Third parties are pitching new ways to connect loan-starved community banks to prospective borrowers.
Each suitor offers something different, whether a Web service linking borrowers directly to banks, a la the dating site Match.com, or a member-controlled lending cooperative that will deploy loan development teams nationwide, to name two. What the companies have in common is an underlying mission to help small banks prepare for tougher competition and dwindling profits.
"What most banks are finding is that they don't have access to enough loans in their footprint," particularly commercial and industrial loans, said Lee Sachs, a former Treasury Department official and a founder of BancAlliance, a lending cooperative in Chevy Chase, Md. "They need this in order to diversify and become more stable."
Intermediaries have long offered services to bankers, especially when loan demand is weak, and it has caused problems for some banks that didn't know enough about the kinds of loans they were involved with.
To some, the re-emergence of such middlemen reveals just how difficult it is to add good loans.
"The concept itself isn't new," said Lee Pollock, a managing director at Loan Workout Advisers, a Chicago bank-turnaround consulting firm. "The fact that people keep on going back to it suggests that it's at least intrinsically a good idea."
Pollock said the lessons of the recent downturn have shown that education should be a crucial component of any new venture.
Educating members is a major tenet for BancAlliance, said John Delaney, the executive chairman of CapitalSource Inc. and another BancAlliance founder. The company, which just announced an investment from BlackRock Inc., will act as a platform to find and refer loans to a network of small and midsize community banks.
BancAlliance's member-elected board will establish oversight and credit policies, and the company, which encourages banks to diversify beyond traditional real estate lending, will host seminars to teach bankers how to properly underwrite new kinds of loans.
"It's important for us that our members understand what they're getting into," Delaney said.
BancAlliance will use loan origination, credit and risk teams to help identify opportunities and refer loans. A bank doesn't have to accept a referral, but it must participate regularly to maintain membership. The platform will also let members collectively bid for bigger loans often snagged by larger lenders, Delaney said. In a traditional participation loan, an originating bank offers a piece of the deal to clients paying higher fees.
"By the time anything gets down to the community banks, it's really been picked over," Sachs said. "This puts them essentially at the table, because we're doing this on their behalf."
In the Midwest, the Ohio Bankers League has launched a service to help members find other bankers to participate in larger loans, and serves as a market for secondary loan sales. OBL Loan Participation Service, launched in April 2010, is an online system that lets members specify the types of loans they want to buy or sell using geographic region, dollar amount or industry type. When other banks post loans that fit a bank's search parameters, the system alerts them of the potential matches.
The service is one of the first efforts spearheaded by a committee of former bank chief executives that formed in 2009 to brainstorm new products and services.
Many of the league's banks are looking for partners for larger loans that they cannot take on themselves without exceeding their legal lending limits, said James Thurston, a spokesman for the league. In the past, those banks often worked with brokerage firms or bankers' banks to find opportunities. "There was nothing out there that just made it easy and took the kind of time out of the process," he said.
Thurston compared the portal, a place where bankers can connect with each other without a middleman, to the dating site Match.com.
Boefly.com, which launched in early 2010, takes a similar approach by working directly with business borrowers, and sometimes the brokers that represent them, to help them find financing. The company doesn't retain any risk in the loans or charge points on loans it facilitates, said Michael Rozman, an executive vice president. Rather, it charges businesses and banks membership fees. Borrowers fill out a sort of "universal loan application" and offer supporting documents, and banks provide a detailed description of the kinds of loans they would take on.
How does this square with the age-old advice that bankers should know their clients? Rozman said he sees it as another marketing tool, similar to advertising in the local newspaper or sponsoring a youth baseball team.
"What Boefly did was make the introduction," Rozman said. "In the end, the regular banking process kicks in, and that bank is still going to do their normal diligence. It's just a more efficient way of making that connection."
Jana Rouble, a Texas loan officer for Community South Bank in Parsons, Tenn., has been using Boefly to search for loans for about a year and reviews about 10 loan applications monthly. Rouble said she hasn't found a match yet, but is confident that the quality of borrowers will improve as the site builds visibility. Rouble said the $674.7 million-asset bank would use the site to add to its portfolio.
"We will do some of those loans that other banks won't do if they have a really good story," Rouble said. "That's what Boefly is good for. Sometimes a broker lists someone on there who might just have been calling the wrong banks."
John Buhrmaster, the president of First National Bank of Scotia in New York, said the $350 million-asset bank has considered using a company to connect with borrowers. Regulators now give much greater scrutiny to participation loans, he said, and his bank has mostly shied away, partly because demand hasn't dropped off as much in upstate New York. Buhrmaster said the allure of companies that would connect borrowers with lenders may grow as competition increases.
"We've had two regional banks move into the area in the last couple months," Buhrmaster said. "That makes it more difficult. So for some of the smaller banks in the area, a service like this might be attractive."
Sachs and Delaney said their services complement local lending, rather than replace it, and in the process make banks more competitive. "It's a terrible thing for a community when the local bank ends up having to sell itself to Bank of America or Citibank," Sachs said. "They lose all the benefits of having their own locally owned, locally controlled bank. What we're trying to do is preserve that, make sure they're there and healthy through all kinds of economic conditions, by having a more well-rounded portfolio."
