, but it isn’t 100% of the equation.”

Whitson believes that consistency can help hold customers. She says First National Bank’s credit standards have remained steady for five years.And Glenn says that sometimes a First United Bank and Trust client that departs for a rate will return for service.

“We’ve had customers leave because we would not bring a rate down, and two years later, they’re back to us,” says Glenn. “Something will have happened at that other lender. Then they will remember that at our bank, they can get quicker turnarounds, that they can talk to us, that they can get answers.”

One concern for these banks is that the generation coming up in business doesn’t necessarily “get” the value of a strong relationship with your bank over a price advantage today.

“Younger customers aren’t buying into that,” explains Stephenson. “It’s a lot easier to sell that to a borrower with 30 years’ experience than to a borrower with five years’ experience who’s never had any tough times.”

One factor that has caused some friction with longtime borrowers is regulators’ increased expectations that credit analysis will include global cash flow analysis—looking at all sources of income for a borrower, and all forms of indebtedness with all creditors. Some say this has been an issue because certain borrowers didn’t appreciate being asked for much more data than they have been before. However, other lenders in the roundtable group say that they’ve been asking for that depth of customer information for years.

Finding talent, keeping it strong

There’s a belief out there that community bank executives, when all is said and done, would rather hire experienced lenders than work with trainees. Essentially, the idea has been that the big banks trained them and the community banks snapped them up. Among the bankers in this group, there is some of that.

Indeed, the overall growth Stephenson has been enjoying in Sioux Falls has him ready to hire more commercial talent from other banks, so long as the bank can find a place to house them.

However, while community banking can be attractive to lenders who have been through a merger or other upheaval, it is not that simple, other members of the roundtable group point out. Even for bankers like Glenn who have found new volume by hiring lenders from other institutions, it is not such a straightforward proposition to turn a large-bank commercial lender into a successful community bank business lender.

It comes down to “hats.”

The reason, interestingly, is testimony to the adaptability and flexibility of the typical community bank employee today: Community bank folks simply learn how to be multifunctional bankers.

Sometimes, bankers from larger banks have been trained too specifically to be of direct use to a community bank, for instance. Glenn has found that prospective hires from larger institutions may have strong field-selling skills, but they haven’t really been trained to do detailed credit analysis.

“You’ll get these people claiming that they know things, but they don’t,” says Glenn. Hyland adds that sometimes big-bank hires have to be trained in the more administrative aspects of their jobs, as their new, smaller-bank employer doesn’t have the depth of support staff that the larger bank did.

“As a small bank, we can’t hire a ton of people, so they have to be cross-trained a bit in different areas,” explains Hyland. In addition, he says, a smaller institution like his requires lenders who can not only handle a specialty, but also pitch in on other loan types when necessary.

As stated at the outset of this article, every bank’s situation is different. De novo bank leader Umberger points out that as a startup, he relied on being able to hire experienced lenders from other institutions.

Nor is any of this to say that established community bank lenders may not have some things to learn. “I hired a couple of lenders a year and a half ago, because all of my old-time lenders were getting beaten up by regulators because they lacked the analytical skills to do the more intensive global analysis that examiners want to see now,” says Hyland.

However, on the flip side, increasing regulatory burden has bankers like Whitson of First National Bank wondering if a combination of centralization or specialization may not become the norm.

Ultimately, does it make more sense to train generalists to handle everything, Whitson asks, or does it make greater sense to reorganize so that specialists handle complicated areas, or generalists feed to specialists who stay out of the field to handle the nitty gritty?

“I’m not saying that we’re there yet,” continues Whitson. “But you have to think of the capacity needed to handle all these regulations, and the necessity of getting it all right.”

Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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