THREE BENEFITS OF LOAN PARTICIPATIONS IN THE CURRENT MARKET 1. Minimize liquidity issues amid deposit competition. Participating out existing loans already in an institution’s portfolio provides “liquidity space” for them, Dewes says. “It opens up additional capacity to lend because a participant is buying a portion of an existing loan, which frees up those dollars for other loan opportunities,” he says. “It also allows them to continue to work with their borrower and bring in a participant so they can conclude a loan with a borrower.” 2. Enhance customer relationships. Banks may seek a loan participation to ensure they don’t lose their best customers due to lending limits for a single borrower. “They want to provide the loan to their borrower,” Dewes says, “but it’s too big for them. In this instance, the bank could reach out to another financial institution or a correspondent bank to participate in the loan. This would allow the bank to meet the needs of their customer by offering them the larger loan amount they need while still staying within their per-loan maximum dollar amount.” 3. Boost profitability. Entering into loan participations allows community banks to conduct regular business without interruption. “That’s what’s so critical for institutions,” Dewes says. “For them to operate and to be profitable, they have to lend money. By using a participant, this allows them to seamlessly continue to lend to their borrowers regardless of their liquidity position.” CONSIDERING YOUR PARTICIPANT Loan participations themselves can be very beneficial to helping your community bank maintain relationships with good customers and increase their lending. When it comes to choosing a participant, though, Dewes has some words of caution: “There is the risk that the participant bank that has the financials on the borrower might think that they’d be a good target, so they start marketing to them to try and effectively steal the client away.” For this reason, it’s prudent to consider alternatives to other banks when you are deciding on a partner. For instance, a correspondent bank cannot originate loans to the general public. “This eliminates the risk of competition with the lead institution that’s offering the participation,” says Dewes. “That’s your insurance. A correspondent bank will never talk to the borrower unless the lead institution allows them to.” Consider entering into a loan participation to minimize liquidity issues amid deposit competition, enhance customer relationships and boost profitability. To continue this discussion or for more information, please contact Matt Helsing at mhelsing@pcbb.com or visit www.pcbb.com. Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management services such as Settlement and Liquidity for the FedNow Service, international services, lending solutions, and risk management advisory services. CURRENCY | 21
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