An increasingly popular model for start-up commercial banks is to forgo traditional branches and instead rely on the Internet and courier services to gather deposits.
Capital Pacific Bank in Portland, Ore., intends to follow that model when it opens for business this summer - but with a twist. The de novo also plans to allow its customers to deposit funds in accounts at other banks, which will be swept each night into Capital Pacific accounts, and will pay the partner banks a fee for the service.
"We want to make it as convenient for our customers as possible," said Larry Rosencrantz, its chairman, chief executive officer, and lead organizer.
Capital Pacific, which is in the process of raising $10 million of capital, is slated to operate out of an office on the seventh floor of a high-rise in downtown Portland.
By setting up deposit agreements with its competitors, it also hopes to avoid the troubles some other banks have had in gathering deposits with the courier-and-Internet approach. For example, Bank of the Northwest, also in Portland, could not attract deposits fast enough to keep up with loan demand and eventually had to construct four branches.
Still, despite the challenges, the branchless model is becoming more popular among bank organizers. Richard A. Soukup, a partner with the Chicago accounting and consulting firm Grant Thornton LLP, said it is definitely catching on in major metropolitan markets. He estimates that there are at least one or two banks following the model in each major U.S. city.
"You couldn't just service commercial customers in a small town - the market for that there just isn't big enough," and trying to serve everyone with couriers is out of the question, Mr. Soukup said.
The banks, often run by longtime local bankers with fat Rolodexes, typically target the owners of small and midsize businesses, as well as wealthy individuals and nonprofits that are pinched for time. At these banks, it is not unusual for a client to deal with a relationship manager who handles all of the customer's loan, deposit, and investment needs.
About a dozen such banks are operating in Oregon and Washington, said James Bradshaw, an analyst with D.A. Davidson & Co. in Portland.
"We've had a lot of acquisitions up here by key players, and that's created many veteran bankers wanting to start their own banks," he said. "But it's tough to compete with larger banks that have a branch on every corner, so these banks will try to do whatever their customers want, like go out and pick up their deposits at their place of business."
Banks are also attracted to this model because they can become profitable fairly quickly, Mr. Bradshaw said. For example, $122 million-asset Today's Bank in Vancouver, Wash., and $70 million-asset Columbia Community Bank in Hillsboro, Ore., were making money within months of opening, while banks with more overhead typically will not show a profit until two or three years after opening, he said.
These banks are also catching the attention of potential acquirers.
Case in point: $354 million-asset Bank of the Northwest, which continually posted higher-than-average returns on equity in its six years of business, was bought by $3.1 billion-asset Pacific Northwest Bancorp in Seattle last year. Before the deal closed in November, Bank of the Northwest had a return on equity of 15.89%, an impressive feat for a bank so young, according to Mr. Bradshaw.
But its history also highlights one of the main challenges for banks that use this model, he said - attracting enough deposits to meet loan demand. "Their business strategy was so successful that they had buckets of loan demand but not enough deposit growth to support it."
So Bank of the Northwest altered its model and opened four branches in the Portland area before it was bought. "I think banks like this need to be a little flexible and change their strategy if they need to," he said.
It is not just start-ups adopting this model.
In the late 1980s Jerry Smith was offered the chance to buy Kingston-Dalton State Bank, a tiny institution in central Wisconsin with less than $100 million of assets. After Mr. Smith bought it, he and the board quickly moved the bank's headquarters to the bigger city of Madison, to take advantage of the dearth of community banks there after acquisitions by several giant banks.
Kingston-Dalton also scrapped its traditional, small-town community bank model and began serving only businesses and their owners. It changed its name to First Business Bank and sold its two branches in central Wisconsin. Then it went even farther - instead of building branches, it chose to use couriers (and later online banking) to serve their customers.
"This way, we're really able to leverage all of our people in a single location," said Corey Chambas, who is now the president and CEO of First Business, which now has $418 million of assets.
Its parent, First Business Financial Services Inc., opened a second bank in June 2000 in the Milwaukee suburb of Brookfield using the same one-branch model.
"Why pay for all of those branches when you don't have to?" Mr. Chambas said. "Couriers are very convenient to our customers, so we don't ever have to have tellers, drive-through windows, or weekend hours."
Texas Capital Bank in Dallas, which uses a similar model to serve middle-market businesses, found another way to address the challenge of gathering enough deposits. Six months after opening in 1998, it launched www.BankDirect.com, a banking Web site which also solicits customers worldwide for deposits, mainly certificates of deposit.
The site has helped Texas Capital accumulate nearly $1.8 billion of assets in five years, says Joseph M. "Jody" Grant, its chairman and CEO. "There's no way we would have had that growth without access to brokered deposits."
Mr. Grant disputes the notion that such deposits are subject to the whims of fickle customers and hence are an unstable source for funds. "We don't regard brokered deposits as hot money - the deposits we provide are very much in demand."
The promise of Internet banking was also one of the reasons why Texas Capital was able to raise an unprecedented $80 million of initial capital before opening - many more times the amount that the average start-up raises. Organizers used that money to open a few branches in four major Texas cities, and it plans to enter Houston this year, Mr. Grant said.
