Lenders cultivate new niches to counter tepid loan growth

Emerging from the pandemic, many consumers and businesses are flush with cash and do not yet need loans. The result: Growth is tough to generate.

But some banks are setting themselves apart by emphasizing unique lending areas, building up in arenas where loan demand is strong early in the recovery from the pandemic.

“It’s still a really tough market out there for loan growth,” said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates. “There’s a ton of cash in the system and not a lot of traditional loan demand. But if you have expertise in a niche that is an exception to the rule, you could be among the few not only talking loan growth but showing it.”

Wintrust Financial in Rosemont, Illinois, is one case in point. Excluding Paycheck Protection Program loans — the government-backed small-business loans that are rolling off banks’ books this year — the bank posted second-quarter loan growth of $1.2 billion, or 15% on an annualized basis.

The $47.6 billion-asset bank’s First Insurance Funding, which finances commercial insurance premiums, grew by $563 million from the first quarter to the second, accounting for more than a third of overall growth. The unit attracted new customers amid what Richard Murphy, Wintrust vice chairman and chief lending officer, called increasing interest in financing premiums due to ultralow interest rates. These borrowers take out loans to pay for a policy’s premiums.

Additionally, the bank’s Life Finance division, which finances life insurance premiums, grew by $248 million from the first quarter. The Wintrust business has grown by about $1 billion over the past year, in part due to more clients capitalizing on low rates to expand life insurance as part of estate planning.

“We're feeling pretty comfortable right now that momentum will continue at least through year-end” in the niche businesses, Murphy said during an earnings call last week.

For comparison, commercial real estate loans, a bread-and-butter business for Wintrust and for most regional and community banks, grew by $134 million from the first quarter.

Wintrust expects that, as consumers and businesses work through disposable savings built up during the pandemic, they will start to borrow more later this year and into next. In the meantime, specialty lending can offset the doldrums in traditional business lines and drive near-term growth.

Signature Bank in New York City paints a similar picture. The $96.9 billion-asset Signature’s fund banking division, which provides financing to the private equity industry, spurred the bank’s growth in the second quarter. Signature’s loans, excluding PPP, increased a company-record $3.92 billion from the prior quarter, to $52.2 billion.

The fund banking division’s balances were up 33% from the prior quarter and doubled from a year earlier to $16.2 billion; they now account for nearly a third of total loans. Stephens analyst Matt Breese called the fund banking unit “critical” to Signature’s growth in what is an otherwise stagnant lending environment.

Signature President and CEO Joseph DePaolo said on an earnings call the fund banking activity was largely “new” in recent quarters and was the key driver of the bank’s loan growth in the second quarter.

PacWest Bancorp in Beverly Hills, California, said its loans grew about 5% from the prior quarter, excluding PPP, boosted by a 17% jump in its venture banking division, which specializes in lending to entrepreneurs in California’s booming technology sector. Such loans account for nearly a tenth of the bank’s total portfolio.

In an earnings release, the $34.9 billion-asset bank’s CEO, Matt Wagner, called the venture banking growth “outstanding” and vital for second-quarter results.

“Not every bank can carve out these kinds of niches,” Jamesson said. “The smaller community banks may not have the resources and could view it as risky. But if you can swing it, it’s definitely an advantage right now.

Total U.S. loans and leases at the end of the second quarter in the U.S. were essentially flat from the prior quarter at an estimated $10.35 trillion, according to the Federal Reserve. Consumer loans inched ahead, thanks to an uptick in credit card spending. But overall demand remains light.

“The entire industry is facing a difficult growth outlook,” said Wells Fargo analyst Jared Shaw.

To be sure, more banks are pursuing acquisitions to gain new loans, lending talent and entrance to new markets. Bank M&A has accelerated this year following a pause imposed by the pandemic in 2020. Others are hiring banking teams away from competitors in hopes of expanding in growth markets.

The $35.7 billion-asset BankUnited in Miami Lakes, Florida, hired six bankers during the second quarter to help drive a lending expansion, and it plans to hire more in new markets in the East. “We're in the hunt for talent every day,” Chief Operating Officer Thomas Cornish said on an earnings call last week.

Bankers say the economic growth that is anticipated in 2021 — thanks to coronavirus vaccines unleashing pent-up demand — should drive greater use of credit by consumers and businesses to fund purchases and investment. Yet a sustained pickup in borrowing remains elusive for now, while M&A and entering new markets take time — and is not for every bank. That reality makes creative organic growth important.

“I think you’ll see more regionals, in particular, go down” the niche lending path, Jamesson said.