Colorado community bankers are cheering a new state regulation that will let them make more large loans and, they say, help them compete against big banks and small out-of-state rivals.
As it stands, state-chartered banks there are restricted in the number of large loans they can make to one borrower, because the total of these loans cannot exceed 150% of capital.
A bank with $8 million of capital, for example, could make only six $2 million loans before it hit that threshold. But on March 30, when the new lending caps will take effect, that same bank could make as many as 10 loans of $2 million each - or 250% of its capital.
Dave Wade, the president and chief executive officer of the $91 million-asset Front Range Bank in Lakewood. Colo., said it has only a few borrowers whose needs exceed its normal lending limits. But the new rules mean that it may be able to retain some customers that it might have had to refer to a larger bank. "When you are trying to develop a relationship and you can only serve part of it, quite often you are not going to get that new customer as client," Mr. Wade said.
Even when Front Range could keep larger borrowers as clients, he said, it often had to share the loans with other banks.
Mr. Wade said that the new limit will make his bank "more profitable, because you're not having to split loan fees or split out interest income."
Currently, a state bank chartered in Colorado must receive permission from state regulators if it wants to make a loan that is above 15% of its capital to a single borrower. With that permission, it can make a loan of up to 25% of its capital, but the total of these loans cannot exceed 150% of capital.
Under the rule approved by the Colorado State Banking Board late last month, a bank still must receive permission to go above that 15% cap, but those loans can now total 250% of capital.
Richard Fulkerson, the state banking commissioner, said that the regulations were changed to help Colorado-chartered banks compete with banks from surrounding states and national banks that have higher lending limits. He said that though he must approve the special lending caps for banks that want to go above 15% of capital for one borrower, banks that have Camels ratings of one or two, are well capitalized, and have no credit-quality problems usually get approval.
Mr. Fulkerson said that Colorado banks near the state's borders asked for the change because banks in bordering states have higher lending limits and could make more large loans.
Barbara M.A. Walker, the executive director of the Independent Banks of Colorado, said that rural banks were feeling the most pressure. "You had out of state banks in those rural areas that had rural expertise and could come in and pick off the best loans from our banks," Ms. Walker said.
According to the Conference of State Bank Supervisors, banks in Nebraska can lend up to 35% of capital to one borrower on secured loans and 25% on unsecured loans. Oklahoma banks can lend up to 30% of capital and reserves to one borrower for both kinds of loans.
Those states' lending limits are still higher than Colorado's, so Colorado banks are still likely to lose out on single loans that exceed 25% of their capital. The problem now is that Colorado banks often lose out on loans within in their lending limits once they max out on the number of loans they can make.
Even though rural banks led the charge to get the rules changed, Ms. Walker said that urban banks jumped on the bandwagon when they realized that the new rules could help them compete in their areas. "Community bank competitors in surrounding states are increasingly putting loan production offices and branches here," Ms. Walker said.
