Insider Loans Top $37 Billion

Last year at this time, we reported on a new rule that would allow businesses owned by bank insiders to apply for Small Business Administration Paycheck Protection Program (PPP) loans (JRN 38:08). There was widespread concern that these loans would be abused. We at Bauer considered it a necessary lifeline, particularly in small town and rural America.

A year later, as PPP loans have dwindled, we are watching these loans climb again – past the level at which they peaked prior to PPP access. So, while we are heartened that many businesses were able to gain access to PPP funds, despite their connection to a bank, we are now back where we started.

With nearly 40 years of experience at this, we know that, prior to seeking a merger or acquisition partner, bankers “in the know” sometimes take out loans. As long as these loans are subject to arms-length scrutiny and underwriting, and as long as the loans are paid back as scheduled, this is perfectly fine. But in some cases, increases in insider loans “could mean” that the bank is considering a sale.

For example, Main Street Bank, Bingham Farms, MI had no insider loans on its books at all… until the third quarter 2020, that is. During that quarter, someone with inside knowledge of the bank, borrowed $357,000 (JRN 38:08). A small amount, yes, but enough to suggest that that person may have wanted to get a loan while it was still easy to do so. The following February, Main Street Bank was acquired by 5-Star Superior NB, Hancock, MI.

Clearly, not all insider loans indicate a pending merger. In fact, most loans are simply that, loans. That’s particularly true now that PPP is no longer an option, and many Americans are still struggling to make ends meet. But, if you’re looking for a bellwether, insider loan growth can be an indicator.

The 50 banks listed on page 7 all have two things in common: They each reported year-over-year insider loan growth of 60% or greater; and, their insider loans now total more than 25% of the bank’s equity. Main Street Bank would not have made this list because the insider loan was nowhere near 25% of the bank’s total equity, but one of the banks listed on page 7 has already been acquired: 5-Star North Arundel SB, Pasadena, MD.

At 9/30/2020, loans to North Arundel SB insiders totaled $656,000. That amount changed incrementally as follows:

The third column denotes the number of executives (or insiders) that have loans greater than or equal to either $500,000 or 5% of total capital (whichever is less).

When the North Arundel SB acquisition was announced last August (highlighted), the bank had only 10 employees. They, their families, the board members and their families, would all be considered bank insiders. Only those with significant loan amounts (as noted above) would be included in column 3, but all amounts are included in column 2.

North Arundel SB merged on January 1, 2022 into 5-Star BayVanguard Bank, Sparrows Point, MD. The merger discussions would have begun long before that.