As he was about to begin a recent interview, Howard P. Milstein, a co-chairman and the president and chief executive officer of Emigrant Bancorp in New York, took a phone call.
Cradling the receiver to his ear, Mr. Milstein talked for about 10 minutes before approving a $5 million loan on a 21-acre parcel on Long Island.
The Milstein family has owned Emigrant for nearly 20 years, but prior to December 2003, when Mr. Milstein and his father, Paul, bought the 45% stake held by the estate of Howard’s late uncle and three other investors, Emigrant would never have considered the Long Island loan.
In Howard Milstein’s view, the $9.6 billion-asset company, while profitable, had grown “ultraconservative” and “stagnant,” and its standpat ways caused it to miss out on a number of promising opportunities in one of the nation’s most vibrant lending markets. His discontent led to difficulties with his uncle Seymour Milstein’s side of the family, which managed Emigrant’s day-to-day affairs through the late 1990s.
As soon as Howard, a longtime real estate developer, took the helm, he began steering Emigrant in a new direction. First, he nearly tripled its in-house limit on real estate loans and broadened its scope so that it can make loans anywhere in the country.
That decision has played a huge role in the outsize profit Emigrant reported for the first nine months of the year: $218.8 million, or almost 50% more than it earned in all of last year.
To keep the momentum going, Emigrant recently started a wealth management subsidiary, New York Private Bank and Trust. Next quarter Emigrant plans to unveil an online banking unit — tentatively named Emigrant Direct — to compete head-to-head with ING Direct.
Mr. Milstein said he tries to think “in broad, strategic strokes,” and when he discusses his strategy on that level, it sounds uncomplicated. The way he tells it, the family feud over Emigrant’s management came down to a question of risk — Mr. Milstein felt strongly that Emigrant’s returns were mediocre because it was not taking enough risk.
He may have had a point. Only once in the six years preceding the change in control did its return on equity rise above 12%.
By taking a bit more risk, it can generate significantly higher returns, Mr. Milstein said. “We’re not trying to be the biggest, or even the most profitable company in banking. Our goal is to make a good return while taking minimum risk.”
When he took over, Emigrant did little beyond real estate and small-business lending, and its market did not extend past the New York metropolitan area. Now it is considering loans anywhere in the country — it recently approved one in Minneapolis.
Bob Giltner, a senior consultant at Sheshunoff Management Services Inc. in Austin, Tex., says family-owned banks have an advantage over publicly traded ones when it comes to making the kinds of changes Mr. Milstein is implementing.
“Accessing the capital markets has significant reporting and regulatory requirements that just aren’t there for private companies,” Mr. Giltner said. “That makes it easier for private companies to implement the vision of a family or an individual. Publicly traded companies are forced into managing for the quarterly reports.”
The Milstein family, which made its fortune developing commercial real estate, began investing in banks about 20 years ago. After making millions on a series of well-timed investments, it acquired Emigrant, which was still reeling from the effects of the savings and loan industry’s collapse, in 1986. Under the family’s management, Emigrant grew into one of the country’s largest thrifts.
Mr. Milstein had served on its board since the family acquired it, but he said he grew more and more restive in recent years as his proposals for improving business were disregarded.
That discord ended up pitting the families of the two patriarchs, Seymour and Paul, against each other in a bitter and public feud. At one point Seymour’s son (Emigrant’s former CEO) filed a lawsuit alleging that Howard and his brother, Edward, had mismanaged a family-owned insurance company.
The battle over Emigrant did not end until the $811 million buyout, which was funded by excess capital.
Just how risk-averse was Emigrant before the change in control? According to Howard Milstein, it had an in-house loan-size limit of $2 million — unusually small for a company its size.
Theodore P. Kovaleff, an analyst with Sky Capital LLC in New York, said there are smaller banks with limits “many steps above” $2 million.
Mr. Milstein said, “Nobody was prepared to recommend that we make larger loans, so we weren’t in a position to capture the market opportunities that presented themselves. The guiding principle was ‘Don’t do anything that could lose money.’ ”
According to the Federal Deposit Insurance Corp., Emigrant has made money every year since 1992 (the earliest year for which the agency has online records). But for the last 10 years its return on equity has been below the average for commercial banks with $1 billion to $10 billion of assets — sometimes substantially so.
Before 2003, the last time Emigrant produced a return on equity in the teens was 1997, when it was 14.29%. Even then, though, the average return on equity for companies in Emigrant’s asset range was 14.88%.
In some respects, Mr. Milstein’s complaints about Emigrant’s previous management resembled those of shareholder activists at other banks, such as Lawrence Seidman and Seymour Holtzman, who frequently prod the banks in which they invest to maximize profits.
One huge difference: Mr. Milstein has never seriously considered selling Emigrant. Instead, he plans to keep restructuring it. “I want to change its character, from spread interest to fee income,” he said.
He likes the idea of starting an Internet bank, because it is cheaper than building branches. And he is attracted to wealth management, which he considers less risky than lending money but just as profitable.
“Banking is a good business, but wealth management is a great business,” Mr. Milstein said. “In banking, we lend our own money, and if we get it back, we make a return of around 3%. In wealth management, we’re working with other people’s money, and we make the same 3%. It’s limitlessly scaleable, and we take no risk.”
Mr. Kovaleff said Emigrant’s foray into wealth management makes sense, because it is an obvious business line for a bank doing business in the country’s biggest and richest market.
Also, the 53-year-old Mr. Milstein’s extensive network of contacts offers a good place to lay a foundation, Mr. Kovaleff said.
“It’s a huge market opportunity, and it seems to me his strategy to pursue it will be well served,” he said.
Mr. Milstein earned degrees in law, economics, and business from Cornell and Harvard, but his plans for Emigrant seem to have been guided more than anything else by hard-headed common sense.
In addition to his work at the bank, he is a managing partner of Milstein Properties, a commercial and residential developer. He is also the chairman of MB Real Estate, a commercial real estate leasing and management company.
He has worked in real estate for more than three decades, so he was more than comfortable with raising Emigrant’s in-house lending limit, to $5 million, which is still low for a bank its size.
Mr. Milstein said he has told brokers that his bank will consider big loans. “Now, we’re approving one or two big loans a day.”
Emigrant is getting many of its large new loans from referrals from Aurora Funding, a unit of Lehman Brothers. Also, Patricia Goldstein, who oversaw Citicorp’s real estate-related businesses before its merger with Travelers Group in 1998, has been hired to play a similar role at Emigrant.
Mr. Milstein is an “outside-the-box thinker,” according to Gilbert S. Stein, Emigrant’s vice-chairman and co-chief operating officer, who was with Emigrant before Mr. Milstein became the CEO. “He comes up with new ideas all the time. He challenges everything that has been done, but in a very positive way.”
A case in point: In July, Emigrant opened a commercial bank to begin competing for municipal deposits. New York law bars thrifts from accepting municipal deposits, and when Mr. Milstein asked, shortly after becoming the CEO, why Emigrant had not followed the example some other state thrifts and chartered a special-purpose bank, he was told the company was discouraged by the four-month approval process.
“I told them the four months start today,” he said.
So far the bottom-line results of Mr. Milstein’s leadership have been positive. Emigrant was able to replace the capital it paid out through bond sales, and Mr. Milstein said he expects its full-year return on equity to top 30%.
Mr. Stein said those results are just a taste of the things to come for Emigrant. “I think we can put together six or seven years of fabulous earnings and take this to the next level.”
He also said he likes working for Mr. Milstein better than he did working for Emigrant’s previous leadership. “I’m working harder, but I enjoy it.”
