Loan production offices lost popularity among community bankers during the financial crisis. A need for growth, amid intense competition, could bring them back in force.
Almost desperate to find new borrowers or to expand current relationships, community banks are on the prowl for experienced commercial lenders. But even when successful, smaller banks are often outbid by larger ones for the ideal branch locations in which to house their new staff.
Enter the loan production office, or LPO, which gives a banking company an opportunity to make more loans but without the expense — and risk — of buying branches, or an entire lender, that could then fizzle in a hypercompetitive market.
"Branches are still as expensive as ever, especially now," with larger banks paying more for prime locations, said Ken Thomas, an economist at BranchLocation.com. "The advantage of an LPO is you can close them as quickly as you can open them."
Such flexibility is critical. Many economic indicators cast doubt on aggressive expansion: interest rates remain near historical lows; loan demand is still soft; and mortgage volumes are expected by many to decline.
Higher regulatory costs are adding to the squeeze on bank profits.
Big banks, by their very nature, can reach deeper when it comes to adding staff and sites, and have a higher threshold for pain if they're not working out. Thomas said JPMorgan Chase & Co. recently paid $3.6 million for a former gas station near Miami, or $1 million more than the site's appraised value.
As Eddy Arriola, the chairman of the $175 million-asset Apollo Bank in Miami, put it, "There are newly capitalized banks and expanders … aggressively acquiring sites, so it's hard to justify competing" with them.
Texas Capital Bank in Dallas is doing just that, however. The bank has traditionally placed LPOs in markets where it finds a top commercial loan officer to boost loan growth, a strategy it plans to maintain.
Earlier this year, the $6 billion-asset bank expanded into Midland, Texas, by hiring a commercial loan officer from Citigroup Inc. who specializes in the energy sector.
Keith Cargill, Texas Capital's president, said that the Midland location became profitable in just five months and that the past three years have been the bank's best for recruiting from competitors.
Nationwide, however, LPOs have lost much of their allure since the start of the financial crisis. Interest rates declined, making it harder to obtain the fee income and volumes needed to turn a profit.
Of the more than 160 offices opened this year and reported to the Federal Deposit Insurance Corp., a dozen were for loan production offices. Banks opened roughly 150 from 2004 to 2008, the years leading up to the crisis, according to the FDIC. The data excludes thrifts.
Not every community banker is totally sold on loan production offices. Gregory Mitchell, president and chief executive of the $835 million-asset First PacTrust Bancorp in Chula Vista, Calif., is cautious about them even though his company would gain 22 LPOs with its deal for Gateway Bancorp. Mitchell said he was comfortable inheriting LPOs from an experienced operator.
"If we were simply opening a bunch of LPOs and going into markets we did not know … that doesn't work," Mitchell said. "We're not taking a new team and going into new markets. We're taking existing teams from competing institutions and dropping them into markets they know."
Bankers also differentiated between branches, where client interaction is the mantra, and an LPO, where the focus is more on simply bringing in loans.
"Generally speaking, LPOs are really transactional-based," rather than based on deepening customer relationships, Arriola said.
Some bankers wonder whether loan production offices will even be necessary should even less-expensive lending channels become more prevalent.
Mary Lynn Lenz, the president and chief executive of Professional Business Bank in Pasadena, Calif., said she still believes there will be less need for brick-and-mortar locations as the industry becomes more Web-centric.
Lenz said a big factor is cost; branches and LPOs often require an initial investment of $750,000 to $1.5 million.
"You really have to pay attention to … how long it takes to garner a return on the investment," Lenz said. "It typically takes five to seven years. That's a long horizon in today's environment."
