Since founding BancAlliance in December 2010, Washington financiers John Delaney and Lee Sachs have corralled 56 community banks in 26 states and raised millions of dollars to support the lending cooperative.
The latest feat came last week with the completion of a $150 million funding campaign involving investments from global asset manager BlackRock, BlueMountain Capital Management and Democratic congressional hopeful Delaney. Funds will be used for making loans.
Pooling the resources of smaller institutions to create economies of scale is not unheard of in the banking world, where similarly structured banks and credit union service organizations have existed for decades.
Yet the response to BancAlliance, which has been signing up more members lately, shows a need for community banks to have broader opportunities to earn money and diversify their portfolios.
The new alliance will be competing with some formidable players. The consolidation of the banking industry has created a handful of behemoths, such as JPMorgan Chase and Wells Fargo, who often edge out smaller competitors for large commercial loans.
“Big banks have the resources to attract intellectual capital, bring talent on board to produce, analyze and document complex loans,” said John Lane, president of Bethesda-based Congressional Bank, one of four local BancAlliance members. “The alliance acts as a great equalizer.”
BancAlliance, governed by an 11-member board, is comprised of banks whose assets range from $100 million to $10 billion, giving the cooperative a lending capacity equal to that of a regional bank.
Here is how it works: BancAlliance’s management arm, Alliance Partners, finds and evaluates mid-sized business and corporate loans for members. The equity capital is used to support loans in the short term, a practice known as warehousing, until members can underwrite the deal.
“Sometimes the borrower needs to close on a certain time schedule. And with this latest capital raise, we’ll be able to do that and allow our banks a little more time to process the loans,” said Sachs, a former assistant secretary at the Treasury Department.
Not all members have to participate in each loan, but those who do must hold a portion of the paper, spreading out the risk.
Alliance Partners retains a 2 percent stake and services the debt for a fee. It also offers financial services, including risk management and oversight of members’ commercial real estate concentrations.
Early last year, BlackRock acquired a 25 percent stake in the management team for an undisclosed amount. Sachs said BlueMountain is also taking a stake in the firm, though he would not provide an exact percentage.
“They both have deep credit backgrounds. You know we didn’t go with traditional private equity investors ... we thought that deep experience in asset management, in credit was something that would be important to have in partners,” Sachs said.
To date, BancAlliance has funded 20 commercial loans for companies scattered from coast to coast. Sachs said there are about a dozen additional loans in the pipeline. He has noticed specific demand for equipment financing.
Sachs envisions the cooperative expanding to include 200 banks, each holding up to $70 million in loan participations.
“We want to have a size that strikes the right balance,” he said. “We’ll grow the membership in line with our capacity to generate quality loans. If we start to feel constrained, we’ll either add lending capacity or stop growing the membership.”
He went on to say it would be better to have “200 happy members, than 400 who are feeling that they are not getting what they want from us.”