It appears that there is not only room for super community banks, but a void to be filled in the ever-consolidating banking environment that is especially prevalent in big cities. One evidence to that trend is First Business Bank in Los Angeles.
In 1981 four career bankers from Union Bank left to form a company Catering to medium-size successful owner-managed businesses in California.
The thought behind the bank was that very few independent banks possessed expertise in midsize businesses, yet many customers prefer the service level and senior executive accessibility typically associated with community banks.
Owned by Customers
The first unusual aspect of First Business was that it was organized by bankers, not by board members (though it had been successful in attracting an illustrious board).
Initial capital was provided by 650 existing and prospective clients. The bank was owned by its customers from day one, and that, as well as high interest rates, contributed to its making a profit from the start.
Since then, the bank has enjoyed 13 consecutive years of profitability and growth. Although its performance is not stellar, it is stable and consistent, which is a result of the philosophy of senior management. First Business Bank's management is not greedy but patient.
"We will take as long as we need to build the best business bank in Southern California", says Bob Kummer, the Bank's chairman. Thanks to its patience and conservative underwriting practices, the bank has survived both California recessions and remains unscathed by the area's economic downturn,
It continues its course to building a free business bank by emphasizing quality internal growth more than short-term profitability and looking at the long-term rather than quarterly earnings, a luxury that few bankers can afford.
The distinguishing niche for First Business Bank was the middle-market company, rather than the start-up small business. Consequently, the, bank has no retail operations to speak of, except to serve the personal needs of the small-business owners and managers, as well as the professionals who serve that community, such as accountants, lawyers, and insurance agents.
First Business is a company based on the concept of quality. "We do not compromise credit or service quality. We look for a company with high-quality management since we believe there is a relationship between credit quality and management."
To ensure quality, the company committed to a relationship orientation, which is a key component of super community banking. The relationship goes well beyond the loan itself.
"We advise our customers financially; they rely on the bank for that. They trust and respect our people. We proactively alert our clients to make them aware of problems. For example, we provided them with an early warning regarding the California recession. As a result 95% of our customers have successfully survived the recession," says Joe Sanford, the bank's president.
First Business also boasts the unique statistic of not having a single foreclosure in its real estate portfolio during the recent California recession. Management says that's because it focuses on owner-occupied commercial real estate and avoids development loans.
Profits from Margins
The bank's profits are generated primarily from core net interest margin, which it enhanced by nearly 30% of the deposits in non-interest-bearing deposit accounts. A typical customer carries six figures in a noninterest checking account, as well as six figures in an interest-bearing account.
The average loan ranges from $400,000 to $2 million. In addition, the company enjoys lean overhead since all four senior management officers operate in the line capacity; they all have their own book of business and deal with customers directly.
Overhead is minimal and assets per employee near $5 million. Consequently, although fee income is low, the bank's overall profitability is stable and solid. "We now have relationships with only 1,500 of our 20,000 companies in our target segment, not to mention Northern California", says Mr. Kummer. Another typical pitfall for start-up banks that First Business avoided was lack of quality management in all areas. The four partners who formed the company had expertise in lending, credit management, and operations.
Due to its unwavering credit culture, First Business does make large loans relative to asset size, "Our typical loan is $1 million to $3 million, which is equivalent to $100 million to $300 million for Bank of America. The result is we must be very selective," says Mr. Sanford.
The result speaks for itself, with nonperforming assets well under 0.5%.
The stories the partners tell about quality service are illustrative. "One of our clients called us at 3 p.m. He had a check drawn on First Chicago that he needed to cash, but the banks were closed.
"We called our correspondent in Chicago and told him we needed a cashier's check cashed. We sent someone to the client who picked up the check, flew to Chicago on the red eye, and brought it back to L.A. that day. The client didn't have to pay for this service, but such a response is a '10-year glue' to the relationship," says Mr. Kummer.
Given the target market, bank management feels that "we must offer all services to our customers that a major bank can offer." As a result we have our own Fed Wire system, lockbox, international department, letter of credit, bankers acceptances, foreign exchange transactions, our own money market investment department department that offers bankers acceptances, short-term Treasuries, etc.
The First Business Bank is a community-oriented institution that identifies its community as a business segment within a major metropolitan area. It possesses many of the characteristics of a supercommunity bank: relationship orientation, strategic focus, superior service, and low turnover.
The result: a consistent performer in an economy where such performers are rare, and a company that boasts 13 years of improved earnings.
Ms. Bird is national director of the financial institutions consulting group at BDO Seidman, New York, and author of "Supercommunity Banking." A Superstrategy for Success."