A fast-growing community bank in upstate New York plans to stop participating in leveraged shared national credits.
The $1.2 billion-asset Evans Bancorp told analysts during a Monday conference call to discuss quarterly results that it is also letting existing loans in that portfolio roll off of its balance sheet.
Evans’ executives pointed to reasons for the decision, none of which involved concerns about credit quality in that particular portfolio. The company’s choice to back out could portend exits by other like-minded community banks.
“We’ve had enough production to keep ourselves busy without these partnership deals,” David Nasca, the company’s CEO, said during the call.
“We don’t think that’s a community bank platform for us to necessarily be involved in, No. 1,” Nasca added. “No. 2, I don’t think the OCC loves it for any other banks.”
Evans is joining the ranks of community banks that are exiting certain types of loans.
Opus Bank in Irvine, Calif., retreated from technology and health care lending over the past year, while Green Bancorp in Houston decided to quit energy lending.
At Evans, leveraged shared national credits no longer fit into the company’s strategy, which focuses largely on organic growth in western New York, Nasca said. Overall, the company has benefited from strong credit quality; net chargeoffs totaled just 0.06% of average loans during the third quarter.
Management’s reference to the Office of the Comptroller of the Currency was interesting, though Nasca stopped short of suggesting the bank’s regulator pushed for an exit. Regulators have been warning banks to be mindful with leveraged loans and shared national credits.
An OCC spokesman did not immediately respond to a request for comment.
While there is no catch-all definition for leveraged syndicated lending, the OCC’s handbook defines it broadly as “a transaction where the borrower’s post-financing leverage … significantly exceeds industry norms.” A recent review of bank regulators' Shared National Credit program set the threshold where a loan becomes a leveraged credit at “committed senior debt above three times EBITDA or committed total debt above four times EBITDA.”
The SNC review, released in early August, noted that leveraged syndicated national credits are the “primary contributor” to special mention and classified credits. Such loans comprise nearly two-thirds of all special-mention commitments and about half of all shared national credits on nonaccrual status.
The review also warned that "losses could rise considerably should economic conditions deteriorate."
Given those trends, Evans’ decision to exit the business is a wise move, said Joseph Fenech, an analyst at Hovde Group. While leveraged shared national credits helped Evans “scale up,” a strategic shift “improves the risk profile without sacrificing much in terms of loan growth,” he said.
“It’s always prudent to do these things when times are good,” Fenech said. “I’m not really seeing any signs of looming concerns [with leveraged shared national credits], but that is pretty much true of credit across the board.”
Evans has been growing significantly in recent years, bouncing back from 2014 charges by New York Attorney General Eric Schneiderman that the company redlined several minority neighborhoods in Buffalo. Evans agreed to settle the matter a year later for $825,000 — though it strongly denied any wrongdoing.
The company has been a beneficiary of Upstate New York’s ongoing economic revival. Evans earned a record $8.3 million in 2016 and appears all but certain to shatter that mark by a wide margin this year. Through the first nine months of 2017, profits totaled $9.5 million.
Earnings rose 68% in the third quarter from a year earlier, to $3.7 million, due to loan growth and a large decrease in the loan-loss provision.
Total loans increased 9% in the third quarter from a year earlier, to nearly $1 billion. The increase could have surpassed double digits had Evans opted to renew an $11 million leveraged shared national credit that it instead allowed to run off the books.
Roughly $12 million of leveraged shared national credits remain on the books, though Evans seems content to part ways with them, too.
“While the company is not actively marketing these remaining loans, it does not plan to originate any new loans in this portfolio in the foreseeable future,” John Connerton, Evans’ chief financial officer, said during Monday’s call.