Smaller banks fear customer flight as loan payoffs spike

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Fierce competition and increased payoffs are muting loan growth at several small and midsize banks, a challenge that could intensify if interest rates fall.

Several companies, including Old National Bancorp in Evansville, Ind.; CenterState Bank in Winter Haven, Fla.; Fulton Financial in Lancaster, Pa.; and BancorpSouth in Tupelo, Miss., noted that loan growth was offset some by accelerated payments.

“The payoff story is real,” John Corbett, CenterState’s president and CEO, said during the $17 billion-asset company’s earnings conference call. Total loans at CenterState rose by just 1% from the first quarter despite $864 million in new production.

“We believe the payoffs are a reflection of the mindset of our Florida and Atlanta clients and their risk aversion because of the lasting scars from the Great Recession,” Corbett added. “We're finding that many of our clients are skittish about the cycle risk and are just selling the projects or their entire companies.”

At the $20.1 billion-asset Old National, total loans at June 30 were flat from a quarter earlier. The company pointed to clients selling their businesses or refinancing with other lenders as the main reasons for accelerated payments.

At the same time, Old National wants to remain a disciplined lender.

“We don't believe this is the right time to get too aggressive on new commercial credit,” James Ryan, Old National’s CEO, said during the company’s quarterly earnings call.

Fulton also struggled with competitors offering lower rates, relaxed terms and longer durations to lure clients, said Philip Wenger, the $21.3 billion-asset company’s chairman and CEO. Total loans fell by 0.6% from March 31.

“Our commercial business continues to be impacted by an extremely competitive lending landscape, and we’re seeing competition from banks, small and large, as well as nonbank lenders,” Wenger said during Fulton’s earnings call. Some lenders “are taking less profit, and I also think they're taking on more risk.”

Pressure would likely intensify if interest rates start to fall because borrowers could look to refinance into lower-rate loans, industry observers said. Nonbanks, in particular, could benefit, they said.

“If rates do come down, you could see concern [about] a wave of refinancing,” said Stephen Scouten, an analyst at Sandler O’Neill.

Another factor has been real estate developers paying off loans.

“We had several payoffs in the final days of the quarter, totaling between $50 million and $60 million,” Dan Schrider, president and CEO of Sandy Spring Bancorp in Olney, Md., said during his company’s earnings call. “It’s important to note that we saw a good bit of self-liquidating from successful construction projects, not representing clients leaving the bank.”

Total loans at the $8.4 billion-asset Sandy Spring fell slightly from a quarter earlier, to $6.6 billion on June 30.

Still, nonbanks have already made it clear that they will compete on rate, Dan Rollins, chairman and CEO of BancorpSouth, said during the $18.9 billion-asset company’s earnings call. While BancorpSouth's loan portfolio grew by about 4.5% during the quarter, payoffs offset some of the growth.

“Nonbank lenders are aggressive, and so we continue to see some outsized payoffs,” Rollins said. “That’s the lumpiness in the growth in the portfolio. … It doesn't take but a couple of excess-sized payoffs from secondary market or nonbank lenders to throw you back in a different direction.”

BancorpSouth and other small banks must generate meaningful interest income on loans to protect their net interest margins, making it difficult to compete with nonbanks. Maintaining a disciplined credit culture is another factor.

Corbett said CenterState passed on about $700 million in potential loans reviewed in the second quarter. The company rejected 85% of those loans, or roughly $595 million, “because they didn't fit our underwriting policy and competitors were willing to stretch loan-to-value, debt service coverage and recourse,” he added.

“The nonbank lenders are making long-term fixed-rate, nonrecourse loans that we will not play in,” Rollins said.

“My guess is most banks are not playing in the nonrecourse third-party or nonbank lending world,” he added. “We're trying to protect margin and grow in a prudent manner.”

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