Lender Life


A pooled loan for U-Haul International draws two dozen community banks nationwide

By Phil Britt

Could the opportunities and appetites for engaging in large commercial participation loans be returning for community banks?

If a $100 million loan package arranged this past winter for U-Haul International Inc. with funding from nearly two dozen community banks from 17 states is any indication, the answer could be yes, indeed.

Last fall 23 community banks—working through MidFirstBank, a $9.6 billion-asset bank in Oklahoma City, as the lead creditor and loan administrator BancAssets LLC in Austin, Texas, which also conducted much of the due diligence for the participating banks—joined together to fund a $100 million loan for Amerco Inc., the parent company of giant U-Haul International Inc. in Phoenix. The Amerco loan was used to refinance an existing loan used for working capital for U-Haul. (A second $100 million participation loan for Amerco was expected to close by early 2014 with many of the same community banks involved in the company’s original participation loan planning to help fund the second loan.)

For Amerco, the participation loan provided the opportunity to work with local financial institutions to support many of the communities where the company does business, says David Hill, CEO of BancAssets, which specializes in brokering participation loans to community banks. “It’s a great story about economic development and about how they are helping to keep local dollars at home.”

“We found that during the last meltdown that a strong loan agreement and participant agreement is critical.”
—David Dalton, Kennett National Bank

A bitter taste lingers for many community banks that joined out-of-market participation loans that went sour during the Wall Street financial downturn of 2008-2010. Addressing those jointly funded loans created an array of serious and messy problems, exposing the more complex due diligence, risk and loan management, and resolution process involved with such loans. Industrywide activity in participation loans, which briskly boiled during the boom years as many community banks looked outside their marketplace for new and diversified opportunities, hasn’t rebounded since the downturn.

But that could be changing as community banks search for more profitable commercial loans such as the Amerco financing deal amid a market of cut-throat credit competition. While many community banks have been steering clear from participation loans, First Chatham Bank in Savannah, Ga., was comfortable providing $1 million toward the overall Amerco loan, says Wes Gash, senior vice president of the $400 million-asset community bank.

Although First Chatham Bank’s funding share provided a slightly lower profit margin (2.5 percent) than the bank typically seeks, U-Haul’s widely understood move-it-yourself equipment rental model helped the bank join the underwriting, Gash says. The publicly traded company’s transparent creditworthiness and the easy availability of its financial documents also made underwriting the bank’s share of the deal worthwhile. BancAssets provided the necessary documentation to the participating banks through a secure portal for all participating lenders.

Advice for Future Participations

Originating a $100 million participation loan for Amerco Inc., the holding company for U-Haul International, provided the community banks involved with valuable insights for others considering whether to re-engage in out-of-market joint lending again. Here’s what those community banks say:

  • Become as thoroughly familiar with the company seeking the loan and its financial condition as you would for any other commercial loan. If a borrower is a large, publicly traded company like Amerco, then a large amount of public information will be available for due diligence. However, if the borrower is not a publicly traded company, more time and resources will be needed to conduct proper due diligence.
  • Understand the lead bank’s underwriting process and the level of credit risk it finds acceptable, which might be different from your community bank’s own credit standards. Make adjustments, if necessary, to properly evaluate the loan. Similarly, understand how your community bank’s process for booking the loan might be different from that of the lead bank.
  • Don’t necessarily shy from the loan if your community bank’s initial knowledge of participation loans is limited. Ask plenty of questions. Read research on the approach your bank’s regulator takes regarding participation loans, a step that can include talking with your bank’s examiners.

Still, extra due diligence was necessary for the banks involved in the Amerco loan, which couldn’t evaluate the company’s physical assets beyond looking at some of its local facilities, says David
Dalton, vice president with Kennett National Bank, a $100 million-asset bank in Kennett, Mo. The community bank funded $1 million toward Amerco’s first participation loan and plans to fund another $500,000 of the company’s anticipated second participation loan.

Additionally, some of the community banks participating in the overall loan didn’t have experience in evaluating a big credit deal for a giant company that normally relies on Wall Street financing, admits Derek Steeley, senior vice president of First National Bank and Trust Company of Broken Arrow, Okla., which provided $1.5 million of the overall total loan package. Going through the process provided the bank with valuable insights for future participation loans, according to Steeley.

Though regulators emphasize caution and due diligence to community banks in participating in such an out-of-market loan, they also encourage community banks to remain open to such loans, despite the negative experiences of 2008-2010, Steeley says, adding that First National Bank and Trust’s officials requested a meeting with regulators before making the loan. Others said regulators didn’t have any reaction to the loan.

Even with the easy availability of financial information and the general understanding of U-Haul’s business, there is always the chance that the loan can go bad, Steeley admits. Should that happen, it would be like any other loan going bad on the bank’s books, with similar implications to First National Bank and Trust’s balance sheet and earnings.

But it’s an acceptable risk, Steeley says, adding, “We’re in the risk management business.”

“We found during the last meltdown that a strong loan agreement and participant agreement is critical,” adds Dalton. The Amerco loan agreement allows MidFirstBank, as the lead lender, to call the loan into default if the borrower becomes delinquent, he says, and it details the bank’s responsibilities to maintain current documentation on the loan.

Phil Britt is a writer in Illinois.