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Today’s Ground Rules for Community Banks in Accessing Middle Market C&I and Consumer Lending
September 2015
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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 thethree current lending platforms was selected. Sample loans are presented for illustrative purposes only to provide examples of the types of loansavailable through the BancAlliance network. BancAlliance members may or may not own these sample loans at this time. The specific loans identifieddo not represent all of the loans recommended to BancAlliance members. To request a complete list of all recommendations made within the past year,contact info@bancalliance.com.
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.
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Presented By
BancAlliance.comWashington, D.C. Office | 4445 Willard Avenue Suite 1100 | Chevy Chase, MD 20815
Main:(301) 232‐5440 | Email: info@bancalliance.com
301.232.5416 | wgore@alliancepartners.com
Wayne GoreDirector, 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.
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MEMBERSHIP DEMOGRAPHICS
Members typically range in size from $200MM to $10B in assets
BancAlliance is an exclusive network with
200+ MEMBERS
AL1
AZ2
CA13
CT6
FL11
GA5
IL17
IN6
IA2
KS1
LA6
DE1
MA20MI
3
MO6
NJ7
NY4
OH3
OK4
PA10
RI1
TX9
WI1
KY2
ME1MN
4
MT1
NE11NV
1
NH2
NC10
OR3
SC3
TN1
UT1
VA11
WA3
WV1 DC
2
ID1
MD4
WY
ND
SD
CO
NM ARMS
VT
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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
New Lending Platforms for Community Banks
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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‐$10BN in total assets1Represents banks registered as of May 10, 2015.Source: SNL. Represents medians for Q4 data.
Trends:‐ Decreased Return on Average Equity
‐ High real estate concentrations, even post crisis
‐ Excess liquidity‐ Long‐dated assets
Some Community Banks Have Chosen to Diversify into Corporate C&I via Leveraged Loans
11%
8%
10%
7%
0
2
4
6
8
10
12
2004 2014(%
) National Avg. Attendees Avg.
74%
79%79%
86%
65
70
75
80
85
90
2004 2014
(%) National Avg. Attendees Avg.
5%
15%16%
26%
‐
5
10
15
20
25
30
2004 2014
(%) National Avg. Attendees Avg.
28% 27%27%
26%
20
22
24
26
28
30
2004 2014
(%) National Avg. Attendees Avg.
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Definitions will vary, but there are typically a few common themes:– Proceeds used to purchase companies outright, acquire additional companies to be merged with an existing company, or for capital distributions
– Total Debt divided by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) exceeds 4X; or Senior Debt divided by EBITDA exceeds 3X; or other defined measure appropriate for a particular industry
– Not a uniform market Essentially two categories:• Broadly Syndicated Leveraged Loans• Middle Market Leveraged Loans
What is a Leveraged Loan?
Why are Community Banks Attracted to this Market?– Access to diversified pool of C&I loans– Can provide better risk‐adjusted return versus in‐market C&I– Typically floating rate, priced off Prime or LIBOR (“L”)
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0
50
100
150
200
250
300
350
400
450
2004 YTD 2014
Billion
s ($)
Middle Market
Broadly Syndicated
Broadly 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 & PoorsLoan State Report.
98%
90%
10%
2%
New Issue Activity
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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, recapitalizations
Commercial 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
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Anatomy of a Middle Market C&I Loan1
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 1st Mortgage• 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.
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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
RiskMiddle Market C&I Loans
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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.
Source: Wall Street Journal
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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\2
Marketplace Lenders
SMB Credit
Consumer
Purchase Financing
All Shapes, All Sizes
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Drivers of the ShiftMost 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 BankersNarrower customer relationships (implicitly inviting the big banks in)
Loss of earning assetsLoss 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.
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The Opportunity
Generate Loan Growth and DiversificationHold a diversified portfolio of high FICO score consumer whole loans consistent with strict underwriting guidelines.
Deliver a First Rate Customer ExperienceProvide 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 RequiredLending 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%
* Performed by MTG Risk, LLC using Lending Club data.
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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.
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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
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Deep Expertise Alliance Partners offers a strong team drawn from industry leading firms with expertise specific to BancAllianceloan 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.
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Loan Screen Initial Asset Profile (IAP) Credit CommitteeMemo (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, industry, recent bankruptcy, quality of management,
headline risk
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
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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.
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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
BankCustomer
Community Bank
BancAlliance
Lending Club
Proven origination and servicing technology High‐quality, validated underwriting models Superior customer service/experience All loans originated through regulated bank
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 User‐friendly online experience
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