Delaware Banks Lower Their Guard to Make Loan Network Work

A half dozen small banks in Delaware have established a network to compete in a big arena — loan participations.

Pooling resources on bigger loans once was a common practice, but it fell out of favor during the financial crisis. Soft loan demand and stiff competition from bigger banks are bringing such alliances back en vogue.

Yet they are evolving. Banks typically engaged in participations with institutions outside their main markets through more controlled channels, to alleviate the risk that their partners would steal their customers. The Delaware effort highlights the increasing appeal of local, more informal structures.

"For years we were territorial with each other," says Lynda Messick, the president and chief executive of Community Bank Delaware in Lewes. "Right now, it's the little banks trying to hold their ground, particularly when you see some of the rates being offered."

About five years ago Messick reached out to her closest competitor, County Bank in Rehoboth Beach, because she knew its executives wanted to book larger loans. Messick has known them for a long time and describes them as "people we respect and trust."

Messick's group, which has expanded to include six banks, addressed competitive fears with handshake agreements not to poach each other's clients. So far it has worked. Local collaboration has also stimulated the economy, fulfilling "one of the tenets of community banking," she says.

Community Bank's business loans, absent participation, average $250,000, Messick says. In comparison, the average participation loan among members of the six-bank group is $3 million.

"I like the whole local idea," says David Gillan, the chairman and CEO of the $324 million-asset County Bank. "Our deposits are here in southern Delaware. We like to lend to people in southern Delaware."

Informal networks are an important way to build loan pipelines, serve longtime business customers as they grow and compete for larger credits, industry experts say. A "real strength of community banks is great service," says Lori Bettinger, head of membership at BancAlliance, a cooperative that helps small banks with large commercial credits.

Still, borrowers looking to secure a large loan must "know the money will be there and that's where the larger banks have the advantage," Bettinger adds. Having a network in this situation is highly beneficial.

"It's always great to have multiple options," Bettinger says. "There are borrowers out there that continue to grow as the economy picks up, and they want to stick with banks that supported them through the downturn."

Participating on loans also allows banks to diversify their balance sheets, industry experts say. The $145 million-asset Community Bank is based in an area that relies heavily on the resort and hospitality industry, so overconcentration is always a concern, Messick says.

Loan participations also allow banks to extend credit to bigger, often more stable, borrowers, Bettinger says.

"Between two community banks, we can service a customer that maybe would have to go to a regional," says Joseph Chippie, president of the $293 million-asset at First National Bank of Wyoming in Delaware. "We know these customers. We know these bankers. Trust isn't necessarily important to regulators, but it is to community bankers."

Ensuring "diversity of risk should be high on the minds" of bankers, says Terry Keating, managing director of Amherst Partners, a boutique investment bank in the Midwest. But it can be tricky if a bank is working with others in a small geographic area, he says. Executives must make sure that they actually achieve diversity.

There are other pitfalls that bankers must consider when working with peers, industry experts say. Banks need to explicitly discuss underwriting and credit standards to make sure their risk appetites are compatible.

Bankers also need to think about the health of their fellow institutions to make sure that those partners will be around for the life of the loan, Keating says. Reciprocity is also important to make sure that one bank isn't responsible for bringing in all the loans, he says.

Loan pricing has become fiercely competitive in recent months, according to many lenders. Banks collaborating on loans should make sure the pricing makes sense for everyone involved and not just the primary lender, which is often trying to keep a longtime client, Bettinger says.

The need for small banks to band together to make loans highlights how important scale is to survival, Keating says.

"The logical extension would be whether these banks should combine," Keating adds. "If you merged, then you wouldn't need to worry about cooperating."