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Top concerns and growth strategies of community banks: Part II

October 9, 2014
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This article is the second in a two-part series on top concerns and growth strategies of community banks. Part I focused on bankers’ greatest concerns, while this section will focus on growth strategies.

Everyone in the banking industry seems to be asking the same question these days: How can we facilitate growth? We can find answers in the August Bank Director’s 2014 Growth Strategy Survey, which asked executives from banks of all sizes across the United States about their growth strategies for the next 12 months.

The vast majority plans to focus on organic loan origination and/or an acquisition or merger, with 85 percent of respondents choosing loan origination and another 45 percent choosing bank acquisition or merger.

Source: 2014 Growth Strategy Survey

According to Forbes, many U.S. banks are moving back into commercial real estate (CRE) lending as the economy continues to improve. It is not surprising that 77 percent of survey respondents indicated that they see the greatest organic loan growth opportunities in CRE. Additionally, 57 percent indicated commercial and industrial (C&I) lending as an area of opportunity for growth.

Source: 2014 Growth Strategy Survey

While banks have traditionally leveraged CRE lending in some form or another, many banks are now increasingly looking to expand their C&I portfolios. As such, it is important to understand the potential risks. These include:

Different data sources. C&I loans require a different type of financial data than the bank may be accustomed to collecting or analyzing. To understand borrower risk, the bank must collect and properly analyze business and personal tax returns including K-1s and financial statements for all entities.

Improper global cash flow analysis. With a C&I loan, a bank could have, in one borrowing entity, several different operating companies and owners, each of which comes with its own financial story and potentially overlapping commitments. To properly asses the credit risk of that entity, the bank must perform a global analysis.

Inadequate strategic planning. Expanding the C&I portfolio is a strategic decision that will impact other critical areas of the bank including capital requirements, stress tests, risk thresholds, hiring needs, etc. If the bank does not properly plan for entry into this segment, they could overlook certain implications, which could put them at risk.

Inexperience with business entities. An experienced analyst knows when to make a loan, even if the spreads are unconventional or otherwise hard to spread. Familiarity with this type of loan empowers experienced analysts to ask the right questions for a comprehensive credit analysis. Without a seasoned commercial lender, a financial institution could be ill equipped to handle C&I loans that require special attention.

Aside from risk, there are other challenges when it comes to organic loan growth. Of the survey respondents, 84 percent noted that the highly competitive banking environment is their greatest challenge, while 59 percent noted weak loan demand.

Source: 2014 Growth Strategy Survey

From the survey results, it is clear that community banks across the United States are putting an increased emphasis on expanding their portfolios, primarily in the areas of CRE and C&I lending. In addition, many are considering a merger or acquisition. M&A activity remains high with little sign of slowing, according to a recent survey conducted by the Federal Reserve and the Conference of State Bank Supervisors.

To learn more about growth strategies, check out this on-demand webinar on The New Normal: How to Achieve Profitable C&I Loan Growth in Today’s Economy.

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