Marco Perez

YourTexasBanker

Throughout my experience working at a big bank, I seldom thought about legal lending limits and loan participations. Frankly, I didn’t fully grasp the concepts. At that time, the bank I worked for had a legal lending limit of about $100 million, and the thought of our customers outgrowing our bank never crossed my mind.

So, what exactly is a legal lending limit?

A legal lending limit is the maximum amount a bank can loan to a single borrower, expressed as a percentage of the bank’s capital. For an individual borrower, this limit cannot exceed 15% of the bank’s capital and surplus. While there are exceptions for certain loans, I’ll primarily focus on business borrowers in this post.

During my tenure at the “big bank,” I spent the majority of my time cold-calling prospects, which in hindsight, turned out to be a substantial waste of time. Anyone who has worked for a big bank can attest to this reality. These institutions offer an abundance of resources and tools, and if you can adapt to their demanding sales culture, you can become a successful lender with a substantial income. Unfortunately, I was unable to adapt, so I decided to seek new opportunities. Don’t get me wrong, the experience was enriching, and the bank and my colleagues provided some of the best moments of my career.

Fast forward to today.  I am now a commercial lender at a community bank with approximately $750 million in assets. As community bankers, we may not have the same resources and tools as the big banks, but what we possess is the invaluable relationships we build with other community banks and bankers. With the number of banks decreasing, it is more crucial than ever for community banks to stand together. According to FDIC data, the number of community banks (with assets less than $10 billion) has declined by 46% over the last two decades, dropping from 7,620 in 2003 to 4,129 in 2023. In contrast, the number of regional banks (with total assets between $10 billion and $100 billion) has increased by 50% during the same period. As of 2023, big banks have 30,000 branches, while community banks have over 27,000 branches. Given these statistics, I cannot stress enough the importance of fostering long-lasting, profitable relationships with one another. One effective way to share in the profits is through loan participations.

What exactly is a loan participation?

A loan participation refers to the practice of sharing or selling interests in a loan. By engaging in loan participations, community banks can address gaps in loan demand. They can also sell loan participations to diversify their portfolio and mitigate risks associated with certain collateral concentrations.

From my personal experience, both buying and selling loan participations have significantly contributed to the growth of my loan portfolio and the expansion of my most profitable relationships.

I emphasize the importance of building relationships with other community banks, particularly those that are not your direct competitors and are not situated in your market. When you sell loan participations, exercise caution, and if you must collaborate with a competitor, ensure you trust the banker you’re working with. Contacting a competitor means they gain knowledge about your customer, including the interest rates you’re offering. I learned this lesson the hard way, two different banks paid me off on a $3.5 million and $1 million relationship. Some bankers seem to forget the old saying, “Don’t bite the hand that feeds you.”

Instead, focus on developing relationships with banks that are not your direct competitors. It’s these banks who lean more towards being a depository institution that require such relationships to thrive and grow. If we stick together, we can collectively compete with every big bank out there.

At BANCreach, we will help you extend your reach to build relationships, transparency, revenues, and opportunities.  Help us help you build the marketplace.  Join now for free.