Add Taylor Capital Group (TAYC) in Rosemont, Ill., to the list of community banks turning to largely overlooked business lines for extra revenue.
The $5.8 billion-asset parent of Cole Taylor Bank has formed a national group to finance employee stock-ownership plans for midsize businesses.
"If you aren't growing, you're dying," says Lawrence Ryan, Cole Taylor's chief lending officer. "We've filled in some areas that our customers were demanding. There's not a lot of loan demand, so we have to create our own demand."
Smaller banks are turning to niche businesses, such as equipment leasing and asset-based lending, in response to fierce competition for loans and compressed net interest margins. Taylor in recent years began offering those services, along with residential mortgage originations.
"There's certainly a scarcity of good assets," says Brad Milsaps, an analyst at Sandler O'Neill & Partners. "Everyone at this point is looking for ways to leverage their excess capital."
Employee stock-ownership plans, or ESOPs, are formed when a business owner decides to retire, lacks a successor and doesn't want to sell the company to outsiders.
A valuation firm determines the company's worth, allowing the owner to sell a portion of his or her stake to the ESOP. A bank provides financing for the ESOP to buy the shares from the original owner. Qualified employees receive shares, which they sell back once they retire.
Products such as ESOP financing give Cole Taylor a national reach, helping combat the pressures of the highly competitive Chicago market. There are roughly 16 banks that serve middle-market commercial customers in the Windy City, so it's important to find growth opportunities elsewhere, says Terry Keating, managing director at Amherst Partners in Chicago.
The heavy fees associated with creating an ESOP make it prohibitive for some companies, Ryan says. Cole Taylor's target market is existing clients with $20 million to $50 million in annual revenue, Ryan says.
Demand for ESOP financing is likely to rise in coming years as more retiring baby boomers seek an exit strategy, says Gregory Brown, a partner at Katten Muchin Rosenman in Chicago who specializes in ESOPs. Also, the tax advantages for business owners have become more enticing as tax rates have gone up, he says.
Providing ESOP financing is unrealistic for some small banks, industry experts say. The business is complicated and relies more on a business's cash flow than collateral, Ryan says. Lenders must have relationships with law firms, valuation companies and other players that are involved in setting up an ESOP, Brown adds.
Cole Taylor had completed some ESOP financing before forming the unit. Still, having a unit with dedicated employees allows the bank to develop deeper connections, Ryan says.
A roadblock to entering any new lending area especially ESOP financing is experienced staffing. Taylor Capital is "uniquely positioned" to overcome this challenge, Keating says.
Mark Hoppe, Taylor Capital's chief executive, was a senior executive at LaSalle Bank who had several units reporting to him before its 2007 sale to Bank of America. As a result Taylor Capital has been able to hire a number of former LaSalle executives with the necessary experience to lead new units.
"The most important risk when you start a new business line is execution," Keating says. "Are the people you hire right? Do they have a sound business model?"
Instead of trying to build a level of expertise internally, smaller banks could get into ESOP financing through participation loans, Brown says. This would allow them to gain experience while also managing for risk.
"If you have good people then you can do it," Brown says. "But it's not a universal target."