Today’s Ground Rules for Community Banks in
Accessing Middle Market C&I and Consumer Lending
June 2015
FORWARD-LOOKING STATEMENT AND OTHER IMPORTANT DISCLOSURES
AP Commercial LLC, is a wholly owned subsidiary of Alliance Partners and is the SEC-registered investment adviser referred to herein as “Alliance Partners.” Registration with the SEC or with any state securities authority does not imply a certain level of skill or training.
Information contained herein may include information with respect to prior investment performance. Information with respect to prior performance, while a useful tool in evaluating Alliance Partners’ investment activities, is not necessarily indicative of actual results that may be achieved for unrealized investments.
This presentation is for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product, or service of Alliance Partners.
Unless otherwise noted, information included herein is presented as of December 31, 2014. This presentation is not complete, and the information contained herein may change at any time without notice. Alliance Partners does not have any responsibility to update the presentation to account for such changes. Alliance Partners makes no representation or warranty, express or implied, with respect to the accuracy, reasonableness or completeness of any of the information contained herein, including, but not limited to, information obtained from third parties. Past performance is no guarantee of future returns.
The information contained herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations.
Note 1: Sample loans were selected from all loans presented to BancAlliance members through September 30, 2014, and one loan from each of the three current lending platforms was selected. Sample loans are presented for illustrative purposes only to provide examples of the types of loans available through the BancAlliance network. BancAlliance members may or may not own these sample loans at this time. The specific loans identified do not represent all of the loans recommended to BancAlliance members. To request a complete list of all recommendations made within the past year, contact [email protected].
Note 2: The portfolio summary represents the portfolio of loans offered by Alliance Partners to BancAlliance members, which is generally representative of the portfolio held by BancAlliance members in aggregate as of March 16, 2015. Each loan in the portfolio is given equal weight, irrespective of size of the loan.
3
Presented By
BancAlliance.com
Washington, D.C. Office | 4445 Willard Avenue Suite 1100 | Chevy Chase, MD 20815
Main:(301) 232-5440 | Email:
301.232.5416 |
Wayne Gore
Director, Alliance Partners
Wayne is a Director at Alliance Partners. Prior to joining Alliance Partners, Wayne held
leadership roles in the Financial Institutions Group with McKinsey & Co. and served as
Managing Director at the Corporate Executive Board. Previously, Wayne was an investment
banker with Merrill Lynch and Goldman Sachs as a member of the Mergers & Acquisitions
teams. He has also served on the Board of a non-U.S. community bank during its growth
from $200 million to $1.1 billion in assets. Wayne received his B.A. from Princeton University
and his J.D. and M.B.A. from Columbia University.
1.
The Business Case for Middle Market C&I in
Community Banking
2.
Reclaiming Market-share in Consumer Lending
3.
An Overview of the BancAlliance Platform
–
Credit Selectivity Priorities and Approval Process
–
Credit Management and Loan Portfolio Objectives
5
74% 79% 69% 77% 40 50 60 70 80 90 2004 2014 (%) National New York Attendees
Business Drivers for Prudent Diversification
Return on Average Equity
Real Estate Concentration
Cash & Securities as % of Assets
Assets in 5+year Maturities
National medians represent banks with $200MM-$10BN in total assets 1Represents banks registered as of May 10, 2015. Source: SNL. Represents medians for Q4 data.
Trends:
- Decreased Return
on Average Equity
- High real estate
concentrations,
even post crisis
- Excess liquidity
- Long-dated assets
Some Community Banks Have Chosen to Diversify into Corporate C&I via Leveraged Loans
1 11% 8% 8% 9% 5 6 7 8 9 10 11 12 2004 2014 (%) National New York Attendees
5% 15% 21% 29% 5 10 15 20 25 30 35 2004 2014 (%
) National New York Attendees
28% 27% 39% 32% 20 25 30 35 40 2004 2014 (%
Definitions will vary, but there are typically a few common themes:
–
Proceeds used to purchase companies outright, acquire additional
companies to be merged with an existing company, or for capital
distributions
–
Total Debt divided by EBITDA (Earnings Before Interest, Taxes,
Depreciation, and Amortization) exceeds 4X; or Senior Debt divided
by EBITDA exceeds 3X; or other defined measure appropriate for a
particular industry
–
Not a uniform market
Essentially two categories:
•
Broadly Syndicated Leveraged Loans
•
Middle Market Leveraged Loans
What is a Leveraged Loan?
Why are Community Banks Attracted to this Market?
–
Access to diversified pool of C&I loans
–
Can provide better risk-adjusted return versus in-market C&I
7
0 50 100 150 200 250 300 350 400 450 2004 YTD 2014 B ill io n s ($) Middle Market Broadly SyndicatedBroadly Syndicated Leveraged Loans vs. Middle Market Loans
Benefits of Middle Market
- Typically have financial
covenants
- Low duration to address
interest rate risk
Benefits of Large Corporate
Market
- Market typically has
liquidity
- Fortune 1000 companies
- Low duration to address
interest rate risk
Broadly Syndicated
Corporate Market
Statistics
*
•
EBITDA above
$50MM
•
Target loan size:
$250MM - $1BN+
Traditional Middle
Market Statistics
*
•
EBITDA of $50MM
or less
•
Target loan size:
$20 - $250MM
*Data as of Sep 30, 2014. Source: Standard & Poors Loan State Report.
98%
90%
10%
2%
New Issue Activity
Middle Market Commercial Lending:
Overview of a Subset of Middle Market C&I Loans
Leveraged Lending/Corporate Finance
Equipment Finance
Healthcare Real Estate
Use of Proceeds
Commercial loans to private equity-backed companies to finance growth, acquisitions, recapitalizationsCommercial loans and leases to finance essential use capital equipment purchases
Commercial loans to finance assisted living & skilled nursing facilities and other senior housing-related operators
Loan Attributes
• Facilities of $50 – 250 million• Senior secured
• Variable rate
• Facilities of $5 – 50 million
• Senior and hard asset secured
• Fixed rate
• Facilities of $20 – 250 million
• Senior and real estate secured
• Generally variable rate
Annual Segment
Market Originations
(Middle Market Only)
$20 billion $50 billion $15 billion
Key Market Players
• GE Capital• Madison Capital
• National and regional banks (JPM, Wells Fargo, Barclays, Deutsche, BMO, Credit-Suisse)
• Specialty banks (CIT, CapitalOne)
• GE Capital
• National and regional banks (Wells Fargo, Key, PNC)
• Specialty banks (CIT, CapitalOne)
• GE Capital
• Healthcare REITs
• Specialty banks (CIT, CapitalOne, Private Bank)
• Selected national and regional banks
9
Anatomy of a Middle Market C&I Loan
1
What does Company do?
Provides outsourced janitorial
services to retail and grocery
customers at more than 14,000
stores across all 50 states and
Canada.
Credit Snapshot
*:
•
Senior Secured Term Loan
•
7 Years
•
4.77%, with 1% L Floor
Opportunity:
Lend to a market leader with
customer relationships avg. 10+
years
What does Company do?
One of the largest crane rental
companies in North America
with a diverse fleet of over
3,000 units of lift equipment
capable of serving a broad
range of market sectors.
Credit Snapshot
*:
•
Equipment Secured TL
•
47 months
•
3.09%
Opportunity:
One of largest crane rental
companies in the US with strong
collateral and amortization
What does Company do?
159-unit assisted living and
memory care facility that
recently completed an
expansion project, increasing
units from 126.
Credit Snapshot
*:
•
Secured by 1
stMortgage
•
5 years
•
3.32%, with 0.75% L Floor
Opportunity:
Solid operating history in a
strong market with real estate
collateral
Many middle
market C&I
companies offer
a product with a
national
footprint
Corporate Finance
Equipment Finance
Healthcare Real Estate
*This yield is net of advisory fees and expenses paid to Alliance Partners, which can range from 50-150 basis points.
Targeted Benefits for Community Banks
For all the
aforementioned
reasons, we
recommend
community banks
dedicate a portion of
their lending activity
toward middle
market C&I loans
Balance Sheet
Diversification
Prudent Deployment of
Securities & Liquidity
Asset Diversification
with Stable Borrowers
Potential for
Meaningful Return on
Equity
Floating Rate Product,
Mitigate Interest Rate
Risk
Middle
Market
C&I
Loans
11
The Consumer Finance Challenge and Opportunity
Due to lack of
independent scale to
compete with the
largest banks in
consumer lending,
community banks
have lost market share
in a $1.3 trillion
marketplace they
once dominated.
Real Estate Merchant Cash Advance Pay Day Education Financing
Explosion of New Lenders: Marketplace Lending
Marketplace Lending Developments and Opportunities_vFinal.pptx\31 AUG 2014\3:25 PM\2Marketplace Lenders
SMB Credit Consumer Purchase Financing13
Drivers of the Shift
Most community
banks are unable to
compete
independently due to
economies of scale
across the business
including risk
analytics, advertising,
ops, compliance, and
servicing
The Consumer Finance Challenge and Opportunity
Implications for
Community Bankers
Narrower customer
relationships
(implicitly inviting the
big banks in)
Loss of earning assets
Loss of diversification:
However,…
Community banks enjoy superior customer relationships (consumers
would much prefer to do business with them over bigger banks)
Community banks enjoy superior cost and stability of capital
Source: SNL data, Banks between $200MM and $10BN in total assets. As of September 30, 2014.
The Opportunity
Generate Loan Growth and Diversification
Hold a diversified portfolio of high FICO score
consumer whole loans consistent with strict
underwriting guidelines.
Deliver a First Rate Customer Experience
Provide access to a borrower-friendly,
pre-approved loan with competitive rates.
Trusted Compliance Management Oversight
With expertise in regulatory and compliance
issues, BancAlliance provides comprehensive
program oversight.
Limited Investment Required
Lending Club provides marketing, services loans
and creates the technology customer-interface.
Potential for Attractive Risk-adjusted Returns
Consumer Loan Program in Partnership with Lending Club
Independent RISK Analysis*
Average Borrower FICO 704 - 731 Average Borrower Debt-to-Income 16.0% - 18.0% Average Borrower Income 75,000 - 87,000
Gross Rates 7.0% - 13.4%
Charge Off / Prepay Impact 2.1% - 4.8% Lending Club Servicing Fee 0.8% - 1.0% BancAlliance Servicing Fee 0.4% - 0.6%
Weighted Average Estimated Net Yield 4.9% - 7.0%
15
An Overview of the
BancAlliance Platform
Executive Overview
The BancAlliance network is a shared lending
platform that provides its community bank
members with a broad array of loan programs
and services, including sourcing, underwriting
and managing loans that might otherwise be
inaccessible.
Our mission is to enable our members, the banks
that direct our activities, to prudently diversify
into high-quality commercial, consumer and
other loans in a manner consistent with the
highest commercial and regulatory standards –
without changing the nature or mission of the
traditional community bank.
17
How the Network Operates
BancAlliance is a Maryland
non-stock corporation,
governed by a member elected
Board of Directors
Eligible US banks have the opportunity
to join the network by executing
membership documentation.
Members elect the Board of Directors,
who adopt and maintain
BancAlliance’s oversight policies.
Alliance Partners is an SEC-
registered investment adviser
and serves as the asset manager
for BancAlliance
Alliance Partners is responsible for
identifying opportunities for the
network, for negotiating and
managing partnerships, and for
sourcing, underwriting and
approving all loans and loan
programs prior to referring them to
the network.
BancAlliance is
supported and
managed on a
day-to-day basis
by Alliance
Partners
MEMBERSHIP
DEMOGRAPHICS
Members typically range in size from $200MM to $10B in assets
BancAlliance is an exclusive network with
200+ MEMBERS
AL
1
AZ
2
CA
13
CT
6
FL
11
GA
5
IL
17
IN
6
IA
2
KS
1
LA
6
DE
1
MA
20
MI
3
MO
6
NJ
7
NY
4
OH
3
OK
4
PA
10
RI
1
TX
9
WI
1
KY
2
ME
1
MN
4
MT
1
NE
11
NV
1
NH
2
NC
10
OR
3
SC
3
TN
1
UT
1
VA
11
WA
3
WV
1
DC
2
ID
1
MD
4
WY
ND
SD
CO
NM
AR
MS
VT
19
Deep Expertise
Alliance Partners offers a strong team drawn from industry leading firms with expertise specific to BancAlliance loan programs. In addition, members of the Alliance Partners management team have had decades of experience managing lending businesses through a variety of credit cycles. The team is in service to BancAlliance members.Specialized Focus
Alliance Partners focuses on identifying the specific challenges facing community banks and developing innovative solutions that advance the interests of BancAlliance members.Strong Compliance Framework
Alliance Partners recognizes the critical importance of regulatory compliance and designs the BancAlliance loan programs and services to operate in a manner consistent with regulatory expectations. To the extent possible, Alliance Partners seeks to minimize the regulatory challenges and costs imposed on members.Alignment of Interests
The BancAlliance Board of Directors ensures that the interests of members and Alliance Partners are aligned.Fiduciary Duties and Oversight
Alliance Partners is a registered investment advisor subject to oversight and examination by the SEC.The Asset Manager
Alliance Partners is the investment advisor to
BancAlliance members. Alliance Partners deploys a
specialized orientation and set of resources to help
members meet their asset and return objectives.
Loan Screen
Initial Asset Profile (IAP)
Credit Committee
Memo (CCM)
Preliminary Evaluation by
AP Lenders
Detailed Review by AP
Credit Team
Formal Evaluation by AP
Credit Committee
Loans Approved by AP
Credit Committee
Loans rejected due to
creditworthiness of borrower,
capital structure, covenants,
Loans rejected due to financial
performance, customer /
supplier concentrations,
competitive positioning, low
recovery value, cyclicality, lack of
clear lien on assets
Loans rejected due to
commodity / regulatory /
legislative risks that can’t be
mitigated, loan structure,
execution risk, business
valuation, courses of exit
Less than 20% of all loans
screened by Alliance
Partners have been
recommended to the
BancAlliance membership
Selective and Disciplined Lending
Loan Origination Sources
Third-Party
Origination
Select Direct Originations
Partnerships
Club Lending
Member Bank
Referrals
21
Commercial Loan Program: Portfolio Summary
Business Services, 11.8% Capital Equipment, 3.2% Consumer Goods, 5.4% Consumer Services, 2.2% Education, 2.2% Environmental, 1.1% Financial Services, 4.3% Food & Beverage,
8.6% Healthcare, 8.6% Logistics, 6.5% Manufacturing, 33.3% Media, 3.2% Mining, 1.1% Packaging, 1.1% Software, 5.4% Technology, 1.1% Automotive, 1.1%
By Industry
Corporate
Finance
Our Corporate Finance Team provides cash flow-based financing alongside experienced private equity sponsors to fund growth, acquisitions, expansion, or recapitalizations of middle-market businesses with $10-75 million in EBITDA. Our Corporate Finance Team typically sources senior term and revolving debt facilities ranging in size from $40-250 million and secured by all of the assets and stock of the business. These loans generally have variable interest rates.
Healthcare
Real Estate
Finance
Our Healthcare Real Estate Finance Team provides first mortgage loans to dedicated healthcare facilities alongside operators with demonstrated successful track records with similar facilities. We focus on financing skilled nursing and senior housing
properties, often where the operator is enhancing or repositioning the facility. Our Healthcare Real Estate Finance Team typically sources senior term debt facilities ranging in size from $10-50 million and secured by a mortgage on the real estate as well as a pledge of any contractual lease payments related to the underlying property. These loans may have either fixed or variable interest rates.
Equipment
Finance
Our Equipment Finance Team provides equipment-secured loans to middle-market businesses. We focus on financing the acquisition of essential use
equipment collateral that is tied to the growth and profitability of the business. Our Equipment Finance Team typically sources senior term debt facilities and capital leases ranging in size from $5-50 million, secured by specific equipment collateral. These loans generally have fixed interest rates.
Asset-based
Finance
Our Asset-based Finance Team provides asset-based loans to non-bank finance companies and similar businesses. We focus on financing financial assets and contracted streams of cash flows. Our Asset-based Finance Team typically sources senior term debt facilities ranging in size from $5-100 million and secured by the specified assets.
BancAlliance has teamed up with Lending Club, one of the world’s largest marketplace lenders,
to create a model that empowers community banks to compete in consumer lending.
Consumer Loan Program
Bank
Customer
Community Bank
BancAlliance
Lending Club
Proven origination and servicing technology
High-quality, validated underwriting models
Superior customer service/experience
Strengthens customer relationships
Low marginal costs
Portfolio diversification
Increased interest and fee income
Program design, oversight and due diligence
Compliance management
Performance analytics
Portfolio reporting
Lower debt burden and cost savings
Improved FICO score
Ability to obtain consumer loan through trusted community bank
Washington, D.C.
4445 Willard Avenue, Suite 1100
Chevy Chase, MD 20815
Telephone: (301) 232-5400
