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August 11, 2020

A Conversation with Lori Bettinger on Loan Risk in a COVID-19 World

Kris St. Martin, Director of the CBIZ Insurance Bank Program and a bank CEO/Chairman prior to joining CBIZ, recently posed a series of questions to Lori Bettinger, Co-president of Alliance Partners and President of BancAlliance. Prior to joining Alliance Partners, Lori served as the Director of the TARP Capital Purchase Program at the Department of the Treasury, focusing on the implementation, investing and restructuring cycles of the $205 billion portfolio. From 2004 to 2008, she was a financial economist with the U.S. Securities and Exchange Commission’s Division of Trading and Markets. Lori received her M.A. from the Johns Hopkins School of Advanced International Studies and her B.A. from Yale University.

KRIS: Lori, your involvement with Alliance Partners and BancAlliance puts you in a unique position to comment on loan risk in a COVID-19 world. Would you give us an overview of Alliance Partners and BancAlliance and how you serve the banking industry?  

LORI: Alliance Partners is an asset management firm that works with BancAlliance, a network of over 250 community banks located across the country. We offer a full-service lending platform with a credit-centric approach to originating, screening, underwriting, managing and servicing loans. We offer a wide range of loans and programs based on the intersection of our clients' objectives and our view of the market opportunities and challenges. 

BancAlliance is a member-driven network designed to provide community banks with access to lending services available only through membership. In particular, through its flagship commercial loan program, BancAlliance offers its members access to an efficient way to diversify their loan portfolios.

KRIS: We’ve heard a lot about the devastating impact the shutdown has had on certain industries, including hospitality, travel, retail and office rentals. What are some lesser talked about sectors or sub-sectors that your underwriting team is closely monitoring?

LORI: We’ve been keeping an eye on companies that serve the education market – whether contractors to public school districts or retail companies active on college campuses. It’s fair to say that of all the risks contemplated during the underwriting process, a wholesale closure of public school districts across the county was not contemplated! In addition, we’re keeping an eye on certain retail sectors that are impacted by various factors aside from just general consumer demand, such as companies that target the professional apparel market. We’re also very focused on the fitness industry, as clearly many gyms have been greatly affected by the shutdown. Also, who would have thought that during a pandemic so many healthcare companies would be at least temporarily adversely affected due to the cessation of many medical procedures?

KRIS: Do you see any similarities or differences between the real estate crash of 2010 and the current COVID-19 shutdown?

LORI: Thankfully, not yet. Financial institutions appear to be in a stronger capital position going into this downturn and currently seem well-positioned to weather this extremely challenging environment. In addition, today we have a financial crisis that is clearly precipitated by a health crisis, which is quite different from the earlier crash. I do worry that if the recession persists, we will certainly see ripple effects in the commercial real estate market, which could cause challenges for the banks most active in that sector, but still believe that the banking industry will prove resilient. 

KRIS: Many banks are reporting that loan demand is significantly down today. Where do you see opportunities for making loans?

LORI: There are clearly some companies that are in businesses that have done well through the crisis – grocery stores, food suppliers, and certain service companies that facilitate remote working and virtual events. While I mentioned that some healthcare companies have suffered temporary disruptions to their businesses, others have clearly flourished during this time. The challenge with any borrower is feeling confident in the ability to underwrite cash flows during a time of such volatility, when the market seems to change by the week (if not by the day). 

KRIS: There were many non-bank companies that were selling loan participations in the early 2000s, with many of the loans being real estate development in nature. What went wrong with that model?

LORI: With real estate, it is so important to understand a particular market in detail; it can be a challenge to underwrite real estate loans without a deep understanding of the dynamics of a particular market. In the past, some of the participation loans that caused serious issues for community banks were focused on real estate, and it may have been difficult for all participants in a loan to fully underwrite the risks if they were not present in that specific market. 

With cash flow lending, financing is typically provided to fund middle-market businesses with approximately $10 to 75 million in EBITDA. To underwrite these types of loans, you must understand their business model and how the company generates the cash flow necessary to service the proposed debt. The physical location of a company is less important during underwriting than a thorough understanding of its business, which makes the underwriting easier to do from a remote location (so to speak).

KRIS: Thanks for your time, Lori. I know our readers are appreciative of your insightful commentary.

If you are interested in more information about Alliance Partners, don’t hesitate to reach out to Lori at lbettinger@alliancepartners.com or 301-232-5444.

If you are interested in engaging in a thoughtful conversation or providing a guest article for our quarterly newsletter on issues impacting the banking and financial sectors, please connect with Kris St. Martin at kstmartin@cbiz.com or 763-549-2267.

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