Avner Mendelson is one of few executives who will openly admit that his bank is too conservative.
Since becoming chief executive of Bank Leumi USA two years ago, Mendelson has sought ways to transform the financial institution — a unit of Leumi Group in Israel — into a high-tech company with a much bigger appetite for risk.
"There's been some sleepiness," Mendelson said, pointing to the New York bank's slow growth and reluctance to compete.
Bank Leumi has hovered around the $6 billion-asset mark for the past decade. In its defense, however, the bank posted consistent profits throughout the financial crisis.
Mendelson, however, is eager to pick up the pace. Like many fast-growing community banks, he plans to expand lending to specialty industries such as film production and nursing homes.
Leumi is also overhauling its technology. The bank — which also has offices in Los Angeles, Chicago and Miami — has invested about $40 million in the last two years to upgrade everything from desktop computers to its mobile banking platform.
Through LeumiTech, Bank Leumi is making an aggressive play in tech financing, providing loans to startups and taking equity stakes in venture capital firms.
"What we're trying to do is put more of our balance sheet in play," Mendelson said.
The tech focus comes as the parent company makes splashy investments in digital banking. Leumi Group, for instance, is building a new digital platform to replace its aging core systems.
The changes also come as Leumi Group looks to turn a corner on a difficult period; it agreed last year to pay $400 million for helping U.S. clients evade taxes. The company admitted to unlawfully assisting clients in hiding assets from the Internal Revenue Service.
The investigation contributed to a $50 million loss last year, Leumi's first in 20 years, according to the bank.
Mendelson discussed those changes in a wide-ranging interview. The following is an edited transcript.
What has surprised you since taking over as CEO?
Avner Mendelson: The inherent culture here at the bank is almost like a family. The flip side, I will say, is that the bank has been sleepy. This combination of being overly conservative — with people being here for a long time and having this overly fuzzy family —has been confused in some cases for lack of accountability and acceptance for mediocrity.
The biggest challenge for me over the two years has been morphing that DNA.
Has the bank played it too safe? That's not something you hear often.
If you go look through the last cycle, in 2008 and 2009, the bank didn't lose a dime.
What about your real estate portfolio?
There was real estate, but it was very conservatively underwritten. Again, it was what I would call an overly conservative approach. I do believe when a crisis of one in 25 years happens, it's okay to expect a bank to post a loss over a year or two. That is, a loss that the capital structure can absorb.
Tell me about some of your tech initiatives.
The big initiative is on the group level in Israel. We have our own layer of converting our core systems. This is another place where we have the advantage of not being a public company. We don't have the analysts to serve every quarter, so we can afford — and our shareholders can hold — a longer-term perspective and decision-making.
What's included in that investment?
It's the systems. It's the underwriting, the deposit generation, general ledger, desktops for the relationship managers, data warehouse reporting. That's the non-sexy stuff. Obviously the sexy stuff is the customer facing, cash management, [business banking], mobile app, wealth management.
The bank has also been working with startups.
That's the third part of the initiative. Today, there are probably about 6,000 tech companies in Israel, from the two guys in the garage all the way to the large corporates. The development, the innovation, is in Israel. But the market, whether it's the funding, or the marketing and the corporation, with the big technology players, is in the U.S.
We have traditionally served that community in silos. We have an office in Palo Alto, we have an office here in New York, we have a sister subsidiary in London, and we have teams in the commercial division in Israel. The idea was to take a more focused approach and create a subsidiary called LeumiTech.
What kind of financing does LeumiTech provide?
It's everything from the simple stuff such as opening [a client's] first bank account in the U.S. or getting a credit card to the guy who doesn't have a credit history here. It's the burn-rate management or foreign exchange. Obviously it's loans.
To serve tech startups? Or venture capital firms?
In Israel, we're the lead investor in the tech sector, so we have probably about $150 million or so invested in various VCs in Israel. Here, the idea is to put our balance sheet at play, not just on the equity side, but obviously finding the right path of lending responsibly.
We're not a venture lender, but we know how to do venture lending, from the traditional working capital lines or bridge-to-equity calls for the funds, as well as taking some riskier positions. This is relationship banking. It is tech, but it's the most traditional form of finance.
Who are your competitors? Silicon Valley Bank?
Silicon Valley, absolutely. And the model — it's the Silicon Valley model. Silicon Valley Bank is the 800-ton gorilla in the U.S. We're competing with them, but to tell you that we're going to compete with them for the Sequoia [Capital] relationship tomorrow, probably not. If we can be a Square 1 Bank or Bridge Bank, that were both acquired recently, in terms of activity, we'll be more than content.
Are you concerned about rapid growth in that sector?
Right now, no. I think our exposure is minimal on a relative basis. We've had a more conservative bent in terms of credit. We're becoming more aggressive, and we're trying to become more aggressive, with the idea that we'll be able to identify those right partners.