Don't be fooled by bankers' public comments the taboo associated with loan purchases is going the way of the check, the toaster and other industry relics.
Yes, when asked how they are generating loan growth, most executives from small and regional banks at an industry conference in Atlanta this week talked up how they are doing it organically (meaning, they originate the loans themselves) or by acquiring other banks.
Behind the scenes, something different is happening, according to other bankers, analysts and brokers. The market for purchasing loans has rebounded in recent months, as some banks have struggled to originate loans and have tried to deploy huge piles of excess liquidity.
"A lot of bankers are saying, 'Hell no, we're not doing that,'" said Chris Marinac, director of research at FIG Partners, which sponsored the conference. "I would prefer to have 100% organic loan growth, absolutely. But there are an increasing number of community banks that are [purchasing loans]. It's just another piece of their portfolio."
Figures on loan sales are not readily available, as banks are not required to report those details to regulators. In a recent survey that FIG Partners conducted of bank executives, about 40% said their loan portfolios included credits they had acquired and were originated by third parties.
Buyers of whole loans are typically banks with low loan-to-deposit ratios, typically 70% and below, Marinac said. Sellers are those banks with loan-to-deposit ratios of 85% or higher. The $17 billion-asset BankUnited, in Miami Lakes, Fla., reported a $19.3 million gain in the first quarter from the sale of commercial loans. BankUnited reported a ratio of net loans and leases to deposits of 86% at June 30.
As low interest rates continue to depress yields from securities portfolios, many banks are looking to improve their mix of assets and liabilities, said Kip Weissman, a banking attorney at Luse Gorman.
"Loans-to-deposits ratios are a massive issue for the industry right now," Weissman said. "You have to have some loans on the books. If you can't originate them yourself, for whatever reason, you need to acquire them in another way."
"If you can raise your loans-to-deposits ratio from 40% to 45%, it can make a huge difference in your net income," Weissman said.
Many banks have steered clear from purchasing loans since the financial crisis, after some institutions were burned by loans they had acquired out of their home markets. That mind-set has changed, which has prompted many banks with an excess of loans to put some up for sale, said Bill Looney, president of loan sales at DebtX, a Boston company that operates an online market for loan sales.
"The stigma of whole-loan sales as a bulk-disposition strategy has gone," Looney said. "If you has asked a banker a few years ago about loan sales, they would have conjured an image of a distressed-loan sale. Now, loan sales are done for strategic reasons."
Both regional and community banks have bought loans. In Georgia, the $27 billion-asset Synovus Financial, in Columbus, Ga., recently disclosed that it had bought loans, Marinac said. Fidelity Southern, a $2.7 billion-asset company in Atlanta, has sold excess production in its indirect auto-lending business to other banks, he said.
The $404 million-asset CoastalStates Bank, in Hilton Head Island, S.C., has been purchasing syndicated commercial-and-industrial loans to diversify its portfolio, said Brad Langs, chief risk officer. The bank's home market is heavily reliant on tourism and the bank had little diversification in industry segments and geography, he said.
"This gives us access to different industries," Langs said. "There are no smokestack factories on Hilton Head Island."
Langs' professional background may have also helped persuade CoastalStates' directors to approve the bank's move into purchasing loans. Langs previously worked as a portfolio manager with Morgan Stanley, buying and selling bonds and bank loans.
"I know this market pretty well," Langs said.
Other banks have been attracted to loan purchases because of ineffective lending teams, Weissman said.
"Some banks don't have the sales cultures to attract large volumes of loans," he said.
Most banks are buying commercial real estate and commercial-and-industrial loans because they tend to carry floating rates and shorter terms, Marinac said.
It's less common to buy residential mortgage loans because many carry 30-year terms with fixed rates. But some banks are using Federal Home Loan bank match-funding programs to help offset the interest rate risk associated with purchasing residential mortgage loans, Weissman said.
Ultimately, bankers are casting aside their own biases, and disregarding some investors' prejudices, and giving in to the cold financial facts that purchasing loans can help the bottom line, Marinac said.
"It's the quickest way to convert cash from a low-yielding asset to a higher-yieldng asset," Marinac said.