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Community banks are revamping branches and offering new services in an effort to become trusted advisers to small businesses. Such a transformation is often easier said than done.
March 18 -
TowneBank bought a minority stake in a security firm to help protect its commercial customers and boost revenue.
August 8 -
Executives at Lead Bank in Garden City, Mo., are hopeful that offering small businesses more high-touch services, such as consulting, will provide an advantage in an area that has become fiercely competitive.
January 22
Lots of banks are feeling their commercial customers' pain, and some are finding a way to capitalize on it.
As a result some regional banks have expanded, and some small banks have started, investment banking services to help commercial customers sell their business or buy other firms. Long seen as a niche primarily for banking's biggest players, i-banking can help these banks distinguish themselves from their competitors, deepen customer relationships and boost fee income.
"It is increasingly difficult for banks to make money, and this is a way to drive some fee income without deploying capital," said Terry Keating, a former managing director at the investment banking firm Amherst Partners and now an executive vice president at the commercial financier Accord Financial.
Many business owners are disappointed about the weak economic recovery, Christopher Gorman, the president and chief executive of KeyCorp's corporate bank unit, said during the company's second-quarter earnings call with analysts.
KeyCorp's M&A fees rose 134% year over year, he said, and the Cleveland company recently announced that it would
"You have a situation where [business] people are sitting on a lot of cash," Gorman said. "There's not a lot of growth to be had and so people are looking to grow strategically."
Even tiny banks are pursuing a piece of the action.
The $294 million-asset Freedom Bank of Virginia in Vienna launched FBV Capital Advisors in February with plans to work with smaller government contractors looking to sell. Less money has flowed to these smaller firms in recent years as the government has bundled more of its contracts.
It made sense for Freedom to offer M&A advisory, even if many owners won't decide to sell for years, President and CEO Craig Underhill said. These businesses will need other banking services in the meantime, and eventually the advisory unit could boost noninterest income at the bank.
"We felt like this was a service that our clients could use, and we could make some money for them on the way out," Underhill said. "We think this will help bring people in who aren't thinking of selling immediately but it is a differentiator for the relationship."
Providing additional services to commercial customers, such as
Expanding into investment banking activities is an extension of that philosophy. There is also a fear that banks could lose out on wealth management revenue if business owners get help with a sale somewhere else and then entrust managing their windfall to that new firm, Keating said.
Lead Bank in Garden City, Mo., has
"A lot of the goal is to be able to help businesses to solve problems and grow," Harris said. "Really not many other banks are offering all of these services in the Kansas City market, and we think there is an opportunity for real growth."
But banks need to be aware that adding these services can be tricky, experts warned. Business owners may not naturally think to contact their bank to advise them on a sale, said Chip MacDonald, a partner at the law firm Jones Day. There is also a delay between when a bank launches the unit and when it finally starts making money, he added.
"You have the time it takes for regulatory approval for one," MacDonald said. "Then you have the lead time it takes to develop contacts so you won't be generating any revenue."
There are also cultural differences between commercial and investment banks, experts said. M&A advisory work is largely driven by relationships, so it requires having experienced bankers, Keating said. That means "making sure your compensation is enough to attract people but not enough so they take unnecessary risks," MacDonald said.
Pacific Crest had been courted by potential buyers before, including other investment banks, private-equity firms and commercial banks, but it decided to join forces with KeyCorp because both companies have similar cultures, said Scott Sandbo, chairman and CEO of Pacific Crest. Both firms have a "culture that is grounded in bringing industry expertise to bear for clients" and are "very collaborative," Randy Paine, president of KeyBanc Capital Markets, added.
Overall "retention will be exceptionally important" and is something that KeyCorp and Pacific Crest are already working on, Sandbo said. Both teams have already spent "hundreds of hours over the last six months discussing how we would fit together," he added. Paine understands firsthand the importance of making employees comfortable with this type of transition he joined KeyCorp after it bought McDonald Investments in 1998.
"I've sat in the chair that Pacific Crest is sitting in, so as we embark on this I am very sensitive to retention," Paine said.