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Can Dallas Capital Bank Succeed in a Crowded Market?

The North Texas financial service is growing through snazzy tech and in-person lender visits--without opening branches.

Technology and talent top bricks and mortar in delivering white-glove financial service. That’s the wager Dallas Capital Bank is making to compete for high-end clientele who run small and mid-sized companies in North Texas.

Since announcing its purchase of Town North Bank in September 2014, an investor group led by Dallas billionaire Darwin Deason has helped fund extensive technology upgrades and the addition of more than 40 new employees, many of them bankers from larger rivals. But while large lenders in particular recently have been focused on improving their branch service, Dallas Capital’s CEO, Doug Hutt, has no near-term plans to open additional locations beyond his far North Dallas headquarters.

“We have chosen to invest in best-in-class technology and best-in-class bankers to deliver financial solutions,” says Hutt, former president of Bank of America Dallas. Hutt’s bankers visit clients in person, both to deliver advice and cement relationships. Clients receive snazzy technological capabilities helpful to smaller businesses, such as person-to-person payments and same-day funds availability, both of which remove the need for costly wire transfers.

Dallas Capital’s take on banking is notable for two reasons: First, its focus on all things non-brick-and-mortar runs counter to the industry’s current obsession with branches. Consumers still visit branches for specific needs like opening new accounts, experts say, but prefer digital for day-to-day banking needs. Second, Dallas Capital’s story shows how innovation is spurred in community banking. Starting banks from scratch has become too expensive and difficult, experts say, citing hurdles in regulation and in getting deposit insurance from the Federal Deposit Insurance Corp.

So entrepreneurial-minded investors instead have purchased banks and changed their business models, according to S. Scott MacDonald, president and CEO of the Southwestern Graduate School of Banking at Southern Methodist University. Today “you will go through additional scrutiny” by changing the model, he says.

Dallas Capital, however, escaped such regulatory flack. Indeed, its assets have grown 22 percent, to $728 million, since announcing the Town North purchase, which closed on undisclosed terms in May 2015. Still, it remains to be seen how Hutt’s model will fare long-term in North Texas.

The local submarkets the bank is targeting are especially crowded. As of June 30, 2016, a dozen banks had deposits in the 75254 zip code, where Dallas Capital’s location sits. Another 21 banks had deposits in 75034, covering parts of Frisco and Plano, says Jacob Thompson, managing director at Samco Capital Markets. “There’s been an increase in the number of banks targeting these markets in the last five to 10 years as they follow the demographic trends northward,” he says. “All of them, to a certain extent, target the same niche that Dallas Capital is pursuing.”

Not just about money

Dallas Capital’s take on high-touch service comes as banks grapple with shifting preferences among customers. About three years ago, James Bexley’s research found consumers were ranking service atop wish lists from banks, rather than convenience. That marked a change among bank clientele’s attitudes, according to Bexley, the Huntsville-based Smith-Hutson endowed chair of banking at Sam Houston State University’s business school. Customers still want tech razzmatazz from banks, such as depositing checks via wireless devices, Bexley says. “But 96 percent of accounts are opened in a bricks-and-mortar facility. You don’t need as many, but there’s still a convenience factor.”

That creates two issues for banks: Determining how many branches are enough, and making those locations pay for themselves. Traditional branches cost about $2.4 million apiece to set up and $200,000 to $400,000 annually to operate, according to experts Reuters quoted in August 2016. With customers doing fewer transactions in person, U.S. banks shrank their collective branch count by 6.5 percent between 2008 and 2016, according to the National Community Reinvestment Coalition, an advocacy group. Dallas County lost 52 branches over that time frame, or 8 percent of its total, NCRC data show.

But a funny thing happened on the way to all-digital banking: Branches proved more valuable than lenders may have realized. A recent national study of big-bank clients by J.D. Power found 71 percent had visited a branch an average of 14 times over the past year. Customer satisfaction was higher among customers young and old who visited branches versus those who didn’t, J.D. Power found. That seemingly plays to the wheelhouse of community banks, which generally compete on service, not price. But big banks have improved customers’ in-branch experiences and have better technology offerings to boot, J.D. Power notes. A J.D. Power spokesman declined to comment.

Spending money to make money

Unlike many community banks, Dallas Capital can compete technologically with the big boys partly because its backers are willing to write checks for the improvements. By working with a large financial-tech company, Florida-based FIS, Dallas Capital has made it easier for its clients to do their banking on wireless gadgets or through its call center. “Electronic processing of invoices and payables is the next big area of change in the commercial world,” Hutt says. He says the company has “invested heavily” in its technology to ensure product offerings are “state of the art.”

While large banks offer technology bells and whistles galore, their massive size forces them to focus on the biggest customers to move the proverbial financial needle, experts say. “Money center banks have not tried actively to compete in providing financial guidance to smaller and mid-sized businesses,” says Scott Hein, retired E.W. Williams Centennial Bank chair in finance at Texas Tech University’s business school. The reason: It’s too expensive for big players to offer relationship-oriented advice to that customer segment, he adds. Dallas Capital views that as an opportunity, and the expanding North Texas region as the optimal spot to exploit it.

For the 12 months ending July 1, 2016, Frisco and McKinney ranked No. 2 and No. 3 respectively in population growth rates among U.S. cities that had 50,000-plus residents on July 1, 2015, according to the U.S. Census. Frisco (6.2 percent) and McKinney (5.9 percent) were outpaced only by the Houston suburb of Conroe, whose population surged 7.8 percent. Dallas, meanwhile, added 20,602 residents during those same 12 months, the sixth-highest numeric increase among those big U.S. cities. Fort Worth, with 19,942, was seventh, Census data shows. “The investor group believes that Dallas-Fort Worth is the best banking market in the country,” says Doug Deason, Dallas Capital board member and the son of Darwin Deason, who founded Affiliated Computer Services. Doug Deason says regulatory changes and consolidation in banking have created an opening for Dallas Capital’s approach to serving small-business executives. “In a market like Dallas, with significant business and job formation, we saw a great opportunity,” he says.

Growth as challenge

The flip side to DFW’s growth is the possibility of submarkets becoming “over-banked,” with too many lenders chasing too few customers. University Park’s Preston Center complex drew media attention in 2007 about this issue. Thompson says that, with a few exceptions, he’s not hearing about banks stealing each other’s customers, which can be a symptom of overbanking. Assuming the market doesn’t boil over a la 2007-08, a separate question becomes whether Dallas Capital could outgrow its bread and butter of small and mid-sized businesses. As a bank’s assets pile up, regulators allow it to make larger loans. Healthy growth also builds a bigger financial backstop to insulate the institution against bad situations, such as loans going south. “I learned long ago never to say never,” Hutt says. New branches are always possible, as are mergers or acquisitions, he says. “Having said that, our business plan and our focus is to continue growing the bank organically off the strong foundation we’ve laid,” he says. 


Jeff Bounds is a freelance business writer in Garland.

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