By day, Brian Williams made loans for Third National Bank in Nashville. By night, he roamed the city’s famed Music Row, mingling with musicians and half dreaming of becoming a performer himself. He heard stories about how bankers rarely took the professional aspirations of artists seriously, evidenced by exchanges like the following:
“Right, but what do you do for a living?”
Williams began to see that songwriters and other musical artists might wait months between the time a song became a hit and the arrival of a royalty check. So he decided to break new ground at Third National, later SunTrust Bank, creating a type of personal loan specifically for individuals in the music industry. The bank began to lend money against future royalty income, using the songs as collateral. The business caught on, and Williams’ program went gold in the Nashville financial services scene, especially when country music burst from its southern stronghold and became a national phenomenon.
That certain something
During the 1990s, banks fought to make a name for themselves by competing head to head with one another’s products and services. The result was homogeneity and commoditization as too many banks tried to become all things to all people. A few, however, worked hard to mine niches in search of customers that other lenders had missedu00e2u20ac”efforts that have now hit pay dirt.
Steve Williams, principal of Cornerstone Advisors Inc., believes focused strategies pay off and advises his clients to consider finding a niche. A long-term commitment to niche lending, he says, offers three benefits: a bolder identity, a buttress against lulls in the economy, and a chance for notable growth in size and revenue. This type of strategy also provides a seductive story for investors, which can boost the value of the bank’s stock over time.
When speaking of developing a specialty, Steve Williams doesn’t mean a shallow niche like small-business lending that “everyone and their mother is doing.” He’s talking about going where other bankers fear to tread. “To be a niche player, you have to be something of a contrarian,” he says. “You’re doing what other people said isn’t possible or isn’t worth it. You have to have an appreciation for entrepreneurship.”
The following profiles exemplify lenders that have found strong footholds in their communities by responding to unique lending demands.
By the time country music’s popularity had skyrocketed, SunTrust’s Williams had established himself as the personal lender to the country music industry. “Our unit exploded,” he says. “We had a small staff and we had run out of space. We moved to an office on Music Row. It was a clear signal to the music industry that we were serious.”
In 2003, the $120 billion SunTrust had 30 lending officers devoted to nothing but music-related lending. Earlier this year, the bank expanded this department by opening offices in Atlanta and Miami to serve artists breaking into trendy hip-hop and Latin music segments. This required an even bigger investment on the part of SunTrust to its burgeoning niche area. As it prepared to launch its newest music divisions several months ago, it hired new loan officers with core banking experience but little knowledge of the music business. SunTrust then sent them to Nashville for a crash course in the music industry.
Tim DuBois, senior partner of Nashville-based Universal South Records, also serves as a director on SunTrust’s Nashville board. He helped ramp up the bank’s latest foray by leading a training session when the new loan officers were in Nashville. DuBois’ presence has brought a new level of experience and respect to the bank’s music lending business, and his acumen concerning the needs of artists and the industry as a whole has helped bridge the gap between the bank’s traditional and nontraditional loan processes. In addition, his contacts in the recording industry provided access to potential clients that SunTrust would never have gotten by cold calling, according to Brian Williams.
Bridging an Intercontinental Divide
In 1992, East West Bancorp was a $600 million savings and loan that made no-doc mortgages for immigrants who settled in Los Angeles’s Chinatown district. Its CEO, Dominic Ng, always an opportunist, soon began eyeing business areas that others considered too exotic. Today, the independent banking company has $3.6 billion in assets, operates 38 offices, and trades at more than $40 a shareu00e2u20ac”for a price/earnings ratio of nearly 20. Throughout this period, the bank’s growth and earnings have been remarkable, allowing it to parlay its assets into a profitable stock value for its shareholders. Ng came aboard as president after serving as the head of the U.S. investment arm that bought the bank in 1991 for $40 million. In 1992, Ng became CEO of East West Bank. Six years later, he had orchestrated a management buyout at a price of $238 million that translated into a stock price of $10 a share. The bank went public in 1999 on the NASDAQ exchange, and today, the stock price has quadrupled and the market cap is over a billion dollars.
Exploiting lending areas that other banks shunned was something of a challenge for Ng. He started by tapping one vein:
He wanted East West to help bridge Southern California’s Chinese immigrant population with its mainstream community. “No community banks out there had that niche. Those that go after mainstream clients only know the local community,” said Ng, who boldly decided his team would meet with suppliers who were reluctant to deal with them.
Throughout its 20-year history, East West had learned a thing or two about Asian culture. Its primary investor had a corporate empire in Asia comprising companies in China, Taiwan, and Hong Kong and boasted nearly 100,000 retail customers. It had contacts at the Bank of China and throughout the continent. What’s more, it had a solid foundation from which to launch something new: Its customers made their mortgage payments faithfully, and in its 30-year history, East West had only suffered minor earnings losses twice.
“People said, if you are successful in your field, why do you care about going someplace else?” Ng recalls. But with the new business, East West has delivered more value to its shareholders. And it could develop greater staying power, he says.
Despite all the talk about wealth lending, the customers East West decided to target were less than desirable to some institutions. Yet the statistics show there is plenty to be optimistic about. Today Asians are the fastest-growing minority in California, posting a 38.5% growth rate during the past decade, with a higher-than-average median income and lower-than-average unemployment rate. Ng, though, was interested in serving Asians who had previously been left out.
“You know what I like about low-income housing and senior housing?” asks Ng, referring to one of his bank’s niches. “There’s a tremendous entry barrier. Developers, bond councils, city managers don’t want to have to bother with teaching a financial institution how to do it, so they just deal with the same bank, [us], over and over.” The Chinese-American outreach strategy has proved to be enormously successful, providing the bank with a solid lending portfolio with negligible historic losses, according to the company’s annual report.
Since that time, East West has launched several other initiatives based on its Asian culture expertise: credit enhancement for bond financing of low-income and senior housing; lending for the development of loft apartments in downtown L.A. historic buildings; the Ex-Im bank Guaranteed Export Program, government backed financing for small businesses involved in the import and export of goods and services.
Banks that lend where others won’t are taking a risk. And even though credit quality has remained high, many of the niches East West has tackled have raised eyebrows, according to Ng. “It requires a lot of guts, quite frankly, from our board to let us go into those areas,” says Ng, “but they’re not just a rubber-stamp board. What they do is really ask the questions and debate and make sure that management can provide great logic. We make sure we hone it into the strategic direction and get it right.”
Keith Renken, chairman of the bank’s audit committee and a former managing partner at Deloitte & Touche, says one way to offset risk is to do your homework. Spending close to 20 hours a week on research alone, Ng does a lot of homework. “Dominic has a good vision and is absolutely a creative-type person,” says Renken. “I’ve served on half a dozen public company boards and I would say that he is one of the strongest executives I’ve had the opportunity to work with. He’s conscientious, he works very hard, and he utilizes the board.”
Cultivating Loans in the Heartland
Fishback Financial Corp., a $750 million closely held holding company in the heart of Brookings, South Dakota, a Midwest farming community, created an ingenious means of growth that represented a cross between its agricultural heritage and the newest thing in industrial technology: the financing of wind energy operations and ethanol plants.
For years, says Fishback director Kenneth O. Berg, the officers and directors had been keeping their eyes open for opportunities to both serve the community and grow the bank. During that time, several farmers approached the bank because they were looking for financing to convert their farmland into wind energy operations, or “wind farms.”
Wind farms use turbines driven by giant propellers as an environmentally friendly means of producing electricity. A landowner whose property is located on a power grid has the option of becoming an energy provider, a project that initially costs about $1.5 million, according to Van Fishback, CEO of First National Bank of Brookings, a subsidiary bank of Fishback Financial. When the bank finances the operation, he says, generally the operator has a source of equity that covers 40% of the cost and the bank lends enough to cover the remaining 60%.
The turbines have popped up all over Minnesota, thanks partly to state incentives that encourage wind-farm development. And business has been brisk for the banku00e2u20ac”so much so that Fishback’s Minnesota subsidiary, First National Bank of Pipestone, committed one loan officer to become a dedicated wind farm expert. In fact, Fishback says the Minnesota business is so promising, the bank will have to be vigilant to keep the loans within the prescribed percentage of capital.
While South Dakota is plenty windy, it lacks the government incentives Minnesota has instituted to push wind farming into a growth business. But what South Dakota does have is an abundance of corn, which in turn makes an abundant source of ethanolu00e2u20ac”another bio-friendly energy product, which pays more per bushel of corn than granaries. The difference between the two types of operations was found in the start-up process. The wind farms, Berg says, were a discrete land-lease operation and the conditions were fairly well established. Ethanol financing involved many players, and more than a year’s worth of education took placeu00e2u20ac”both for management and the boardu00e2u20ac”before the first loan could be extended. The start-up cost of an ethanol plant is fairly steepu00e2u20ac”some $25 million. Fishback structures its ethanol-lending deals by taking a piece of the loan, perhaps as much as $5 million. Like its Minnesota counterpart, First National Bank of Brookings dedicated one loan officer to the niche area in order to provide the necessary expertise within the lending institutionu00e2u20ac”a must for any bank considering a true niche strategy.
“Of course we’ve dedicated a loan officer to this,” says Van Fishback. “We can’t afford not to dedicate a person to these things. If we’re going to have any significant exposure, we need to know what we’re doing. That’s what regulators expect. If we were talking about $2 million or $3 million in loans, of course we would not dedicate a loan officer to it. But at this level, we feel it’s appropriate.”
The strategy appears to be working. “We simply began listening to the people in this industry,” says Fishback. “In March 1999, we dedicated a person to understand the ups and downs and the pros and cons of wind energy. We saw a need in our local communities and saw there was an opportunity there. We decided to develop that expertise so that we could be a proponent in the right situations and not be a drag on the system. We didn’t want to have to say, ‘We don’t do that stuff. You’ve got to find somebody else.’”
The Fishback directors realized that the alternative energy products married the community’s farm culture to the energy provisions of the future. “I think the first thing we talked about was, ‘Is this a logical economic development project in this part of the upper Midwest? Does it make sense?’” says Berg. “There’s a search for a new source of renewable power, both in terms of wind and solar, and it seemed like a logical direction to encourage this type of development.”
Aiming for new heights was nothing new to Frank Breazeale, president and CEO of First National Bank of Gilmer, Texas. In fact, Breazeale’s own passion for flying inspired him to launch his institution into an area he knew a little something about from personal experience.
The $300 million East Texas community bank took off into airplane financing after it became apparent to some of the directors that folks who were looking to purchase small aircraft had nowhere else to turn. Demand for airplane financing was much greater than the supply in Gilmer, a small county seat nestled in the wooded rolling hills of Upshur County, Texas. In fact, the town’s annual “Yamboree” Air Show at the local Fox Stephens Field draws thousands of people each year, further heightening the community’s enthusiasm for small aircraft.
Breazeale says First National Bank finances the purchase of five to 10 small airplanes a year, most of them older models in the $200,000 range. Admittedly, he says, much of the motivation for pursuing this niche arose out of his own passion, and he concedes that airplane financing is not a business that will ever be a huge piece of the bank’s portfolio. “We do it more as an accommodation,” he says. Nevertheless, the fact that Breazeale brings his own knowledge to bear has bolstered the bank’s ability to understand and tap into this potentially lucrative market and meet a need in the Gilmer area at the same time.
“Nobody else in this market wants to do it,” Breazeale says. “They don’t know that it’s a simple deal, and they don’t know anybody who could fly the plane if they had to repossess it.”
Breazeale notes that lending in an area that doesn’t have a long track record or statistical loan data can add to the risk.
But he says his board has learned to trust him, even if they regard small planes as “excessively dangerous.”
“My bank has more insecurity about me flying than [about] making these loans,” he says.
Now customers in Gilmer’s immediate market area of 40,000, as well as those in the extended market of Tyler and Marshall, “talk to Frank” if they’re interested in buying a plane. And rarely are they one-time customers: Every few years, most airplane owners upgrade their models in their continual quest for increased speed and efficiency.
Adopting a New Idea
Like any good parent, Norman Hecht, a vice president in the business banking unit of $50 billion M&T Bank, has learned to be patient. He is an adoptive father who is credited with having pioneered the practice of lending money to families for the purpose of adopting children.
When he was a lending officer and adoption advocate at what was once Maryland National Bank, Hecht received calls from families who wanted to adopt but didn’t have the money to do so. The costs for such families can be staggeringu00e2u20ac”currently about $10,000 to adopt domestically through a private agency and $20,000 to adopt internationallyu00e2u20ac”causing many to give up their dreams.
Hecht repeatedly told these customers that they should apply for credit at their own banks. But the feedback he got about doors being closed made him want to take a more proactive approach. “They did need me,” he says. “Their own bankers looked at them as if they had two heads.”
As someone who had stood in their shoes, Hecht decided to see if he could carve out a niche strictly for financing the fees for adoptive families. “Banks spend enormous amounts of money to reach out to the community and find people to loan money to, but they weren’t interested in people who walked in and asked for the loan,” he says. “When they walk in the door and ask for money, bankers say ‘What’s wrong with you?’”
As he soon found out, loan quality wasn’t a problem. Most of these potential customers were married, were employed, owned homes, were financially stableu00e2u20ac”qualities that had allowed them to pass muster with adoption agencies. The challenge was the odd nature of the loan. If the payments weren’t made, the adoptions could hardly be considered collateral. A more ingenious program was needed.
Hecht developed a variety of means of structuring the loans, using unsecured home equity loans, for instance. He devised a type of unsecured personal loan for these special customersu00e2u20ac”many of whom could pay the loans back out of the hefty tax credit given adoptive parents by the federal government.
After Maryland National merged with Nationsbank in 1993, Hecht moved over to First Union and championed his cause there as well. The niche strategy was implemented so successfully that in 1996 the bank installed a toll-free number answered by phone reps answered who began, “Your adoption lender…” The benefits were seen on both sides; articles ran in The Washington Post and The New York Times about the “bank with a heart.”
The growth rate for adoption loans at First Union was phenomenal. In 1996, the company made 100 adoption loans totaling $1.8 million, and in the two years following, it made 400 loans each year totaling about $4 million. Hecht says that sometimes the adoption loans were leveraged for additional business as well: Borrowers who came in for an adoption loan often ended up reconfiguring their debt, making an average loan of $45,000.
Still, Hecht knew there was a lot of room for growth, since more than 130,000 children are adopted each year. While at First Union, he made adoption loans in all 50 states, even assisting an American family in Germany. In 1999, Hecht left the bank to start a consulting business and the adoption program faded.
Hecht made major inroads in this area and several other institutions have dabbled in adoption lending, yet there is no leading contender among commercial banks at present. The field, it would appear, is wide open. According to Steve Williams of Cornerstone Advisors, any bank that could capture 5% of the total U.S. adoptions, or 6,500 loans a year, could make this a worthwhile endeavor.
Carving Out a Niche
Niche lending requires thinking outside the box. Yet bankers may want to know how they can take on riskier endeavors in the post-Sarbanes era. Says Cornerstone’s Williams: “You have to be wise enough to know if you’ve done the proper planning, if this thing makes sense; if you see the numbers, if you hold people accountable. If you look at companies like GE, they have a process of planning and accountability that allows several niches to operate in the same company.”
As entrepreneurs, niche bankers have to test their imaginations. “I don’t think there’s a playbook,” says Williams.
“There may be a special reason why the niche becomes part of who you are. You may have a deeper, specialized knowledge that other banks don’t have. What parts of the bank are growing fastest? Maybe they’ve got a niche. Look at your best customers. Do you have particular clusters where you could make a good margin on this type of client?”
While a bank has to be ready to find opportunities and take risks, Kenneth Berg of Fishback Financial warns that it also has to be ready to pull the plug if it turns out that returns fail to meet expectations. And just as important, a bank’s management and board have to have patience.
Banker-aviator Frank Breazeale agrees. As he points out, a de novo bank can start out with a particular niche as a major part of its portfolio. But for an existing community bank, responsible for the mortgages, car loans, small business, and other needs of everyone in its market, it could take years before a niche becomes a significant business for the bank. “Niches are built over five to 10 years; they don’t happen immediately,” he says. “One of the hardest things to do is commit to a niche. If you commit resources, time, and focus to one niche, you forgo other opportunities.”
Like anything else in banking, the key is to make sure the bank has done enough research to know it has the right niche and then feed it whatever’s necessary to make it work. Ng, for example, says East West Bank knew nothing about low-income housing when it entered the niche. And it took six months before the executives could finally say they got it. He wonders how many community banks would be willing to invest that kind of time.
Van Fishback, however, doesn’t see his community bank as having done anything special.
“We don’t have any secret sauce, so to speak,” he says. “There’s nothing unique about us. All we did is get out there and learn the business.”