BID® Daily Newsletter
Sep 6, 2012

BID® Daily Newsletter

Sep 6, 2012

LEARN ABOUT NATIONAL C&I LOANS


It is frequently difficult to conclude if a certain phenomenon is the manifestation of a cyclical change or the result of more permanent changes in the market. Scientists continue to debate about the weather events that have occurred in the U.S. Are these extremes in climate conditions the result of global warming, or simply the variability caused by Mother Nature? The FOMC is struggling with a similar conundrum. Is the high unemployment rate of over 8% a structural shift in the economy, or simply a reflection of post-recession cyclicality? The concern is that after almost four years of zero-based interest rates and $2T of balance sheet expansion, the economy is growing at sub 2%. Some argue that the poor performance is the result not of a cyclical variation, but a structural and more permanent change. One grave concern bankers have today is two fold: 1) loan growth is tepid, and 2) interest rates are low and expected to stay low for at least the next 18 months. If that were not enough, loan pricing continues to contract faster than funding costs. For banks with assets between $100mm and $1B (small banks), the net interest margin (NIM) is now an average of 3.84% (down from 4.41% from 10Ys ago). For banks with assets between $1B and $10B (medium banks), the NIM is now an average of 3.97% (down from 4.25% from 10Ys ago). The efficiency ratio for both of these groups of banks has increased to 69% and 60% (for small and medium banks, respectively). As most bankers will agree, it is getting more expensive to operate a bank and this appears to not be cyclical but a more permanent industry change. On loan growth, small banks are now operating at a 72.6% loan-to-deposit (LTD) ratio, and medium banks are operating at 78.7% LTD ratio (substantially below their historical average by almost 10 percentage points). If LTD ratio continues to decline, and overnight returns remain well below funding costs, we are only a few quarters away from industry ROE falling below 5.00%. Bankers question when loan demand will return. When it does, the question remains how successful small and medium banks will be in booking business in the face of competition from larger banks, credit unions, life companies and other entities. Again, some analysts argue that the lack of loan demand is not the result cyclical variation, but a structural and longer-term change. At this juncture it is crucially important for banks to maintain adequate loan volumes and book "sticky" loans. The last position any bank wants to find itself in is on a loan prepayment treadmill. A credit worthy 10Y loan today is almost 5x's more profitable for a bank as a 2Y loan. As a bankers' bank, PCBB has found the same day-to-day challenges in this regard that our community bank customers experience - where to find quality earning assets. Syndicated national loans provide one such solution. To gain more insight into this product, we invite lenders and credit underwriters to any one of our three 45-minute webinars on th subject. We will discuss how PCBB augments loan growth with C&I purchases of this sort and discuss the risks and rewards of such loans. The environment remains challenging for all banks, but this is one possible way an experienced banker can augment weak loan demand with a portion of the loan book. On the webinar we will review criteria for underwriting national C&I credits, cover two specific credits in more depth and discuss some of the parameters you might consider when analyzing C&I loans of this type. We will also explore the advantages of lower underwriting and origination costs.
Sign up for our webinars by following the links in the Related Links section on the bottom right of this page.
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