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Special Section
As the banking shakeout accelerates,
business owners wonder, Who you gonna call?
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Business New Haven
10/23/1995
By: Lori Green
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Fewer players in the state's commercial banking industry may mean less choice for business customers. But the fittest banks will survive by anticipating and meeting the banking needs of the fastest-growing segment: small and middle-market companies.
With the regional banks extending their reach across the state and a number of state-based mid-sized banks uniting in mergers and acquisitions, what will be the net effect on local commercial lending? Mid-market companies, generally defined as those with $5 million to $10 million or more in assets, may continue to be well-served by existing and newly formed financial institutions. But smaller businesses may experience a measure of disorientation as new branch banners go up and familiar faces of lending officers change.
“Connecticut has long been regarded as an over-banked state,” observes Keith Johnson, chairman of the finance department at the University of Connecticut School of Business. “From an economist's view there was too much competition, which needed to clean itself out through consolidations, but business lending needs should continue to be served.”
For the moment, it appears that the credit needs of small and mid-sized businesses have fortuitously coincided with the competitive urges of the marketplace. In fact, some industry observers believe that as banks vie for position in the state's commercial market, they may have to provide upgraded consulting services to start-up or growing businesses, such as reviewing business plans with an eye toward enhancing their quality as documents demonstrating creditworthiness.
The Bridgeport-based People's Bank, for instance, in partnership with Hartford College for Women, already offers some business planning, government funding information and other seminars for entrepreneurs, in addition to a wide range of banking services at its Women's Business Center in Bridgeport. In general, banks still regard business planning and forecasting the job of the credit-seeking company's managers or owners.
“Projections in business plans should be the work of the management managing those daily operations,” says Brian Dreer, a commercial lender for People's. “It's not a terribly good idea to get involved with planning - it's really something better left to the borrowers' financial advisors and managers.”
People's asserts that the Connecticut marketplace is its first priority, and its plans include rolling out 45 new branches over the next two years in Stop & Shop locations across the region. Bank officials say they intend to continue capitalizing on what they view as their key competitive advantage: being the largest bank headquartered in the state.
Peter Melly, Bank of Boston's vice president of small-business banking explains the bank's commtiment to the small to mid-size commercial borrower, “A conscious decision has been made to bring up retail and small business banking. Two years ago, lending to small businesses [which the bank defines as firms with less than $5 million in sales with credit needs of less than $1 million] comprised 15 percent of our total income stream; now it comprises 30 percent of our income stream. Our focus groups tell us that small businesses want products that are simple, easy-to-use, reports that are easy to understand, and they want their branch manager to know them. Larger companies are more credit-driven and choose a bank based on the ability and desire of the bank to lend to them.”
The second largest bank headquartered in the state, the Waterbury-based Centerbank, also appears to be intensifying its commercial lending activities. Having recently acquired both the assets of the failed Founders Bank from the FDIC and the Watertown-based Heritage Bank, and achieved SBA certified-lender status along with 11 other banks operating in the state, Centerbank portrays itself as aggressively targeting community, municipal and small-business credit needs.
The bank's attainment of the FDIC's outstanding rating for its compliance with the Community Reinvestment Act, evidenced by its “Can-Do” and Center-Reach programs, reflect “not just our commitment to the CRA but rather to the community that we serve,” says Richard Dumont, senior vice president and Centerbank's CRA officer.
Another indication of the bank's effort to enhance its focus on local markets is its appointment of Joseph M. Murphy to the newly created position of New Haven regional president. One way the bank is working to avoid the depersonalization which can characterize larger institutions is by speeding up decision-making at the point of customer contact.
The jury is still out as to whether recent marketing and customer-service initiatives such as these launched by the larger players will reap bottom-line benefits for the banks, while actually generating growth opportunities for local businesses. In the meantime, a number of smaller guys in the field claim to be stealing bases while the muscle-flexers merge, contemplate mergers, or allocate resources to converting systems and retraining staff.
“We're seeing a lot of business coming our way from the larger banks,” says President F. Patrick McFadden of the Bank of New Haven. “Our commercial loan portfolio is around $82 million, which includes 226 new customers signing on over the last several months. We are essentially a commercial bank.” With average commercial loans around the $1.4 million mark, McFadden envisions expanding the bank's current eight-office operation to better serve the area business community. As do others, he sees a general lack of interest on the part of the larger banks in making loans to businesses with $3 million or less in annual sales. No underdog mentality prevails here, however. Says McFadden: “Our people are highly skilled, our decisions are all local, and we're well known throughout the New Haven area. The local commercial market is filled with opportunity.”
As one of the few mid-sized banks left standing, Lafayette American Bank & Trust Co. occupies a unique position in the commercial lending market. For one thing it is well out of the trenches, having posted profits for seven straight quarters since recapitalization two years ago.
Although the bank targets a wide spectrum of businesses, those with sales ranging from $2.5 million to $35 million, much of their commercial activity is based in the manufacturing sector - an area which has been propelling new customers through Lafayette American's doors. The average size of a commercial loan is around $3 million. “We've increased staffing in commercial lending, while maintaining the same senior people out in the field talking to customers,” says president Robert B. Goldstein. “We're a sophisticated but not large bank, though we would be willing to acquire suitable institutions.”
Goldstein's bank recently opened two new branches in Westport and one in Norwalk, and intends to strengthen its commitment to the business community by providing the “full-range of services, including working capital, commercial mortgages, and financing for facilities expansions,” explains Goldstein.
Toward the “upper-middle” stratum of bank size is Webster Bank (still known as First Federal until next month), the recent jackpot winner of 20 of the 27 branches divested by Shawmut Bank as it dissolves into the Fleet Financial Group by year's end. Although the award process for the branches up for sale was a private one, most acknowledge that the three major bidders at the table were First Federal, First Fidelity and Citizens Bank.
While industry sources report that the highest premium bid was in fact submitted by First Fidelity, First Federal/Webster's Gary MacElhiney, executive vice president of commercial banking, points out that “the highest premium may not be the best deal.” And the deal was more complex than most observers could discern, with Fleet wanting the buyer of its branches to hire or retain as many Shawmut people as possible - not solely from altruism, but also to reduce Shawmut's severance costs as it integrates personnel with Fleet.
It is also widely acknowledged that Fleet preferred a mid-sized rather than a larger bank to acquire Shawmut's branches in order to avoid making key competitiors even more formidable by feeding them large chunks of assets. Other factors also weighed in heavily, such as the bidder's ability to close on loans quickly and its commitment to and presence in the state. Says MacElhiney, “We are entirely in the state. For example, we use AFS in Wallingford to do our check-processing. We don't know where checks get processed at the larger regional banks.”
The emerging Webster Bank entity defines its niche as providing financing and banking services to smaller and middle-market commercial customers. As do most of the banks that expect to be in the market long-term, Webster's avidly subscribes to the “relationship” (vs. transaction) approach to banking and customer service.
By early 1996, having closed on the acquisition of Shelton Savings Bank and divested two of its Fairfield county branches, Webster will operate 63 branches throughout the state and hold approximately $4 billion in total assets, $575 million of which are projected to be in commercial assets. This will put Webster neck-in-neck with Centerbank for the title of second largest bank headquartered in Connecticut. “More than half of our assets are in New Haven, and we conduct no commercial activity outside the state,” explains MacElhiney. “Our policy is to lend in towns where we have branches so we can provide a full-service relationship.”
First Fidelity Bank, while somewhat disgruntled and skeptical about whether all the cards were out that should have been on that bidding table for the Shawmut branches, is visibly on its own fast track to the major leagues as it moves in with First Union to create a combined total asset base of $126 billion. Although the bank is still a year away from hoisting up the new First Union signs, new marketing and sales strategies driven by the merger are already being brought on line.
President and COO Thomas H. O'Brien Jr. says 1996 “will be a transitional year for us. We have no plans to close branches today and will be looking to see how to best expand our presence in the greater Hartford area. New products will be introduced more quickly, and there will be a much stronger sales focus: Employees at all levels will be incented to be more sales-focused. An account officer used to spend 30 to 40 percent of his time face-to-face with prospects; the new relationship banker will increase that to 65 to 70 percent. They will be in the marketplace twice as frequently,” explains O'Brien.
First Union's recent re-engineering of its entire operation - now also underway at First Fidelity - has resulted in an increased re-empowering of the bank's underwriters, enabling them to make decisions on credit requests without going through extensive layers of bureaucracy and credit committees. The bank is aiming to issue decisions on credit requests within three to five days after receiving all requested information. First Union, headquartered in Charlotte, N.C., has already successfully instituted many of these service improvements.
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