Community Bankers' Hidebound Ways Stymie Commercial Loan Push
Growing loan volume and diversifying the portfolio beyond real estate are the stuff of community banker dreams, right?
So why have just 36 institutions joined BancAlliance, a cooperative formed a year ago to give community banks a shot at booking pieces of large commercial loans. Why has a loan syndication service started by the Ohio Bankers League completed just one deal?
For many community bankers it boils down to a stubborn desire to stick with the comfy ways that have delivered for decades. They want to look the borrower in the eye; they want to kick the tires on the collateral. That's great if there are borrowers to stare down and collateral to check out.
If there aren't — and loan demand has dried up for many community banks at the same time that deposits have poured in — then you better start considering your options.
"There is an element in our industry that is still acting like ostriches," says Mike Van Buskirk, the president and chief executive of the Ohio Bankers League. Those bankers, he says, need to "get over it and get with it."
The trade group's service is designed to help community banks in the state compete for, and then share, larger credits. If a loan is too big for one bank to handle, it's offered to other members to see if any would like to participate.
Despite its painfully slow start, Van Buskirk remains optimistic. "Bankers tell me it's a good idea. They are using it to broaden their marketing pitch" to larger borrowers, he says.
That's exactly why Malcolm Hotchkiss, the chief executive of United Labor Bank in Oakland, Calif., joined the BancAlliance network.
"We wanted to diversify and to be able to go after bigger credits," Hotchkiss says. "We looked at this as a way to pass off some of that product to somebody else in the group and still be able to keep that client relationship."
Hotchkiss says BancAlliance will help him "compete with larger institutions and maintain those client relationships." He described a commercial customer who does a lot of business with the $285 million-asset thrift — payroll, a commercial and industrial loan, a property loan. If that customer wanted an equipment loan, the whole relationship might be more than United Labor could take on solo. "If I can't handle that, Wells [Fargo & Co.] is going to grab it. So we have to find a way to do that and I think BancAlliance" can help.
Based in Chevy Chase, Md., BancAlliance's members are spread across 19 states plus the District of Columbia. Founded last year by John Delaney and Lee Sachs, with investments by BlackRock Inc., BancAlliance finds the deals — so far, mainly cash-flow-based corporate credits — shops them to members and, if there is enough interest, will underwrite the loan. It does the servicing, charging banks a fee, and sends member banks quarterly reports on performance. So far, so good. All its loans are repaying on time.
"We are not a panacea for the community banking industry, [but] we are a part of the solution," says Scott Winslow, an executive vice president at Alliance Partners, the cooperative's parent. "Community banks have $2 trillion in investable deposits on their balance sheets. That money is essentially trapped, so we are trying to marry that funding with borrower needs."
Sounds good to me. And yet a year on, only 20 of BancAlliance's 36 members have participated in about 10 loans.
That's partly because it took a good six months to get the program up and running. But it's also because too many community banks are simply crossing their fingers and hoping they won't have to make any changes to their business model. In this fantasy, the economy roars back, demand jumps, and loans flow.
Delaney, who also is the chairman of CapitalSource Finance LLC, a commercial lender based in Los Angeles, will tell you those bankers are dead.
"The math is overwhelming: there are just not enough local loans to support most community banks," Delaney says. "There is a supply-demand imbalance between the number of local loans that exist and the number of banks going after them."
In addition to large corporate credits, the network will do club deals with four or five lenders and eventually lend directly to borrowers. BancAlliance signed a deal in December with Denny's Corp. to finance franchisees. And, of course, it will help its members find other lenders to share those larger credits.
John Lane, the chief executive of the $300 million-asset Congressional Bank in Bethesda, Md., has participated in seven loans with BancAlliance, and Delaney is both a member of his board and an investor.
"We have gotten involved with them because it's my job to try to find a way to enhance shareholder value," Lane says. "It moves the needle in a very material way. It provides an opportunity to enhance return on equity."
Lane says BancAlliance is doing for banks with assets what Promontory Interfinancial Network LLC's Certificate of Deposit Account Registry Service program has done for liabilities with its deposit programs. "John Delaney came up with a beautiful way to complement CDARS on the asset side," Lane says.
The First National Bank in Altus in southwestern Oklahoma joined BancAlliance for much the same reason Congressional Bank did — to add earning assets.
"In rural America, the population growth is very slow so we knew we had to do some things to grow the loan portfolio and mitigate concentration risk," says Phillip McMahan, the president and chief executive of the nearly $290 million-asset bank.
First National has closed two of the four deals it has agreed to do with BancAlliance. And it's about as traditional as community banks come. McMahan is a fourth-generation banker. His great-grandfather founded the bank in 1902. McMahan started working there in 1982.
While he endorses BancAlliance, McMahan did have some words of caution for community bankers: "You have to be very good at analytics, understanding credit risk and dealing with entities that you never talk to face-to-face. If you are not comfortable with that, don't do it. You'll be miserable."
All the bankers interviewed said they explained BancAlliance to their regulators before signing up. None of the bankers had been through an examination since booking a loan through BancAlliance.
But another of BancAlliance's co-founders is Lee Sachs, a former Treasury Department official, and Don Kohn, a former Federal Reserve Board vice chairman, sits on Alliance Partners' board. It's fair to say they know their way around Washington and have run what they are doing by all the regulatory agencies.
Sachs says he envisions the cooperative growing to somewhere near 200 banks, with each holding $50 million to $70 million in loan participations. That would put total financing in the vicinity of $12 billion. To date, BancAlliance members have committed $1.6 billion.
"The more we can show what we've actually done I have to believe we will get a better reaction than we have today," Sachs says. "I think we have just scratched the surface."
Sachs says he expects the cooperative to be booking three to four loans a month by midyear. In March, BancAlliance will host a conference in Florida to pitch the service to other banks.
"We are not trying to change the nature of community banks or what they do," Sachs says. "What we are trying to do is make sure they are there for the long run."