Everybody’s money is green. That is the basic challenge of banking—getting people to do business with you rather than the guy down the street whose loans cost a quarter-point less in interest. And yet a dozen community banks in North Texas out-achieve their competitors, according to analysis by Dallas investment banker C.K. Lee, managing director at Piper Jaffray.
Using six criteria he originally employed for a presentation to the Texas Bankers Association, Lee found a group of North Texas financial institutions that excels in a commodity business while balancing growth with stability. “Most businesses are focused on the income statement,” he says. “They seek to drive revenue and profitability and manage expenses. If you manage a bank solely to boost income, you take an inordinate amount of risk on the credit side and it costs you in the long run.”
To prevent today’s high-profit loans from turning into tomorrow’s bad debt, bank leaders must focus on building the right kinds of loans, loan structures, and customers, says Lee, who helps financial services companies put together deals like mergers, acquisitions, and capital raises. “If you manage the credit risk, the income statement will take care of itself,” he says.
But what distinguishes this dozen is an ability to successfully shift their business models as regulatory and market factors have changed the formula for community bank prosperity over the last 10-plus years. Take Frisco-based Texas Republic Bank, whose charter dates to 1891—the oldest in Collin County. “At one time, a bank’s only choice to be convenient was to have a physical office or branch near prospective customers,” says David Baty, president and CEO of the $256.4 million asset shop. “Today, by using technology, we can reach more low-cost depositors without overhead from bricks and mortar facilities.”
The Big 12
Here are the top-performing community banks in North Texas, according to an analysis by Dallas investment banker C.K. Lee of Piper Jaffray.
|Affiliated Bank||Bedford||$751.7 million|
|Benchmark Bank||Plano||$582.8 million|
|Citizens National Bank of Texas||Waxahachie||$1.1 billion|
|Ennis State Bank DBA Trinity Capital Bank of Texas||Ennis||$231.4 million|
|Legend Bank||Bowie||$694.6 million|
|PointBank||Pilot Point||$545.5 million|
|State Bank of Texas||Dallas||$919.4 million|
|T Bank||Dallas||$305.8 million|
|Texas Brand Bank||Dallas||$203.5 million|
|Texas Republic Bank||Frisco||$256.4 million|
|Texas Security Bank||Dallas||$476 million|
|Veritex Community Bank||Dallas||$8 billion|
Dealing with Deposits
Small banks generally eschew branches because most cater to businesses, where loan officers can go to take care of most everything they need to do with a customer. Consumers have mostly moved to large institutions, partly because a 2010 law, the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Although large parts of the law have since been changed, many community banks still view it as creating too much regulatory risk to home loans for too little return. “The big banks have the sophistication, product set, and technology to compete” for everyday folks, Lee says. “Wells Fargo, JPMorgan Chase, and Bank of America have a lot of branches that are dependent on foot traffic. But they, too, are reducing their footprint.”
After years of near-zero interest rates, small banks are finding themselves competing for deposits, which they use to keep the lights on. The increasingly heated scraps for customers’ dough are partly the result of the Federal Reserve’s rate hikes.
“Today it’s more of a hand-to-hand combat issue with other folks in town for deposits,” says Malcolm Holland, president and CEO of Dallas’ Veritex Community Bank, an $8 billion asset unit of Dallas’ Veritex Holdings.
The ease with which customers can shop rates has also forced changes at community banks. “Ten years ago, we were strictly a rural bank and our competitors were other banks in our community,” says Bramlet Beard, president of Ennis State Bank, which does business as Trinity Capital Bank of Texas. “Today, most depositors are aware of the highest yields regardless of location and are comfortable placing deposits through the internet.”
Deposits are enough of a problem that banks are buying one another primarily for the money they hold for clients, Lee says.
Small banks are also shifting to services that incentivize businesses to put in large amounts of money without expecting high rates of return, such as treasury management or handling their payrolls. “With the progress made through online banking offerings, we are more focused on keeping lending clients’ operating accounts with us, even if their hotels are in a different city or state,” says Sushil Patel, president of Dallas-based State Bank of Texas, a niche hospitality lender.
To meet strong loan demand, institutions like Dallas-based Texas Brand Bank sometimes add to their deposit bases by tapping outside middlemen called “listing services,” according to its CEO, Fritz Heinke. Those services get fees for helping put the transactions together. But as Heinke demonstrated during a recent interview, his institution, like the rest of the dozen community banks, succeeds through their courage to not follow the crowd. “Our strategy is to place banking offices in underbanked areas, such as Uptown, The Cedars, Garland and, soon, Deep Ellum,” he says.
Adding Business Lines, Decreasing Risk
With most community banks focusing on real estate, many they are finding business loans, known as “commercial and industrial” (C&I), to be new sources of both deposits and higher yield, Lee says. “Companies may not have as must tangible stuff to serve as collateral, so you price in your risk,” he says.
Texas Republic has seen enough growth in C&I that it hired a new Dallas market president, Dale Duboskas, who has expertise in that area. As a “preferred lender” through the U.S. Small Business Administration, Texas Republic also has authority to make loan decisions without the lengthy prior approval it would otherwise need from the agency. T Bank of Dallas makes SBA-guaranteed loans to dentists and other professional executives, according to president Patrick Howard. Rather than knocking on prospects’ doors, it is building its C&I portfolio through referrals. “We focus on specialized lending niches rather than trying to be everything to everybody,” says Howard.
An advantage that lenders did not have until 1999 is the ability to add related businesses such as investment banking. A 1933 law, the Glass-Steagall Act, prevented that until it was repealed at the turn of the century.
At 55 years old, Plano’s Benchmark Bank has both a commercial and residential title company and a private wealth management arm, according to CEO Jonathan Filgo. It built the offshoots by bringing in talent in those fields and internal growth, he says. “For Benchmark Private Wealth Management, we partnered with a longtime customer, Wayne McCullough, who understood our culture and what we were about,” he says.
Particularly in an industry that runs on relationships, leadership makes or breaks a bank over the long term. Most investors and board members can only dream of a run like what State Bank of Texas’ founder, chairman and CEO, Chan Patel, has delivered since launching operations on “Black Monday,” a stock market crash on Oct. 19, 1987.
That year marked its first and last capital raise. The original shareholders–all of whom are still on the board–have seen their $2 million investment turn into $302 million in distributions, according to Sushil Patel, who is Chan’s son. Sushil, the bank’s president, and his brother Rajan, the chief lending officer, are the only additions to that shareholder group. “Our bank still has $150 million in capital on its books,” Sushil says.
Jeff Bounds is an award-winning business journalist based in Garland.