How to Find Good C&I Loans

It’s no secret that the last couple of years have been very challenging for community banks. Commercial lending in many regional markets has been slow to recover since the Great Recession, and there is such stiff competition for good loans that net interest margins have been compressed throughout the industry. Alliance Partners Senior Advisor Floyd E. Stoner explains how his company’s commercial and industrial (C&I) loan network for community banks can help member banks find good commercial loans outside their markets without taking on excessive credit risk.

Are you surprised that it has taken so long for the business loan market to revive itself?
Yes, I am somewhat surprised that the commercial loan market hasn’t come back more quickly. What happened during the financial crisis had an incredible psychological impact, and businesses are just more wary. Businesses are not as eager to hire full-time employees to grow their businesses, and as a result, there’s been a real lag. I certainly hope that the loan markets will return with vigor, but I think that’s something we’ll know more about a year from now.

Is there a way for community banks to deal with this slow market?
Obviously for any individual bank, they’re trying to find loans in their local communities, as they should. BancAlliance is designed to provide access to commercial and industrial loans that are bigger than the ordinary community bank’s lending capacity. This is the middle market where interest rates are often higher and the loan structures tend to have very robust documentation, typically with audited financials. Gaining exposure to these loans is a strategy that can work for some community banks.

How do you reduce the credit risk inherent in loan participations?
That’s an excellent question, and it goes to the whole design of the model. Alliance Partners is the asset manager that sources loans on behalf of BancAlliance, a cooperative of 190 member banks. Fourteen of those member banks serve on the board of directors of BancAlliance, with one representative from Alliance Partners. Those board member banks approve the credit policies and the underwriting standards, and they engage an independent loan review firm on behalf of the network. Additionally, loans are generally made based on the level of interest expressed by BancAlliance members in a particular loan. Rather than finding random loans and then pushing them down, we look for loans of potential interest to the network. When members do express interest in a particular loan—and no member has to take a loan if they don’t want to—then there’s a much more intense underwriting process. Only if the loan meets stringent underwriting criteria is it made available to members for their final approval. Alliance Partners also sends to members quarterly updates on the loans that they have sourced through the network. The members certainly have to re-underwrite the loans themselves, but they are not responsible for finding the loans.

So you could almost say that each loan participation is underwritten twice—once by Alliance Partners and once by each individual member?
Yes. Alliance Partners fully underwrites and itself owns a piece of every loan made available to members of BancAlliance, and members often reach out to Alliance Partners during their underwriting process to ask questions, request additional information, and also sometimes use fellow members as resources during the underwriting process.

Can community banks still compete in today’s market?
Absolutely. Community banks provide a level of service for their customers and communities that is qualitatively different from that provided by larger institutions. The roles are different. Community banks can handle complexity, but also with more of a personal touch. I think there’s a great opportunity going forward for community banks to become increasingly sophisticated, but also remain relevant to the communities and customers that they serve.

Floyd Stoner