Banks' loan participation appetite is waning as credit quality metrics normalize and rising funding costs push them to focus on core relationships.
Shared national credits (SNCs) — or loans with an aggregate commitment amount of $100 million or more and that are shared by three or more participating lenders — were a hot topic on US banks' third-quarter earnings calls after several banks took hits from a SNC to a now-bankrupt wholesale oil distributor. While bankers expressed confidence in their current SNC loan portfolios, many said they are pulling back their SNC participation as they remain wary of the potential effects of higher-for-longer interest rates on credit performance and will instead focus on core relationships.
"Obviously, it can bite you occasionally, as you saw," Synovus Financial Corp. Chief Credit Officer Robert Derrick said about SNCs. "But nonetheless, we think we've got a really good group of bankers running that business. [We're] very focused on opportunities that book can present us, and there are some, and we feel like we'll just be more strategic there."
Synovus' net charge-offs jumped up about $40 million quarter over quarter, partly due to the company's participation in the SNC to the bankrupt wholesale oil distributor. Synovus' total SNC exposure stood at about 13% of its total loans in the third quarter, just above the company's goal range of 10% to 12%.
"We're kind of where we need to be, and we'll stay in that range as we look ahead, if not slightly declined," Derrick said on the company's third-quarter earnings call.
Focus on full-service clients
Hancock Whitney Corp. also had exposure to the SNC to the wholesale oil distributor. The company used some of the excess liquidity that flowed in during the pandemic on SNCs, but it is now looking to pare back its exposure, Chief Credit Officer Christopher Ziluca said on the company's earnings call.
"As we kind of look forward, since many of those relationships don't necessarily have full service opportunities, we'll look to dial that back over time," Ziluca said.
However, that decision is not motivated by the wholesale oil distributor situation but instead by the increasing cost of funds, President and CEO John Hairston said.
"We want to preserve that liquidity for use in core growth and clients that have a little deeper wallet share with us," Hairston said.
Other banks are pulling back from SNC lending for the same reason, such as Eastern Bankshares Inc., which sold about $200 million of SNC loans out of its commercial loan portfolio at a $2.7 million loss during the third quarter.
"The reason for the sale is very straightforward. We expect funding conditions to remain tight for the foreseeable future, and this preserves some balance sheet capacity for our core lending customers," Eastern Bankshares CFO, Chief Administrative Officer and Treasurer James Fitzgerald said on an earnings call.
For FB Financial Corp., its desire to focus on core clients is the main reason why it is "SNC adverse" and will only participate if there is a compelling reason, executives said on the company's earnings call.
"We don't do SNCs for growth. We only enter a SNC because we've got some clients or some relationship that gets us into the SNC," President and CEO Christopher Holmes said.
Banks' intensified focus on core clients makes being the lead lender on a SNC even more appealing right now.
It is "far better to, for a variety of reasons, to be the agent on the deal because generally, the agent gets 75% of all ancillary business," BankUnited Inc. COO Thomas Cornish said on the company's earnings call. "Although in the SNC market today, everybody wants part of the ancillary business, and that's a big challenge in the SNC market is there's not enough ancillary business to go around to everybody."
Regulators force downgrades
In the third quarter, some banks were forced to downgrade some credits following regulators' review of their SNC books.
Old National Bancorp was one of those banks, revealing it downgraded about six credits that were not concentrated in any one industry following regulators' SNC review, executives said on the company's earnings call. The company sold one of the SNCs at par following the downgrade and will likely sell another one during the fourth quarter, they added.
Hope Bancorp Inc. and Veritex Holdings Inc. also reported downgrades connected with their recent respective regulatory SNC exams.
Meanwhile, Citizens Financial Group Inc. said it came out of its 2023 SNC exam with more upgrades than downgrades, resulting in no forced charge-offs. Despite that, the company has been cutting down on its participation as part of its balance sheet optimization efforts, Vice Chairman and Head of Commercial Banking Division Donald McCree said on an earnings call.
"We're really churning the book towards full relationship credits and away from some of those participations," McCree said. "A lot of the competition is doing exactly the same thing."
