Loan Participations Plant the Seeds for Lending Growth BY MATT HELSING, SVP & NORTHWEST REGIONAL MANAGER, PCBB When one of your best customers approaches your community bank about a new loan, ideally, you would always be able to say yes. Regulations, however, set limits on how much funding lenders can provide borrowers. Community banks have options, however, to meet these regulatory requirements and still meet the needs of their customers. They can partake in these larger loans by entering into loan participations with other institutions. While you’re likely familiar with loan participations, your bank may not be focused on products like this, instead emphasizing increased deposits and other immediate streams of liquidity. However, there are some very valid reasons that you should be considering more loan participation deals right now. We asked PCBB’s Senior Vice President and Senior Lending Officer Peter Dewes for his advice on why now could be an ideal time to ink some loan participation deals. CURRENT CHALLENGES FOR THE BANKING INDUSTRY • Deposit Competition: According to the FDIC’s latest Quarterly Banking Profile published March 7, Q4 of 2023 was the first time in seven quarters that deposits experienced growth. Yet, for community banks, deposit costs still outpaced loan yields for all of 2023. • Liquidity Struggles: “In the last year or so, institutions have seen deposit outflows, which limits the ability for them to lend as much as they would like to,” Dewes says. Higher deposit costs will challenge banks, even after interest rates drop, according to a Deloitte report. The consultant firm predicts the average cost of interestbearing deposits for the U.S. banking industry in 2024 and 2025 will remain elevated at 1.7% and 1.5%, respectively, even as the fed funds rate declines from the recent peak. This may crimp bank profitability in the medium term. 20 | CURRENCY
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