Increasing C&I Loans: A Practical Approach for Community Banks

We talk to many community bankers who are seeking ways to expand their commercial and industrial (C&I) loan portfolios. Yet, despite the strategic importance of this category, growth has remained elusive. The A and B cross-secured structure (“AB structure”) has recently been utilized by community banks as a practical, risk-managed method for increasing C&I lending volume without changing underwriting standards or requiring new personnel.  This structure not only grows C&I balances but also enhances overall profitability and portfolio quality for community banks. In this article, we break down the structure and the tactic.

The Challenge in Increasing C&I

Increasing C&I lending can be a difficult feat for a community bank to achieve.  Competitive pricing pressures, limited borrower demand in smaller markets, short loan durations, and lack of revolver utilization all work against portfolio expansion.  Smaller community banks have seen their C&I exposure decline as a share of total loans in recent years.

Some of the most common obstacles include:

1. Limited demand in rural or non-industrial areas.
2. Intense competition from regional and national lenders.
3. Compressed spreads that reduce profitability.
4. Short maturities and lack of “stickiness.”
5. Limited treasury management capabilities to retain relationships.
6. High acquisition and servicing costs due to the need for specialized underwriting and monitoring.
7. Low revolver utilization results in capital costs without loan revenue.

These constraints make it challenging for smaller institutions to achieve meaningful C&I growth without taking on new risks or expanding staff.

The graph below shows the C&I loan percentages (gray portion of the stacked bar chart).  The graph shows banks in three asset bands – under $1Bn, $1-3Bn, and $10-25Bn.  The data shows that C&I loan portfolios have been shrinking as a percentage of all loans and smaller banks hold a smaller percentage of C&I loans compared to larger banks.

As Easy as “A and “B” – How The AB Structure Works

The AB structure addresses these challenges by linking a traditional real estate term loan (“Loan A”) with a C&I acquisition loan or a revolving line of credit (“Loan B”).  Loan A and Loan B are secured by real estate and operating assets, and both are cross-collateralized and cross-defaulted.

Loan A: A term loan secured by a first lien on owner-occupied or investment real estate.

Loan B: A C&I acquisition facility or revolving facility secured by a first lien on business assets (inventory, receivables, equipment or intangibles) and a second lien on the same real estate.

By structuring both loans simultaneously and cross-securing them, the bank leverages real estate collateral to prudently support C&I exposure. The arrangement maintains the same overall loan-to-value ratio (LTV) as a conventional real estate loan, while generating additional interest income and expanding the borrower relationship.

Example:
A borrower seeks $1 million to purchase a medical office plus the practice (real estate valued at $1mm and business valued at $300k). Under a traditional structure, the bank might lend $770K on real estate alone (77% LTV). Using an AB structure, the bank could structure:

Loan A: $750k term loan, first lien on real estate and second lien on business assets (75% RE LTV).

Loan B: $250k revolving line ($200K base draw, $50k availability), first lien on business assets, second lien on real estate (83% business LTV but combined 77% LTV).

The total exposure remains within acceptable limits and creates an evergreen credit that builds lasting C&I balances.

Advantages of AB Structure for Increasing C&I Loans

The benefits of this approach for community banks include:

• Immediate increase in C&I balances through reallocation of exposure.
• Stronger borrower relationships via multi-product engagement.
• Improved profitability by lengthening the loan life and deepening yield opportunities.
• Enhanced monitoring flexibility—the B loan allows for annual reviews and performance checkpoints.
• Lower risk of attrition, as the cross-secured real estate loan discourages refinancing elsewhere.
• No need for specialized C&I underwriting expertise, as the real estate remains the anchor collateral.

The AB structure allows banks to grow C&I loans organically within their existing risk frameworks.

Case Study: Applying the AB Structure in a Medical Practice Acquisition

A community bank recently used a variation of the AB structure to finance the acquisition of a medical practice.

The Situation:
A young doctor sought financing to acquire a building and medical practice in a mid-sized U.S. market.  The acquisition price was approximately $2mm, with $1.5mm and $500k in borrower equity.

The Structure:
The bank extended a combined facility under the ARC program as follows:

Loan A (Term Component): A 10-year term loan, secured by first mortgage interest on the borrower’s owned commercial real estate and second mortgage on business assets.

Loan B (Operating Component): A 5-year revolving facility (fully drawn) secured by a first lien on the newly acquired business assets, an assignment of life insurance policies for additional protection, and second lien on real estate assets.

The two loans were cross-collateralized, providing the bank with both a tangible real estate cushion and a diversified asset base. This approach effectively converted a single-purpose acquisition into a mixed credit exposure that qualified as a C&I facility while maintaining conservative risk parameters.

The Outcome:

• The bank achieved C&I and OOCRE classification on the credit balance while keeping total exposure well within policy limits.
• The borrower’s debt service coverage ratio (DSCR) exceeded 1.2X, supported by consistent medical revenues.
• The structure deepened the relationship – the borrower moved treasury and personal accounts to the bank, and deposit balances (almost $100k).
• The bank generated $23k in hedge income.
• The loan was fully compliant with internal policy, requiring no exceptions or special monitoring covenants.

This case demonstrates how the AB structure – or a variant combining business assets and RE components – can finance C&I business efficiently.

Conclusion

If your bank is interested in increasing C&I balances, the AB structure is an interesting way for banks to build balances, quickly, efficiently and without changing their business model.  We have also seen how this structure can be utilized to stave off competition from the national banks with a single close construction through perm AB structure – but that is a topic for a future article.