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Community banks are facing many pressures: deposit growth that outstrips loan demand, loan portfolios that rely heavily on real estate and geographic concentration that is sensitive to local economic conditions.
At the same time, businesses that had borrowed from non-bank sources before the financial crisis are facing reduced credit availability.
“There was a need on both sides of the equation: a need among borrowers and a need among this subset of lenders,” said Lee Sachs, founder and CEO of Alliance Partners, an asset management firm based in Chevy Chase, Md., that coordinates operations for BancAlliance, a network of community and regional banks.
BancAlliance’s purpose is to balance that equation by allowing member banks to band together to meet the needs of larger borrowers.
The system allows community banks to add earning assets with good underwriting to their portfolios while diversifying both in terms of geography and industry, said Floyd Stoner, senior advisor at BancAlliance and former executive vice president for congressional relations at the American Bankers Association.
Geographic diversification is especially important for banks located in areas dominated by a single employer, Sachs said. “If something happens to that employer, you’re not going to be very diversified. It will all tend to correlate, so to get true diversification, you really do need to have some portion of your portfolio outside your immediate footprint,” he said.
BancAlliance provides community bankers diversification so they can continue to serve their communities regardless of any local economic downturns, according to Sachs, and it allows community banks access to businesses they would not otherwise be able to lend to because of their size.
“We just did a deal for a publicly traded, nationally known car rental company. That car rental company would never come to Congressional Bank and ask to borrow some money,” said John Lane, co-founder and CEO of Congressional Bank of Bethesda, Md.
As the clients of community banks grow, BancAlliance also helps them keep pace, Sachs said. If a community bank has done business with a local company for many years, but that company grows and needs a loan that is larger than the bank can provide, BancAlliance members can share that loan, thereby allowing the bank to retain the company’s business.
In addition to thinking about the potential benefits, bankers considering membership wonder about the regulatory consequences, Sachs said.
According to Arthur C. Johnson, chairman and CEO of United Bank of Michigan, which is based in Grand Rapids, examiners are often unfamiliar with larger credits. “It’s one thing for us to learn what we’re doing here. It’ll be quite another to educate our examiners when they come in, and you certainly don’t want to make any mistakes in that,” he said. “BancAlliance was very, very helpful in terms of us having the right kind of governance and the right kind of documentation in place so that won’t be a problem.”
Sachs recommends that banks considering membership discuss the move with their regulators. Alliance Partners regularly communicates with all the relevant regulatory agencies, and Sachs said bankers may have misperceptions about what regulators expect.
“We occasionally hear that a bank might have the impression that their regulator doesn’t want them lending outside of their footprint. In our experience, we haven’t found that to be the case. What the regulators have said is that you have to underwrite and understand every loan you put on your books. In addition, you have to have the right policies, processes and procedures in place to successfully engage with BancAlliance.”
Aside from dealing with regulatory concerns, community bankers may have to adjust to the fact that they will not interact with the borrowers they serve through BancAlliance.
“That is something that has always been very important to us, looking across the desk, looking somebody in the eye, going out and looking at the plant, at the collateral,” said Johnson. “And we don’t get to do that with these businesses, but we’ve become comfortable with that.”
Lane believes that as long as the data is reliable, bankers can be confident in the loans. “We have forgotten to some degree that we’re in the finance business and finance is about financial analysis,” he said.
Bankers may also have to adjust to the fact that these loans seldom reach maturity, Johnson said; instead, they are often refinanced.
“We’re not afraid of that,” he said. “In some respects that makes them a little more attractive.” Refinanced loans may provide the bank an opportunity to take on another attractive credit, Johnson said.
Most of the loans that BancAlliance has funded to date have had a variable interest rate, offering members an alternative to fixed interest rate real estate loans.
In addition to the financial and risk-management benefits it offers, BancAlliance provides members with a network by holding conference calls and membership meetings, Stoner said. Members can go to that network with questions.
Stoner also noted that BancAlliance’s structure helps ensure its longevity: Alliance Partners takes a portion of every loan. “You’re in it together. Alliance Partners is required — it is a policy developed by the banker board — to take a minimum of 2 percent of every loan. A bank can be a member of BancAlliance and never take any loans, but Alliance Partners must take 2 percent of each loan,” he said. “This business model only works if everybody wins.”
Sachs emphasizes that BancAlliance’s purpose is to help community banks survive and thrive. “We don’t want to change and are not trying to change the nature of what it means to be a community bank. Our members are there to serve their communities,” he said. “It’s a way for our members to be able to serve their communities through up and down cycles, good times and bad.”
Elizabeth Whalen is a contributing writer based in Berkeley, Calif.
Copyright (c) February 2013 by BankNews Media