Community banks have been pushed, squeezed and shoved out of the lending market during the past two decades for many types of commercial and industrial loans, where the pricing has become so competitive that it’s not worth the effort. But with the pitfalls of high concentrations in commercial real estate so obvious now, many banks are trying to diversify revenue streams in order to survive. John Delaney and Lewis “Lee” Sachs founded asset manager Alliance Partners in June 2011 to help community and regional banks diversify income and gain access to C&I loans too big to otherwise put on their books. The related entity, BancAlliance, is a cooperative of member banks that identifies, evaluates and refers loans to members. Bank Director magazine talked to John Delaney and Lee Sachs about the market for C&I loans and how their company works.
Why did you think there was a need for this?
Lee Sachs: From the bank’s perspective, for the last 20 years, they’ve been pushed out of so many different markets. As a consequence, community banks have gone from having around 60 percent of their loan assets in real estate to some having almost 80 percent of their assets in real estate. That is not a sustainable business model over time.
John Delaney: Banks do better when they have balance and choice, and the problem with community banks is they don’t have balance and they don’t have a lot of choice. A lot of community banks have just become local real estate lenders. Much of the growth occurring in our country is in the middle markets. The U.S. is more of a service economy and service-based businesses tend to be more regional and national, and you need a certain amount of scale to successfully compete for loans in that market. Right now, a disproportional benefit of that growth goes to large banks. If you look at where jobs are being created, it’s at fast growing, mid-sized business that go from 100 employees to 1,000 employees in a couple years. The middle market requires loans of $50 million to $250 million, which are bigger than what a lot of community banks can handle. However, these borrowers would prefer to do business with community banks. Truly, that’s what they would rather do.
Lee Sachs: Sometimes a Main Street bank will lose a client as that client grows, because the bank can’t accommodate the larger loans. One of the things we help our members do is retain that client.
Who are your members and what does it cost to join?
Lee Sachs: We have 38 members and they’re all over the country, from $200-million asset banks to $10 billion. They don’t pay anything to join. We receive asset management fees based on the volume for the loans they fund through BancAlliance. The banks set the parameters for the loans, policies and procedures, and they tell us what kind of loans they want. Each individual loan may or may not fit with every bank’s needs. We introduce a loan to the membership and each member decides if that loan works for them. We service the loans on behalf of the group. We consider ourselves an extension of their loan department.
John Delaney: We’ve looked at 450 opportunities, and a little less than 10 percent made it through our filter, so 40 loans have been approved on behalf of the network.
C&I lending is a fairly competitive business, especially in terms of pricing, so how do you think you can offer a strategy that will be attractive to community banks?
John Delaney: For small banks, there are too few opportunities in C&I lending and too many banks going after that. In terms of national credits and mid-sized businesses, we find that to be a market that has average competition. We don’t think it is nearly as competitive as the C&I loans in the local footprints. The return profile is better and the risk profile is better.
How do the regulators view your model?
Lee Sachs: We’ve gotten good feedback. We are doing this very carefully; we designed this in a way that fits with regulatory guidelines. The former Comptroller of the Currency, John Dugan, has been outside counsel for BancAlliance and has been instrumental in helping us think this through.