The Money Issue
Community banks think outside the core
Community banks, hard put to earn profits on their traditional lending, are finding new sources of revenue.
Exploiting a Unique Asset
Like many banks, Pilot Bank in Tampa hit a wall during the recession. As borrowers in real estate-related businesses ran into trouble, the bank's troubled loans and assets grew to $21.5 million.
When Tampa banking industry veteran Roy Hellwege arrived in 2010, his team worked on resolving the troubled loans - non-performing loans now are down to $3.4 million - but also looked for other ways to boost income. "You have to find ways to be successful outside your traditional core business," says Hellwege, president and CEO of the bank and its holding company. "I do believe you have to find a niche."
Pilot found an answer in-house. Since 1996, the bank's holding company had owned a company, National Aircraft Finance in Lakeland, which had built a brand name by lending to refinance or buy general aviation aircraft, whether experimental single-engine piston planes or corporate jets.
Believing the aircraft market held opportunity to increase the bank's bottom line, Hellwege and National Aircraft Finance President Kevin Buckland focused on ways to leverage National Aircraft Finance's expertise in aircraft lending.
Private plane owners have "proven to be good borrowers," says Hellwege. Affluent and passionate about their flying, they are loathe to default and see their planes repossessed. National Aircraft signed affinity deals with associations of aircraft owners, two of which total nearly 600,000 members, and with aircraft manufacturers. It created a syndication desk to establish aircraft loan pools for sale to financial institutions with money to lend that wanted high-quality paper and solid yields.
A potentially big payoff landed in 2013, when the Tampa-based company inked a deal with Washington-based Nexa Capital Partners' $550-million NextGen GA Fund to assist plane owners borrowing to meet a 2020 FAA mandate to upgrade their avionics as the FAA moves air-traffic control from ground-based radar to a satellite system using GPS. Upgrades cost from $15,000 to $150,000 per plane. Pilot will take applications, underwrite, book loans and manage the portfolio for NextGen. It could mean $26 million in income for Pilot over five years, the bank says. The work also will provide a chance to pitch plane owners to become customers of the $215-million asset Pilot. "There's a great market out there. We should be cross selling our services to all clients," Hellwege says.
Looking for Niches
Community banks have had to look for non-traditional sources of revenue.
Community banks historically relied for as much as 80% of their income on the margin between what they earned on loans and what they paid out to depositors. But the spread has been falling for decades and has been compressed further by the Fed's low-interest rate strategy. Nationally, banks' net interest rate fell from 4.91% in 1994 to 3.10% in April, according to the St. Louis Fed.
"It's very diffcult for a community bank to make money on the spread," says Michael G. Sanchez, president and CEO of CBC National Bank, a $440-million asset bank based in Fernandina Beach.
Benjamin C. Bishop Jr., chairman of investment banking firm Allen C. Ewing & Co. In Jacksonville, says the key for community banks is to find an alternative niche, then partner with consultants or other outsiders with expertise - rather than just assign a loan officer with no experience in the niche to develop it.
Earlier this year, Marine Bank & Trust in Vero Beach found a niche by partnering with Cocoa Beach-based Connors Wealth Management to offer its customers Connors' services. Marine President and CEO William Penney says the $151-million asset bank expects only an incremental income gain but the bank nonetheless is "excited about the opportunity."
Another niche for some banks has been home mortgages and SBA lending, which traditionally haven't been a focus for community banks. Both have proved profitable for CBC, which has had SBA and home mortgage production divisions since the bank's founding in 1999. CBC's community bank division in the frst half of this year just broke even, but its mortgage division, based in Atlanta, earned $770,000 after taxes while its SBA division, which has offices throughout Florida, turned an $848,000 after-tax profit.
"We didn't do anything new. We did more," says bank President Sanchez. For example, it added 100 people to its mortgage division to handle the refinancing boom. In 2012, the bank, which had $414 million in assets at the time, did $2 billion in mortgage production.