Pub. 1 2021 Issue 5

20 | The Show-Me Banker Magazine By Jim Reber ICBA Securities BALANCE SHEET, COMPLETE: Investors Have Turned Their Sights on Loan Purchases. Contrary to a multitude of reports, not all community banks are awash in cash in 2021. A number of ICBA member banks have been able to grow their loan pipelines, or at least maintain their cash positions – which remain annoyingly unprofitable – at manageable levels. Perhaps the avalanche of cash flows from the bond portfolio is past its peak, too, since mortgage rates have moderated somewhat in recent months. Industry-wide statistics, however, paint a different picture. Between June 2019 and March 2021, loan-to-deposit ratios for banks with less than $1 billion in assets fell more than 10%. This is, by far, a majority of banks, as this metric includes more than 3,500 charters. While certain institutions have been able to keep their balance sheet relatively stable from an earning assets sector weighting posture, most would much prefer to be more highly leveraged in high- quality loans. Diversify and Conquer Consumers and many start-up businesses have long been accused of singing the “Can’t Get a Loan Blues,” which has mystified community bank lenders to no end. The opposite paradigm is at play today, as traditional loan demand has, in large part, been met by various government- sponsored programs, most notably the Small Business Administration’s Paycheck Protection Program. Where does a community banker who’s interested in purchasing a collection of high- quality, high-performing, but nonconforming loans go to find such a package?The dialogue usually begins with prospective sellers realizing they’ve got a concentration issue of some sort – geographic, loan term or even product-specific. Third-party loan analysts like Vining Sparks, ICBA Securities’ endorsed broker-dealer, can assist sellers in identifying marketable portions of a loan portfolio, including an estimate of the secondary market value and the pros and cons of retaining or releasing the servicing of the loans. Blinders Off Once a package of loans has been identified for an originator to sell, the agent will assist in locating several prospective purchasers. It’s not unusual for a portfolio of $20 million to be distributed among four different community bank purchasers. The Secondary loan purchases can be a viable strategy for community banks seeking to build out a more complete balance sheet.