The latest woe to befall community bankers, of course, has been the collapse of the housing and commercial real estate markets, which hit particularly hard since that is where they’ve put the vast majority of their money over the past 15 years. But who can blame them? After all, much of their consumer lending business has been stolen away by bigger and more efficient lenders who have easy access to cheaper funding through Wall Street and the “shadow” banking system. In the process, many had become addicted to the higher yields offered by asset-backed securities and loans to local home builders, developers and land speculators.
Now, with their balance sheet weighed down by under-performing real estate loans and underwater securities, community banks find themselves in something of a pickle. New regulations that limit the fees they can charge depositors for things such as debit card transactions, overdrafts and ATM withdrawals threaten to dramatically reduce their fee income.
A relatively flat yield-curve has reduced the “spread” between the interest they pay to depositors and the interest they can charge borrowers. And although they still have money to lend, many now find they have lost the expertise, risk appetite and customer relationships to make to small- and medium-size firms in sectors other than real estate.
A couple of Washington financiers have come up with a clever answer to their prayers. One is Lee Sachs, a former Treasury Department official in the Clinton and Obama administrations. The other is John Delaney, the just-nominated Democratic candidate for Congress from western Maryland and founder of CapitalSource, a commercial lender based in Chevy Chase. Their new venture, BancAlliance, is a cooperative of community banks that aims to make loans to mid-sized and large businesses that none of its members has the size, expertise or risk appetite to make on their own.
After one year, BancAlliance has signed up 44 banks with collective assets of $40 billion and closed on about $100 million in loans. The goal over the next few years is to get to 200 banks with $200 billion in assets and a syndicated loan book of $10 billion. At that, the alliance would have the scale and scope of a super-regional bank, even as its members remain relatively small. Think of it as bringing to the banking business what True Value or Ace has brought to the hardware business.
With Delaney now mostly off campaigning for Congress, Sachs and a crew of about 25 professionals are at work in Chevy Chase looking for new banks and new loans to offer them. Their management company has already raised its own equity capital from outside investors, including BlackRock, Wall Street’s blue chip asset manager.
The equity will be used to warehouse loans before they are approved by the individual bank credit committees, as well as allowing the firm to take a 2 percent stake in every loan it syndicates through the alliance. The management company will charge a fee for evaluating potential loans and overseeing them once they are approved.
The alliance’s first loans have been pieces of larger loans originated by mega-financial institutions such as J.P. Morgan and GE Capital or the finance arm of industrial giants such as Caterpillar. In time, however, Sachs and Delaney hope the alliance can participate, with three or four other large banks, in what are known as “club” loans that are now out of the reach of community banks.
Member banks will turn to the alliance when they have a fast-growing customer who requires a loan too large or too complex for the bank to underwrite on its own.
“It’s a great equalizer,” explains John Lane, president of Congressional Bank based in Rockville, an early alliance member. (No surprise there: Delaney is a big shareholder).
This new model could also be a boon to growing mid-sized businesses, which are finding it difficult to borrow money at a time when banks have become pickier about the risks they are willing to take and less funding is flowing their way through the capital markets and the “shadow” banking system.
The consolidation of the banking business into a handful of megabanks has dramatically reduced the number of surviving regional banks that used to dominate mid-market lending based on the borrower’s cash flow, reputation and long-term relationship with the bank.
Although all the megabanks claim they are still doing this kind of lending, many do not. Decision-making has been centralized at bank headquarters, and many of the big banks focus their lending primarily on standardized loans collateralized with hard assets that can be processed through largely automated underwriting systems.
Given these market realities, the BancAlliance model looks like a no-brainer for community banks looking to move into this under-served market segment while reducing their dangerous over-reliance on real estate lending. Which raises the question of why BancAlliance, along with a similar syndication effort launched by the Ohio Bankers League, have attracted the interest of so few of the nation’s 7,000 smaller banks.
It could be that this new idea still needs to prove itself?
Or could it be — and I realize I’m being a tad cynical here — that rather than take a risk on a new business model, community bankers would prefer to keep whining about unfair competition and misguided regulation, at least until a decent buyout offer comes along?