BY BANDING TOGETHER, COMMUNITY BANKS CAN PARTICIPATE IN BIGGER LOANS Sometimes, bigger loans are out of reach for community banks. To get around that obstacle, community banks can join with other financial institutions to cosponsor bigger loans. Loan participation is one way for community banks to break into the bigger corporate loan market, and they have been gaining traction. The corporate loan market has been a dynamic place for the last few years, falling in 2020 during the business slump that accompanied the pandemic, then soaring in 2021 to make up for delayed lending needs. In a typical year, borrowers have taken out an average of $1.1T in revolving credit facilities, term loans and other vehicles. Commercial real estate activity is also on the decline. In May, the Mortgage Bankers Association forecasted a 20% drop in commercial and multi-family lending, a result of rising interest rates and falling property values. That still leaves a lot of large businesses looking for financing, and for them, an important issue may be the shrinking availability of lenders. Many large banks aren’t looking to expand their commercial lending portfolios, which presents an opportunity for community banks. The caveat is that it’s not an easy one to exploit. CONSTRAINTS ON COMMUNITY BANK LENDING The amounts big commercial borrowers seek are often well beyond the ability of community banks to extend. These banks may have limits on their lending capability, often because of regulations or their own policies. Community banks must be careful about concentrating too much of their portfolios on a few very large loans. The answer is for community banks to join with other like-minded banks in a participation or syndication, with each institution carrying a portion of the debt that fits within its own constraints. In that way, banks that have typically been unable to participate in the large corporate loan market may now have a way in. The companies seeking financing may also be more inclined to work with community banks at a time when finding willing lenders among larger banks has become difficult. In one recent case, a borrower seeking to refinance a $10MM loan on an office building specifically stated it did not want to deal with multiple lenders. But when it was unable to land a deal, it ultimately secured a loan by working with two community banks. By Matt Helsing SVP & Northwest Regional Manager, PCBB, ICBC Associate Member 28 | INDEPENDENT REPORT
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