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Aspiring consolidators are weighing the benefits of hiring lending teams as opposed to making acquisitions.
September 24 -
Big banks can win on price, but small banks say commercial lending is too attractive to give up on. Some community bankers are hunting for customers that bigger banks might discount and for loan officers displaced by M&A.
November 22
Thousands of community bankers swear they are fighting tooth and nail for loans, but only a few dozen small banks will prove to be winners next year.
So predicts Keefe, Bruyette & Woods, which recently named 42 small-and mid-cap banks it says will have loan growth that far exceeds that of their peers and the overall economy in 2013.
These banks will have a median loan growth rate of 9% against a peer median and GDP growth of 3%, KBW estimates. Most of them stand out because of their specialized lending, successful recruitment of loan officers from rivals and acquisitions of other banks.
"These are banks growing fast, taking market share and expanding into new markets with the right fundamentals behind them," said Julianna Balicka, one of the many analysts at KBW who put together the report released this week.
But celebration would be premature. Only about half of the 42 banks will translate those gains into big profit increases.
"Not all growth is good growth, and we're not automatically liking all of these banks," Balicka cautioned.
The banks' niches vary widely. First Republic Bank (FRC) focuses on jumbo mortgages (16% loan growth projected); SVB Financial Group (SIVB) caters to technology firms and venture capitalists (12%) ; and EverBank Financial (EVER) favors equipment financing (42%).
The banks expected to add the most loans tended to be acquirers such as Columbia Banking System (COLB), which is projected at 53% loan growth; First PacTrust Bancorp (BANC), projected at 36%; and EverBank. Even without the deals, Balicka said, some of these acquirers would still have double-digit growth organically.
The selected group represents only 25% of the small- and mid-cap banks in the country.
"Because of our strong capital base and because of our conservative lending posture, we've been able to stay focused on continuing to build despite the harsh" environment, said Mark Nelson, chief operating officer at Columbia Banking in Tacoma, Wash.
Columbia had the highest projected loan-growth rate among all 42 banks on the list. The $4.8 billion-asset
But many other bank buyers, including Nelson at Columbia, said loan growth is more about the people they hire than the banks they buy.
"We're not getting any real rambunctious business," said Daryl Byrd, president and chief executive of IberiaBank Corp. (IBKC), a serial acquirer of failed banks in the Southeast. "We're going out and investing in people, but businesses are still holding back right now."
The $12 billion-asset IberiaBank has been growing sales teams in target markets such as Birmingham, Ala., and Houston by picking up valuable loan officers mostly from large and regional banks. It has also added specialized products like international services through hiring a former head of Wachovia's corporate and investment banking in Latin America and Canada. KBW projected the company to grow loans organically by 10% next year, though Byrd would not comment on growth projections.
"Our business is a relationship business, and we want to recruit the best relationship managers," he said. "Clients tend to stay with the relationship."
Having experienced loan officers was crucial to being on the growers list, most bankers said.
"What we have done is created a model such that the people we hire have extraordinary experience from a variety of banks" within the market, said Ed White, senior loan officer and executive vice president of the client advisory group at Pinnacle Financial Partners in Nashville, Tenn. KBW projected a 15% growth rate for the company next year.
Pinnacle requires its loan officers to have at least 10 years of experience, but White said their 20 lenders in Nashville average 30 years of experience. The $5 billion-asset company also hires specialized loan officers in niches like health care and the trucking industry.
Pinnacle tries to distinguish itself other ways, too, such as hosting seminars for clients with national speakers. This week, the bank is bringing in economist, Art Laffer, who developed the Laffer curve.
Pinnacle was among the banks projected to have double-digit increases in return on average assets before taxes and provisioning. But many of the growers are expected to struggle with generating higher profits given the low interest rate loans.
"If growth is not going to improve profitability …there's really no good reason for any investor to be paying up for that," KBW's Balicka says.
In fact, only half of the 42 banks are expected to have growth in their return on average assets before taxes and provisioning. The firm expects contraction in ROAA for banks including Access National (ANCX), BankUnited (BKU) and State Bank Financial (STBZ).
Others, including First PacTrust, EverBank, IberiaBank and CoBiz Financial (COBZ), are projected to have double-digit increases in return on average assets. Most of the banks highlighted for growth in returns were also ones that refuse to lower prices drastically.
"We simply pass on certain credits that are so abnormally low it just doesn't make economic sense," White said. He noted they often set a floor in the loan so it can't fall below 2.25%.
For those "banks really fighting to create loan demand, the pressure is such that we're seeing prime at base or minus a half [a percent] with no floors," he said. "I never dreamed that would occur."
Byrd said IberiaBank tries to be "fair" in pricing its loans, especially if a high-quality borrower is involved. But there's only so low Byrd will go. And he can afford to wait as other banks temporarily sacrifice margin for loans.
"Sometimes, the bank losing the client does something crazy and retains them with some low pricing. But realistically, it never holds," he said. "I often tell clients they ought to take it. It's a great rate, but we will be there when they [the other bank] can't do it any longer."
