Garnet Capital Advisors Blog

EXCERPT: Niche lending can help banks, credit unions and other lenders diversify their products and income streams. But without proper precautions and measures put in place, they may also find adjusting their portfolios problematic.

Niche lending, such as yacht loans, can be highly lucrative. But it can also be risky if the proper precautions aren't taken.

With plenty of competition in the lending sphere, banks, credit unions and other lenders are always on the lookout for viable revenue streams, and many have taken to niche lending as a diversified source of lending and profits to stay competitive and profitable.

But while niche lending may offer lenders added revenue sources, such narrow lines of business may make it more challenging when it comes to adjusting their loan portfolios. And if banks, credit unions and other lenders don't handle their niche loans properly, they risk losing out.

From yacht loans to dairy loans, to everything in between, niche lending can be a very lucrative business. But it can also come with a host of issues that can drain earnings if proper care isn't taken.

Take County Bancorp, for instance. The $1.5 billion bank holding company has been experiencing ongoing issues with its niche dairy lending operations that have harmed its earnings reports. More specifically, the company's surge in classified assets has been an issue.

County Bancorp's Q2 2019 earnings were down 5 percent from the same quarter in 2018 to $3.7 million. Its nonperforming assets were 1.94 percent of its total assets by the end of the second quarter, which is much higher than the industry average of 0.6 percent. Further, the institution's proportion of substandard loans spiked by $10 million.

Because 62 percent of County's $1.15 billion loan portfolio is comprised of agricultural loans, any volatility in prices will undoubtedly be felt.

Then there's Bank OZK, a Little Rock, Arkansas-based regional bank with $23 billion in assets that's been experiencing ongoing high prepayment levels over the recent past which has impacted revenues. During Q2 2019, the bank struggled to keep loans on the books.

Despite the group's lenders closing $1.3 billion worth of loans, its real estate specialties group (RESG) loan balance dipped 2 percent to $9.29 billion. RESG lenders are heavily involved in commercial real estate (CRE) deals across the nation. And Bank OZKs profits shrunk by 4 percent by the end of the second quarter of 2019 from the same time last year.  

Like any niche loan products, loans must be priced accordingly to hedge against risk. Even highly profitable, quality loans, such as yacht loans, need to be priced appropriately to minimize vulnerability to risk.

Lenders with niche products on the books may find it tough to adjust their loan portfolios without the assistance of a seasoned loan sale advisor.

Lenders involved in niche lending need to do their due diligence to make sure they’re financing the right types of products that can maintain their values over the long run. Their loan programs should also be relatively conservative when it comes to things such as terms, down payments, covenants and income verification.

Without requiring robust qualifications, defaults are more likely. And when too many loan losses occur, niche lenders risk losing plenty in profits and may even be more likely to lose that entire aspect of their business. Being conservative may be key, as being too aggressive and greedy can spell trouble.  

Banks and lenders with niche loan products may have difficulty adjusting their portfolios. Fortunately, Garnet Capital has experience in these types of assignments and has a cadre of specialty buyers to help lenders sell their sensitive assets.

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