Let’s say you are a bank. Let’s further say that your preference is to make loans to profitable customers in your community. We are also going to go out on a limb and speculate that you are trying to grow earnings and that you would like more loan volume rather than less. How is our fortune telling prowess? Pretty good, huh? Thank you. Since we are on a roll, we will also speculate that you might like our National-to-Local loan program to help with all the above.
We currently have underwritten about 15 commercial & industrial credits (“C&I”) and make these available to you on a participation basis. C&I has a 0.62% non-current rate, the lowest of any major bank lending category including owner-occupied commercial real estate, multi-family and agriculture. We pick a selected industry that we think has a bright future and has a low correlation to real estate and then pick one of the top three companies in the sector. These are names that help diversify not only real estate risk, but also geography for community banks. We want names with broad US and/or multinational exposure. These are names like Heinz, Hospital Corp. of America and J. Crew (pictured) - names that, if there is another downturn, are likely to be the survivors. Names that represent diversified companies that give your bank exposure to America's best brands. We have attached a J. Crew overview to give you a sense for the type of quality we carry. This gives us quality names in strong sectors in the best lending category with an advantageous risk profile. We are going to surmise that your bank likes to be on the lower end of the lending risk spectrum, so this might be attractive.
These credits are all three to seven years in maturity and are all floating rate. Pricing is right around the equivalent of Prime to Prime + 2.25% and all are fully funded so you get earning impact immediately with very little acquisition cost. What that means is that if you purchased three credits at $1mm each you could be earning over $100,000 extra per year net of fees, acquisition costs and underwriting time. Buy a diversified portfolio of ten credits for a total of $15mm and that is over $550,000 to the bottom line. We are guessing you could use that extra money to tell your shareholders thank you or to make further investments in people, technology or infrastructure.
In addition, we make sure the lead bank is diligent in monitoring the borrower every quarter. You get constant updates throughout the year delivered through our secure file transfer system. We further make sure that our participants always have control of things that matter. Unlike small bank club deals, if the borrower tries to change important items like collateral, maturity or pricing, if you don’t agree, you are taken out of the credit. We think you will want this control.
Of course, you don’t get to call up the CEO of Harland Clarke to ask for deposits, and while these are more liquid than most every loan you own, these participations are not as liquid as your investment portfolio. In addition, you may comment that Prime + 1% isn’t enough for you. To which we respond - hold on, let’s think about this.
If you have a better loan with an equal probability of default and a higher return that you can book today, we say do it. However, if you are holding out to hopefully get a Prime + 2% loan in September, then that move could be a mistake. Giving up four months of interest at Prime + 1% means you just lost $10,000 per million. That means the return must be even greater come September on that loan. If you have a low loan-to-deposit ratio and underutilized capital, and you wait a full year, then you are out the whole 4% spread, money that you will not likely get back. That means your next 4-year loan must be a full point higher. If you want a 5% spread, now you are going to have to find a loan with more than a 6% spread to make your decision to wait the correct one. We are going to forecast that for the foreseeable future, loan pricing gets more, not less competitive. You can wait around for that higher margin loan, but the time value of money will most likely make this a losing proposition. There is a cost to doing nothing.
Here is what we suggest. If you are a financial institution, go here and register to get our loan offerings. Let us get on a quick 30 minute webinar with you to explain the program and walk through the risks and rewards. Then, pick your credits and look at our underwriting - quality packages that will impress you. Then, with all the information, make a decision. We guess you will at least want to understand how this program works and possibly build some loan totals before quarter end.
As we pointed out, every day that passes is a day of lost interest so don’t delay. These loans allow your bank diversification and earnings to better focus your resources on the quality customers in your direct lending area. Hundreds of banks have utilized this program so you will not be alone. Be sure to register and even check out a summary of a sample loan. We see in our crystal ball that you will be glad that you did.
Submitted by Chris Nichols on May 22, 2014