September 17, 2020

Small Banks Are Grabbing Commercial Business

EXCERPT:  Smaller banks are using the MSLP as a way to attract larger commercial clients as bigger banks appear to stick only to serving existing clients.

The Federal Reserve has backed $250 million in MSLP loans as of mid-August.

In response to the coronavirus pandemic, community banks appear to be taking advantage of the Federal Reserve's Main Street Lending Program (MSLP) as a means of curbing losses as a result of the health crisis, according to a recent article in American Banker. Even as the middle-market business rescue program continues to pick up, it's expected that this trend won't cease any time soon.

The central bank began buying stakes in loans made under the MLSP in early July, and an increasing number of lenders are starting to originate loans under this program, despite a slow start.

Smaller Banks Snagging New Clients By Offering Them MSLP Loans

According to the Federal Reserve Bank of Boston, the Fed has backed $250 million in Main Street loans as of August 10th. The interesting point is that all the lenders participating in these loans are smaller community banks, with the largest of them all holding $16 billion in assets. This points to the fact that these smaller banks are adjusting quickly, compared to larger institutions.

The Main Street Lending Program is available to businesses with no more than 15,000 employees or under $5 billion in annual revenue. Firms that qualify for the program can receive anywhere from $250,000 to $300 million through the program, with the lenders retaining 5 percent of the loan asset and the Fed purchasing a 95 percent stake.

Smaller banks are stepping up to help small and mid-sized businesses stay afloat throughout the pandemic and retain their employees at the same time. These lenders have worked hard to prepare for the program, keep clients up-to-date on their options, and process loan applications right away. In turn, community banks have been getting these loans out to their approved clients faster than bigger banks, in large part because of their relationships with their clients and intricate understanding of their needs.

Community banks are snagging a number of new clients by offering MSLP loans that bigger banks don't seem to be capitalizing on.

This is a big advantage of community banks. A smaller clientele is easier to navigate and understand compared to a much larger sea of clients, the latter of which may be a detriment for larger banks looking to extend programs like the MLSP because of the time commitment needed to make these connections.

Big Banks Sticking With Existing Clients, Opening a Door of Opportunity For Community Banks

Many of the Main Street loans extended from community banks have been to new customers. Perhaps bigger banks are only offering this loan program to existing customers, leaving the door open for smaller banks to snag new clients who are looking to take advantage of this program. And some have claimed this to be the case, including the likes of Citigroup and Wells Fargo.

Plus, clients with more borrowing power at bigger banks may be more adept at seeking out other types of financing to avoid the restrictions placed on dividends, bonuses, and share repurchases as a result of the CARES Act, which applies to MSLP loans.

Smaller banks looking to add more clients to the roster and fill their loan portfolios with new assets may want to team up with an experienced loan sale advisor. Garnet Capital has an extensive network of quality buyers and sellers to help lenders acquire robust assets while selling off riskier ones to establish a more resilient portfolio.

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