Many bankers find insights in reading this or that account of Apple, and how Steve Jobs and company found a way to make America crave gadgets it never knew it needed, until they were there to be had. If you are reading this on an iPad, you know well what we mean.
What sets banking and technology apart is that societies have needed funds storage and transfer, credit, investment, and trade finance just about forever. The how evolves, but the what, not as much.
As with so much of banking, the key is how a bank applies, and promotes, the basics. Take Greene County Bancorp in upstate New York. In its annual report, “Uncovering Hidden Opportunities,” the company recounts how municipal banking is one of its mainstays—sufficiently so that the company formed a subsidiary devoted solely to municipal services. One of the company’s muni banking officers is a third-generation volunteer firefighter. Working first with local fire districts, that officer developed the bank’s financing program for fire departments into a statewide business. While serving the public interest, this community bank generates tax-free income.
The five banks featured in our second annual revenue ideas report share one characteristic. They have faced the challenge of skinny spreads and other profit drains with a reemphasis on basics—sometimes by reinvigorating or reinventing activities they were already involved in, or sometimes by adapting to market opportunities.
What hidden opportunities can be found under your own roof?
IDEA #1: Making and selling Small Business Administration loans
State Bank of Countryside, $600 million-assets, Countryside, Ill.
As a Chicago-area commercial real estate lender (CRE), State Bank “pretty much had our lunch handed to us in 2008-2009,” says Tom Boyle, vice-chairman. As things stabilized and the bank moved further away from clean-up mode, management sought greater diversification. One successful effort over the past 18 months has been making SBA guaranteed loans, and selling the 75% guaranteed portion to investors through the SBA broker network.
The bank realized this type of lending requires experienced specialists, rather than traditional bankers. It began with a single lender, who knew the business and had family ties to the SBA brokerage world. Bank and lender had some cultural adjustments to make. Some deals brought to the loan committee initially didn’t fly, for example. Boyle says that while the SBA guarantee is there to give lenders confidence, “we are still holding 25% of the credit.” The bank, acting conservatively, prefers these loans to be subject to its mainstream credit standards. An understanding developed, and some $10 million in new credit has been brought in.
During most of the time the bank has been selling guaranteed pieces, they have commanded a premium of around 15%, says Boyle. Though that’s fallen somewhat, it’s still profitable. In addition, nearly every deal has been a new customer. The bank requires SBA borrowers to bring all their operating accounts to Countryside, so it benefits from new deposits. The bank’s relationship bankers, in turn, call on these new customers to develop even more connections.
A second experienced SBA lender was hired recently, and Boyle says the new line of business has given the bank a nice return, comparable to the good days of CRE. Many deals have involved smaller hotel chains in the metro Chicago area, which gives the bank a bit of familiarity. A benefit of the SBA effort: While the bank is booking new business and building new customer relationships, it need only hold capital against the unsold portion of the loans.
IDEA #2: Doubling down on home loans
First State Bank of St. Charles, Mo., $263.5 million-assets.
With Dodd-Frank taking shape, Executive Vice-President Luanne Cundiff says her bank stood at a crossroads. Like many community banks, it had to decide whether to stay in the mortgage business or get out.
In 2010, when the St. Louis-area bank began pondering this choice, many specifics of the Consumer Financial Protection Bureau’s eventual landmark regulatory package were yet to be seen. But things didn’t promise to be easy. Getting the bank’s operation up to speed would take time, expense, and effort—but there would be an opportunity. Management decided to not only delve deeper into mortgages, but to make a side business of serving those banks who could no longer justify continuing as direct lenders.
So First State’s effort began with the purchase of the mortgage operation of another area bank that was well-known to be troubled and later failed. The mortgage division was sound, but had lost all but one of its mortgage-purchasing investor relationships. The division acquired by First State had 18 employees. Today, 120 employees enable First State Bank Mortgage to serve the St. Louis, Kansas City, and Lake Ozark, Mo., markets with a combination of in-branch lenders and dedicated mortgage loan origination offices. It now enjoys relationships with 18 investor organizations. With some investors deciding to get out of acquiring mortgages, First State saw the value of being able to work directly with Fannie Mae, when necessary, and, since January, has been able to do so.
Besides making and servicing its own loans, the mortgage division serves 22 institutions through its Community Mortgage Banking operation. This represents 10% of the division’s mortgage pipeline, by dollar volume. “We’re in the beginning phases of serving other banks,” says Cundiff.
One major organization change: outsourcing some servicing elements to Dovenmuehle Mortgage, Inc. It handles past dues, loss mitigation, and efforts to help troubled borrowers maintain their payments, and homes.
As the new regulatory scheme came in, management decided to make non-QM (Qualified Mortgage) loans, so long as they passed CFPB’s ability-to-repay standards. As a result, not all loans originated are sold to the secondary market. Between 10%-25% of flow is held in portfolio—most being ARMs that don’t meet Fannie Mae guidelines.
“We have always felt that those who can figure out the new regulatory system would be the ones that will be able to service their customers,” Cundiff says, adding that the bank sees this as a public service. Without it partnering with local banks in some small communities, “I don’t know what would have happened with mortgages in those towns.”
IDEA # 3: Reinvigorating in-store banking
Tri Counties Bank, $2.6 billion-assets, Chico, Calif.
Before becoming a banker, Richard Smith, president and CEO, spent 15 years in the wholesale grocery business and then a short time at Safeway before he came to Tri Counties to start its in-store branching effort. His motto about the in-store technique: “Regardless of where people opened their accounts, they all shop.” His point: Who typically visits a bank’s branches? Its customers. But who walks by an in-store branch? Everybody’s customers.
Tri Counties, which has outgrown its name (it now serves 23 counties), began its in-store strategy in 1994. The bank has since adjusted the offices’ look and feel, but one-third of its locations remain in supermarkets or Walmarts.
The purpose of these branches is convenience, but to Smith, that word means more than a place to cash a check, find an ATM, or make a quick deposit. Tri Counties’ in-store branches are full-service and offer consumer and commercial lending, mortgage loans, and investments. Five or six employees man the offices, which are open every day.
Early on, to prove the installation was a bank, tellers were featured prominently. Now, with the concept established and teller services representing the least profitable aspect of these offices, teller service has been de-emphasized.
In some markets, like Sacramento, the bank maintains mostly in-store branches (ten versus two freestanding). In such cases, the ubiquity of the store locations “makes us look larger in size than we really are,” says Smith. “We could not have expanded as we have if we had opened ten traditional offices. It would have been prohibitively costly.”
A location that doesn’t work doesn’t stay in that store for long. Contracts are negotiated to allow the bank such flexibility. Here’s part of what Tri Counties looks for:
• Traffic. The bank likes to see store customers who visit at least 2.2 times weekly. That’s why you won’t find Tri Counties in a Costco—people tend to make pilgrimages there, not regular shopping trips.
• Demographics. You can’t ignore the types of customers who generally shop at a location. “Not all Walmart shoppers would make good bank customers,” Smith explains, so the bank is selective in which stores it selects.
• Goals. Increasingly, the bank is seeking conversations with prospects, not just the opportunity to provide transactional service. This is where many experts predict the future of branches lies. “It’s still hard to do everything on your cell phone or your computer,” says Smith. He believes in-store offices will continue to pay off for at least a decade.
Some say in-store branches represent a good way to reach women. But growth of accounts is the biggest benefit of this strategy, Smith says, adding that plenty of men shop. “And business people go to the grocery store too.”
One last tip: “One of the best marketing tools in a store is its P.A. system. We contract for its use.”
IDEA #4: Look afresh at Home Equity Lines of Credit
Peoples Bank SB, $693.4 million-assets, Munster, Ind.
Regulators and others have been concerned about HELOCs, but the worry is about HELOCs entering the repayment stage, not new ones. Older loans got caught in the property value down-trend during the crisis.
Benjamin Bochnowski, executive vice-president and COO of Peoples Bank, says the publicly held savings institution has been looking at ideas to boost profitability as it seeks to remain independent. One growth opportunity it has pursued for about a year is HELOCs, with an emphasis on making these loans to first-mortgage customers.
HELOCs aren’t new to the bank. Bochnowski characterizes the renewed effort to promote them as a refocusing, coming as part of an overall revitalization of the bank’s sales efforts and review of profit-making opportunities. The bank also is building its commercial lending capabilities.
Now, HELOCs represent a good opportunity for homeowners. “Many consumers forgot about HELOCs after the crisis,” Bochnowski says. “For the first time in a while, there are credit needs in our communities.” Rates are still historically low, making this credit much cheaper than credit card debt. In addition, home values in the bank’s markets have been rising again, opening up more equity to borrow against. The bank approaches this opportunity conservatively, not seeking to lend at high loan-to-value ratios.
In the last year that the bank has been reemphasizing HELOCs, outstanding balances have risen by 10%. Bochnowski attributes growth to a mix of selling—bank effort—and buying—customers asking for the credit lines. For 2014, the bank is projecting 15% growth.
IDEA #5: Serve niche business lending specialties
Opus Bank, $3.7 billion-assets, Irvine, Calif.
Stephen Gordon built this company from a bank of under $300 million that he and an investor group bought in 2010. They expanded it through acquisitions into a three-state regional player. Expansion through much of California and into Arizona and Washington was accompanied by an effort to develop niche business lending and finance strategies facilitated by hiring experts from other institutions. These experts bring the bank’s core business services, and specialized approaches, to customers in the healthcare and technology fields. The bank also does CRE finance and structured finance, and recently launched a merchant banking operation, providing a range of services.
Healthcare illustrates the potential benefits of specialization. Credit needs include practice acquisition and expansion, partnership financing, equipment finance, and other business credit needs. Deals have reached past $5 million.
Gordon, an investment banker with Sandler O’Neill prior to entering banking, pays up when he launches a niche credit specialization. He is looking for a particular kind of banker. “I gauge people on how hungry they are,” says Gordon, the bank’s chairman, president, and CEO. “I can’t teach someone to be driven, or to have the gift of gab. But I can teach them banking.”
Many of the niche operations are headed by executives with titles that reflect their expertise and authority. Quick turnaround of decisions is stressed, though the bank relies on a centralized credit operation to handle detailed analysis.
“It’s possible to have an entrepreneurial environment and still to make sure you are managing performance of assets,” says Gordon. To date, specialized lending niches account for about 40% of the bank’s lending. “These aren’t even mature divisions at this point,” he says, “and they are already significant contributors to profitability.”