With the old gentleman’s agreements fading, bankers’ banks grow increasingly competitive—and “coopetive”

 

Tom Bryan heads The Bankers Bank, out of Atlanta, Ga., but some competitors may be thinking that Bryan and his board emphasize the first word, as in “The Bankers Bank.”

Actually, there are 21 of these specialized institutions around the country. But Bryan and his banker-shareholder board, which manage the largest one, at $2.1 billion in assets, use a blueprint that leaves some other bankers’ banks a trifle breathless. Or, in more than one case, exasperated.

“Our strategic plan is to become America’s correspondent bank,” says Bryan.

Extreme end of the trend

It’s estimated today that between 5,500 and 6,000 community banks and savings institutions use services of one or more bankers’ banks. These specialized institutions were invented to serve the correspondent needs of community banks that found that traditional correspondents either couldn’t serve them, didn’t want to, or were gone. Over time the bankers’ banks have changed their approaches to meet the needs of a changing business.

One of the most extremely evolved bankers’ banks is Bryan’s. Already, The Bankers Bank, originally chartered in 1986 as Georgia Bankers Bank, has about 1,400 respondent banks using one or more of its services, which range from bankers’ bank bread-and-butter basics such as check processing, participations,  and overlines, to investment banking and securities assistance, to consulting in such disciplines as compliance and branch siting.

Bryan’s company draws its shareholders from 12 states, currently, and does business in 35 states. The bank’s physical office network includes 13 states, using a combination of specialized loan-production offices,

business development offices, and regional offices that feature staff from all of the bank’s service areas.

The bank filed to convert to a national charter earlier this year, to better facilitate loan-production office expansion. Already, its footprint extends to several locations in California and Washington state, to Florida, to Chicago and other parts of the Great Lakes region, through much of the south, and as far north as Boston.

In most spots, another banker’s bank already did business there, or even called the market home.

“They are a strong competitor,” says Peter Sposito, president and CEO, Bankers’ Bank Northeast, $120.7 million-assets, based in Glastonbury, Conn., which was chartered to serve the six New England states and New York.  “I’m not sure that we’ve lost any business, but we keep hearing their name.”

A war of multiple fronts

The southern bank isn’t Sposito’s only source of bankers’ bank competition. The $103.7 Atlantic Central Bankers Bank, which began as Pennsylvania Independent Bank in 1983, serves banks in Washington, D.C., Delaware, Maryland, Pennsylvania—and New York.

But like others contacted, Sposito points to The Bankers Bank’s Specialty Finance Group, an operation that the Georgia institution acquired from GMAC Commercial Mortgage a few years ago. The group has stirred up some controversy in bankers’ bank circles, because it actually goes out and finds loans to participate out to The Bankers Bank’s community bank customers and shareholders. This is a sea change from the traditional pattern, which is to let customer banks originate loans and the bankers’ bank participate them to other customer banks.

But to have the bankers’ bank do the prospecting and underwriting first, goes against the grain of some. The true believers in the bankers’ bank world have a saying, uttered with variations here and there: “Always Your Partner, Never Your Competitor.”

Bryan defends his bankers’ bank’s practice as beneficial to customer banks. His specialty subsidiary enjoys a niche, for instance, in financing larger players in the hotel business. Typically these firms don’t even talk to community-size banks, he points out, so finding a way for them to get a piece of these credits provides volume that they would never see, otherwise.

 

Changing competitive picture

While The Bankers Bank is the focus of some criticism, the truth is that the competitive dynamic of most of these niche players has been undergoing significant evolution for some time now.

“The bankers’ bank has been forced to become a different creature, because of our industry’s need to evolve, and our own need to compete,” says L.D. McDonald, president and CEO of Midwest Independent Bancshares, Inc.

His company is parent of Missouri’s $327.4 million-assets Midwest Indepen- dent Bank as well as $26.3 million-assets Nebraska Bankers Bank. Factors such as the internet, Check 21, and remote capture have changed the significance of geography, as has continuing industry consolidation. What being a bank entails has expanded, and, so, then, has what being a bankers’ bank entails.

Some bankers’ banks offer securities services, some investment banking, some insurance lines or even insurance coverage, such as D&O. Independent Bankers’ Bank, Ill., $472.1 million-assets, even provides bank valuation services, for everything from S corp formations to estate decisions.

Specialized technology offerings also play a part in the bankers’ bank evolution. Atlantic Central Bankers Bank launched a special technology subsidiary, BITS (for Banking Infrastructure and Technology Services) in 2005 to provide voice over internet protocol phone service and related network services to participating customer banks. By the end of this year, ACBB expects to have invested more than $5 million in the operation.

And consulting services are becoming more and more important.

Internal audit and compliance consulting—essentially, outsourcing—are growing popular, as many banks find that they can no longer afford specialists of sufficient experience and knowledge for some tasks that they nevertheless must get done. At Bankers Bancorp of Oklahoma (parent of $134.5 million-assets The Bankers Bank), its Bankers Professional Service subsidiary not only provides compliance help, but internal, ACH, and information technology audit.

The country is wide open

Increased competition has been a steady process, ever since an old “gentleman’s agreement” not to market on another bankers’ bank’s home-state turf was broken by the few, and, increasingly, abandoned by the many.

“Basically, today, the United States is open from border to border, to any bankers’ bank that wants to compete,” says Tom Evans, president and CEO of Pacific Coast Bankers’ Bancshares. “Some bankers’ banks have national aspirations, and some have very specific geographical approaches.” Evans, whose California-based bank includes $525.6 million-assets Pacific Coast Bankers’ Bank plus a broker-dealer, serves customers in California, Arizona, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.

Two recent competitive developments make the point:
• Deep in the heart of…California. Texas-based TIB-The Independent Bankersbank, which already serves 1,300 banks in 46 states, announced an agreement in March to buy an existing California bank charter. The $1.6 billion-assets TIB, second-largest bankers’ bank in the U.S., has been doing business in California since 2002. Originally founded as the Texas Independent Bank, the organization changed to its current name in 1998.

It already had out-of-state offices in California, Louisiana, New Mexico, and Oklahoma.

Competition with TIB since its Tulsa office opened caused Oklahoma’s The Bankers Bank to consider directly butting heads with the much-larger institution, but President and CEO Don Abernathy, Jr., says the bank instead has tried to stick to the things it does best.

“In five years,” says Abernathy, “we’ve lost only one customer. I would like to think that we made the right choice.” His own bank makes calls in Texas, but he says the bank’s out-of-state customers tend to be part of organizations that are based in Oklahoma.

• Midwestern battlegrounds. Iowa, with no bankers banks of its own, and Nebraska, which didn’t have one until 2002, have been competitive battlegrounds for outsiders. Multiple bankers’ bank players slug it out for correspondent banking business in such states.

It can get fierce in these markets. But bankers’ bankers take some of this in stride.

“We all go out and compete for business brought to us by a community bank, and we have competitors whom we consider ‘friendly’ competitors,” says John Schneider, Jr., vice-chairman and CEO, Independent Bankers Bank, Ill., “and there are other more aggressive bankers’ banks who probably stretched the definition of a ‘bankers’ bank’ a little too far.”

Bankers’ bank “coopetition”

While competition and aggressive expansion mark the bankers’ bank sector, there is also a picking and choosing going on.

Clearly, while larger bankers’ banks have diversified their services somewhat, some basics of the business haven’t changed. Item processing tends to be a breakeven proposition at best, players say, part of the ante to be in this slice of banking. Credit-based services still pay the bulk of the freight, according to Jon Evans, president and CEO at Atlantic Central Bankers Bank and head for this year of the Bankers’ Bank Council, a loose association of most of the bankers banks.

Some banks have exited lines that they feel they can’t provide to customers profitably, leaving the field open to other bankers’ banks, and in other cases they have chosen to partner to jointly offer some services.

Examples of coopetition include:

• Securities teamup: Five bankers’ banks that own and use the services of Bankers’ Banc Investment Services, which is the name of the former First St. Louis Securities, Inc., acquired in late 2006, and now doing business as First Bankers’ Banc Securities, Inc.

(The five banker’s banks include Midwest Independent and Nebraska Bankers Bank, both part of the same holding company; Independent Bankers Bank, Ill.; The Bankers’ Bank, Oklahoma; and BBOK Bancshares, Inc., holding company for $99.6 million-assets Bankers’ Bank of Kansas, N.A.)

The investment securities firm, specializing in fixed-income securities, was already doing business with banks in 15 states at the time the initial stage of the acquisition took place.

“I’d like to think that this is the direction where things are headed, working with like-minded bankers’ banks to serve the community bankers,” says Illinois’ Independent Bankers Bank John Schneider.

• Lending teamups: Bankers’ banks can partner with other bankers’ banks for lending packages that can be participated among their members. Bankers’ Bank USA’s President and CEO Ron Slater notes, for instance, that his $287.1 million-assets organization, based in Wisconsin, has been developing commercial real estate loans around the country, and partnering with other bankers’ banks in the region where the credit is based. This effort started through the organization’s Wisconsin and Iowa Community Bank Loan Network and began expanding in 2000 in partnership with five other bankers’ banks. It is handled through Bankers’ Bank USA’s BB Syndication Services operation today and expanded beyond the five banks initially selected as partners. Last year the operation put together a package that included more than 100 community bank participants.

• Technology teamups. Three bankers’ banks—Atlantic Central; Independent Bankers Bank, Illinois; and Independent Bankers’ Bank of Florida, with $394.9 in assets—partner together to offer certain technology services.

More of this type of thing is coming. In the longer term, technology promises to continue to be a growth area for bankers’ banks, especially in the checking arena.

A growing number of bankers’ banks offer, or are working on programs, for “On-We” item processing. This is an electronic substitute for the traditional local clearinghouse. As technology continues to wear away at the concept of “locality,” some think that the individual bankers’ banks “On-We” efforts could interconnect, essentially creating an alternative, less-expensive system for clearing that’s designed for community banks.

Large banks have enjoyed such savings for decades, points out Peter Sposito of Bankers’ Bank Northeast, and the savings realized locally among participating banks could increase as networks interlink. In its 2006 annual report, Minnesota’s United Bankers’ Bank, $333 million-assets, reported that it was working with other bankers’ banks and with larger regional banks to set up exchanges between its On-We systems and their systems.

Seven of the nation’s bankers’ banks have set up On-We networks through LendingTools. com, Wichita, Kan.

Mergers in the future?

Unlike, say, the Federal Home Loan Banks or the Federal Reserve District Banks, the number and relationship of bankers’ banks isn’t set by statute. Thus, the number and form of the competitors may change through consolidation.

“That’s a real possibility,” says Pacific Coast’s Tom Evans. He suggests that it could make sense for some of the smaller bankers’ banks to partner up in some fashion, beyond the joint operation strategy already used by some.

Evans suggests that a single deal might be the catalyst for change. “If two bankers’ banks got together,” he says, “the other smaller bankers’ banks might decide that it’s time for them to do the same.” How they structured such a deal—amalgamating operations into one bank, or retaining separate charters while uniting under one holding company, would depend on a number of factors.

It’s significant, says Ron Slater of Bankers’ Bank USA, Wisconsin, that “we’re starting to see the discussion of mergers and acquisitions among bankers’ banks in public.”

On the other hand, Oklahoman Don Abernathy doesn’t see M&A as a future wave. “We all do things differently,” he says of the bankers’ bank set. “We all have our own strengths and our own weaknesses.” While he can see the value of partnerships such as the securities operation mentioned earlier, he doesn’t believe his board would find value in a merger with another bankers’ bank.

Those bankers’ bankers who think that their boards might go for some M&A tend to think it would take the form of multiple banks under a holding company, rather than an outright merger, with, possibly, a shared backshop.

Such organizations already exist—take the Illinois-Nebraska combination mentioned earlier. And then there is First National Banker’s Bankshares, Inc., which owns three separate bankers’ bank charters: First National Banker’s Bank, Louisiana, $255.7 million-assets; Mississippi National Banker’s Bank, $128.1 million-assets; and Alabama Banker’s Bank, N.A., $271.3 million-assets. The latter was founded in 2004.

Yet some of the younger, smaller bankers’ banks have plenty of opportunity left in their own markets. Bankers’ Bank Northeast, for instance, is doing business with one-third of the community banks in its markets, according to CEO Peter Sposito, who says his organization’s priority for growth for the near term is selling to more of the remaining two-thirds. “We’ve got plenty of work to do here,” says Sposito. BJ

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