How a Small Conn. Bank Seized on Big Chance to Refinance Student Loans

Darien Rowayton Bank in Darien, Conn., has learned just how important timing is to a successful business plan.

The first lesson for Darien Rowayton came the hard way after the $701 million-asset bank opened its doors in April 2006 - less than two years before the financial crisis. With the economy in intensive care, the bank lost nearly $17 million through 2011, failing to post a profitable year until 2012.

"When you're a young community bank working to break even, you really want to get there as soon as possible," Robert Kettenmann, the bank's president and chief operating officer, said in a recent interview. "We had the same problems as everyone else, but they were magnified by our [small] size."

Fortunately, lesson two has been more positive.

A group led by investor Gary Lieberman stabilized the bank with $10.5 million in 2010. Not long after, the bank began studying the merits of entering student loan refinancing, which at that time was relatively new and inhabited mainly by nonbanks.

"There was plenty of room for additional competition, and we caught a very positive wave early on," Kettenmann said.

Stripped down to its basics, student loan refinance is "compliance-based, credit-focused installment lending," which gives banks an advantage over other financial entities, he added. That knowhow, paired with a low-cost deposit base, helped the bank prepare "for the basic underpinnings of the business."

Darien Rowayton, which did not refinance its first loan until mid-2013, has seen business explode. Volume recently eclipsed $1 billion. In August, the bank announced plans to securitize a $359 million pool of loans. Profit also jumped from $941,000 in 2013 to $5.8 million last year.

Now, the bank is deploying some of that capital to enhance its core banking franchise.

In October, the bank filed an application with Connecticut's Department of Banking to occupy a branch in Greenwich recently vacated by the $39.4 billion-asset First Niagara Financial Group, adding to three existing branches in Darien, Rowayton and Southport.

All of the bank's branches are in Fairfield County, one of the wealthiest jurisdictions in the nation, with a median household income in excess of $82,000 according to the U.S. Census Bureau.

A new branch would likely boost Darien Rowayton's deposit share. The bank, at Sept. 30, had $630 million in deposits, or roughly 1% of the total funds in Fairfield County.

"Lower Fairfield County is a tremendously rich deposit environment," Kettenmann said. "Because of that, anyone you can think of is here."

Kettenmann joined Darien Rowayton in June 2008, more than a year before Lieberman's group took over the company. Kettenmann credited Lieberman, the bank's chairman, for having the inspiration to enter student loan refinance, though his own background was seemingly tailor-made to drive a major consumer-lending effort.

Kettenmann spent 25 years at Chase Manhattan Bank, where he gained extensive experience in credit card and home-equity lending. In 1992, he went to Dime Savings Bank of New York, where he was general manager of the consumer lending division prior to the bank's sale to Washington Mutual.

Despite a loan book concentrated heavily in student loans, Darien Rowayton reported virtually pristine credit quality, as of Sept. 30, with just $67,000 of loans on nonaccrual status.

That should come as no surprise, said Kettenmann, who noted that the bank's strategy focused on lending to upwardly mobile professionals with promising career prospects.

"Our borrowers are people who've been out of school for some time and are progressing on a reasonably upward tangent," Kettenmann said. "We didn't feel like we were taking any extraordinary credit risk."

Borrowers whose loans are included in Darien Rowayton's planned $359 million securitization have an average FICO score of 765, according to a report by Fitch Ratings.

Student loan refinancing is a business poised for growth, said Andy Josuweit, chief executive of Student Loan Hero, a consulting firm that helps borrowers manage student loan debt. He said the volume of student loan refinancing should total about $9 billion this year.

Most of the debt that has been refinanced to date has consisted of private student loans. If the market expands to take in federal loans, the amount available for refinance could grow to up to $200 billion, according to some industry estimates.

Much of that debt, however, is lower in quality than debt for private student loans.

The key, Josuweit said, is to find "innovative ways" to move down the credit spectrum.

Darien Rowayton, however, sees no reason to change a strategy that has worked so well so far.

"We think there's more potential for this product to grow without sacrificing credit standards," Kettenmann said.