COMMUNITY BANK OF THE FUTURE: WHAT WILL IT LOOK LIKE?
Doctors, N.Y. cabbies, and “green”—three ways banks sample a niche strategy. Regulators are a challenge
BY STEVE COCHEO, EXECUTIVE EDITOR,
This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
Jim Gray could be described as a “serial banker.” He’s been with, and started, a string of banks. He had sold one with a trust specialty, a few years back, with many doctors and dentists as clients. When some of those professionals came to Gray and his team in 2003 with the idea to start a commercial bank that would serve medical clients, he was intrigued.A
Today, Beach Business Bank, a $282 million-assets institution in Manhattan Beach, Calif., maintains a service-marked brand, “The Doctors Bank,” that serves practitioners both locally and nationally. This division, representing about 15% of the parent bank’s business, has proven a strong source of core deposits as well as some solid loans.
The Doctors Bank serves as a latter-day, limited example of a strategy once pushed as the future of the community bank—the niche bank. Some of them succeeded, some flopped. Will it fly now?
Niches to the right degree
Gray never had in mind to wholly specialize in doctors’ needs. “Regulators are never thrilled about niche banking,” he says. Management assured regulators that medical clients were a specialty only.
In the wake of troubles arising from concentrations in commercial real estate and other areas, business plans that involve anything approaching a heavy-duty niche have been nonstarters with Washington, particularly for new banks or banks under close regulatory scrutiny, according to Don Musso, head of the FinPro consulting firm.
Musso has found that regulatory objections must be negotiated through de-emphasis of goals that put too many chips on any niche. In the name of diversification, regulators won’t approve strategies that rely too much on serving a narrow business segment, a particular ethnic group, a specific geography, or a single product line.
“Regulators would like you to be everything to everybody,” says Musso. “They’ve more or less grounded everybody into a traditional community bank focus.”
There is wiggle room, however. Musso and associate Scott Martorana have found that, when a sufficiently strong case is made, regulators will allow some nichemanship. Musso says his firm is using a 25% share of business as the rule of thumb for guiding clients.
“There’s no hard and fast definition,” warns Musso. “Every single case is a feeling-out process. Often, even they can’t articulate it,” he says, referring to regulators.
We looked at three young institutions, two in business now and one in the midst of evolving, for a demonstration of how nichemanship, while no panacea, can help.
In New York, “yellow” is mellow
Riddle: What’s yellow, has wheels, and carries something a lender can love? Answer: a New York City taxi.
Official city cabs are rationed by issuance of “medallions”—metal plates authorizing the vehicle to pick up hails. Costly, they represent a license to do business and need to be financed. That has been the province of a handful of specialized lenders, including credit unions. And now it is also a moderate niche for Madison National Bank, based in Merrick, on New York’s Long Island, not far from New York City.
Michael Puorro, co-chairman and president of the $305 million-assets bank, explains that while the young bank had hoped to expand its business in the Long Island commercial real estate market, in the current economy CRE represented a poor place to concentrate further.
Medallion loans have been one good answer. “You are lending on the medallion itself, not the vehicle,” explains Puorro. “There’s no foreclosure process.” If the owner-driver or fleet were to go out of business, the city reclaims the medallion and reissues it.
In only a couple of years’ effort, Madison has built up $40 million in medallion loans. Puorro says little infrastructure is required. Loans are arranged through a network of special brokers. Due to the nature of medallions, these loans are about as secure as a loan gets, and they have performed 100%.
Breaking into a business dominated by longtime players meant selling good service. “We’re able to turn the loans around in short order for the owner and the broker,” Puorro says. “If you do not provide efficient and quality service, you will quickly be out of this market.”
Tradeoff for the security is that returns aren’t huge, Puorro says, but the bank has found this a better deal than investing in government securities. And there are cross-selling opportunities as well.
Puorro says the market is large, and, pun intended, Madison has hardly made a dent yet. So there’s no plan to go to other locales.
“We’re staying right in our backyard,” he says.
Growth in replanted “green”?
Hundred-year-old Family Federal Savings, Cicero, Ill., was under a “C&D” and things weren’t looking promising. Then came the proposal for “GreenChoice Bank.”
New management drawn from experienced bankers and investors announced acquisition of Family Federal in April, with the intent to evolve the thrift into “the Midwest’s first holistically green community bank.” The game plan is to continue to serve the thrift’s communities while adding the green specialty as a niche. Rebranding is under way.
GreenChoice began with a de novo federal savings bank charter in June 2009, and then made the acquisition. The multi-pronged business plan calls for investing local deposits in the local green economy, for those who wish to encourage such activities. The bank’s new headquarters will be in a multi-tenant green business building under development in Chicago. Management plans to offer special terms on credit and deposits for clients that “embrace sustainability” and that build green facilities and create “green collar” jobs. The bank will also be run as greenly as possible, using electronic banking, imaged-based back-office functions, and more.
“The ceiling in some ways is limitless,” predicts Steve Sherman, a founder and chief operating officer. “Sustainability will be the norm. This can be a bank people can feel good about doing business with.”
Sherman says investors see the green niche as a means of moving away from transactional banking to relationship banking, pegging relationships to the green ideal.
“No one else in the Chicago area really understood this,” says Sherman. The bank’s team has background in real estate lending as well as in green concepts. Sherman himself is a “LEED AP”—a Leadership in Energy and Environmental Design Accredited Professional (a designation granted by the U.S. Green Building Council).
Sherman almost resists the “niche” tag. He believes being a green bank is more than just a “marketing gimmick.” Understanding sustainability is a must.
“Customers are more savvy than that,” says Sherman. He explains that lending on such properties represents a better deal for the bank too. A property built for efficiency and to reduce greenhouse gasses, he says, “is a better piece of collateral.”
Reflecting Don Musso’s advice to avoid filing a wholly green business plan, Sherman noted that community banking will still very much be part of the game plan.
“We’re a community bank,” he explains, “so you won’t have to be green to bank with us.”
But green resonates with investors, he says, which will help when the bank goes back to investors to raise more “green.”
Prescription for healthy returns
Circling back to Beach Business Bank, Jim Gray says remote deposit capture has been a niche winner for The Doctors Bank division. He explains that this service enables the bank to work with professionals locally and nationally. Doctors and dentists like to retain patient checks, should there be the occasional collection issue. And getting funds straight into deposit accounts is a boon. A special savings account Beach offers to all business customers, which mirrors CD rates, has strong appeal, and has enabled the growing bank to avoid reliance on hot money.
Medical loan opportunities in California have been good, with equipment loans, loans for acquiring professional’s practices, and loans for facilities among them. Retirement plans represent an additional opportunity.
While some banks with medical specialties have adopted professional advisory boards, Gray says this hasn’t been necessary for The Doctor’s Bank. Many of the bank’s investors are the doctors and dentists who asked Gray and partners to start the bank. Two sit on the board.
Looming changes to national health care policy weigh on clients’ minds, and the bank’s forte is talking to them, and assuring them that The Doctors Bank is in the solutions business. That is a prescription, Gray says, that they appreciate. â–
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj1010/index.php?startid=16 
Trackback(0)
|
TrackBack URI for this entry
Subscribe to this comment's feed
