When we are not working with banks to help them improve profitability, capture more customers or increase shareholder value, one of the things also do is disaster planning. One thing we have found curious about disaster modeling is the fact that when a dangerous event occurs, a portion of the population will rush towards the incident and put themselves in harm's way. This not only increases the number of people hurt, but slows access for First Responders - further increasing an event's impact. The idea of rushing toward a wildfire, shopping mall bomb or hazardous materials spill is completely counter-intuitive, but is something that has to be taken into account when managing a response.
In similar fashion, we have also noticed that when bank CCOs are faced with CRE and construction risk concentration issues, instead of devoting resources to recduce exposure, a portion of the banking population will speed further into harm's way. These bankers will expend extra effort creating new reports, sorting and resorting their portfolio into different categories and increasing policy limits. Instead of solving the problem, they work hard to rationalize the issue away. As we are finding out now, this behavior is counter-productive. If these banks would have focused resources on solving the problem, instead of papering it over, they would have been in better shape. Now, increased delinquencies have limited their options and exacerbated the impact of the downturn in the construction sector.
One tactic bankers can use to reduce concentration issues is to increase diversification. Partnering with a bank that understands agriculture loans or equipment leasing is one such tactic. Banks can leverage another bank's expertise, while better deploying their own capital. To be clear, these other areas may come at the same or even greater risk than your current CRE exposure, but the important point to understand is that it is a different risk. That difference, when combined with an existing portfolio can reduce the overall impact of a downturn.
At present, consumer exposure has been dramatically devalued. Agriculture exposure, on the other hand, is doing well. Agriculture is also somewhat counter-cyclical, so it helps overall portfolio performance. One lending area that we specialize in (because of its lower correlation to the real estate market), is the underwriting and analysis of middle market C&I credits. These loans are national in scope and priced around Prime – 90bp. They carry upfront fees and have a sizeable amount of liquidity (compared to other community bank loans). To help our community bank clients, we make these loans available to community banks in pieces as small as $1mm. Manufacturing, technology and core industry exposure are all loans we proactively seek out because they are not tied to real estate or financial services (2 of community bank's largest credit exposures). Banks with existing loan concentration issues can purchase groups of these to add instant diversification. While these middle market credits may not be the ideal lending exposure (since they are not relationship driven), they allow banks to quickly add earning assets at little incremental cost and permit management to better focus on core customers.
If you have interest in learning more about available C&I credits, please contact us. Getting more proactive in the management of total loan portfolio performance is more advantageous than just rearranging proverbial deck chairs on a sinking ship.