Phil English Aug 1, 2012

Small Business Still the Charm

Community banks are struggling in many areas of the country and there’s been much industry commentary on how this category of financial institution will have a difficult time competing with larger banks in the future.

But Richard Dailey, CEO of the $215 million-asset Apollo Bank in Miami, asserts that a community bank focused on small business customers can still do well. All three of Apollo’s branches are located in areas known for a high concentration of entrepreneurial small businesses: downtown Miami/Brickell, Doral and Coral Gables. First opened in 2010, the bank has reported profits in its seven most recent quarters. With relatively low cost funding and frequent demand for short-term loans, “the profitability for a business bank can be very, very good,” Dailey says.

Q: Apollo Bank has said it’s targeting small and mid-sized businesses. How do you approach that market from a marketing and business development perspective?

Dailey:  Most of the businesses here in southern Florida would qualify as small to mid-sized. Our focus is on locally-owned businesses, as opposed to a large, national or regionally-owned business. If a major law firm wanted to bank with us, by all means we would welcome that opportunity. But our marketing efforts and business development efforts are focused on local firms.

If we can get the business to bank with us, we’d like the owners to bank with us and we’d like to provide services to that company’s employees. That’s where the consumer side comes in. And we look to locate in markets that are known to have a combination of business customers as well as some retail. At the present time, each of our three branches is located in such a market. Our branching strategy going forward is to go into other markets in south Florida that have that same combination.

The structure of our branches is pretty much the same as other banks in terms of size and service capabilities. But we also station a lender in each branch along with the more traditional branch manager and customer service representatives. We also provide quick turnaround time. For example, the chairman of the bank and myself, as well as our top executives, have cell phones with us 24-7. We tell customers to call us on the weekend and don’t be shy about calling us at home. And when a customer has a need, we’ll go to their office if they don’t want to come to the bank. When we have a loan request, we will immediately meet with the customer and gather information.

All our decisions are made locally, which is an advantage of a community bank. We know a number of banks here in Miami who have very good business developers, but when they take a loan request, they send the package to Chicago or somewhere and a decision takes longer. On the service side, there’s really no way a big bank can compete with a high-touch community bank, particularly if you also have state-of-the art technology like real-time processing, rather than batch processing, and remote deposit capture.

Q: How do you identify neighborhoods with a high concentration of small businesses? What kind of research or analytics do you use to make sure you’re selecting the optimal branch locations?

Dailey: All of us at Apollo are local; all 172 of our investors are from southern Florida. That was by design when we formed this group two and a half years ago. So we know the community very, very well. Since so many of our investors were born and raised here and started their businesses here, it’s not a situation where we have to do market research. We’re not coming into a new market. If we were going to expand into Jacksonville we’d have to do that. But we know this market.

We go into an area and pick up core deposits, checking accounts, operating accounts and business money market accounts. Those are the cheaper sources of funds for a bank. And we know that we’ll have a good market for lending. Most businesses will borrow on a relatively short term basis and the profitability for a business bank can be very, very good.

By contrast, a retail bank focused on residential neighborhoods picks up more certificates of deposit and higher interest bearing liabilities, which means a higher cost of funds, and the need to focus more on consumer-type loans such as mortgages and autos. While we can do that on a selective basis, we’re not geared to do that as our primary source of business.

Q: There’s been a lot of press recently about small businesses lacking a big appetite for credit these days because of the economic uncertainty. Has that hindered your growth efforts?

Dailey: One of the things small businesses need more of these days is capital. And that’s always been a challenge because it’s something a bank cannot provide. But if a bank takes the time to know the business of the customer, it can help them structure their finances to operate within capital limitations. Also, we like making $50,000 to $300,000 loans. Big banks don’t like to do that because they don’t make money at it. Small loans are our bread and butter.

The Miami area, and southern Florida in general, is unique in that we have a very large international presence – lots of international companies and depositors from Latin America and Europe. There’s a lot of growth opportunity here. While a lot of that opportunity has been real estate related, we’re finding more service companies locating here.

It is tough for us to grow right now because of the economy and regulation has added to our costs, just as it has with the large banks. But it’s a good time to be in banking if you’re looking at the future. I don’t think there are going to be a lot of new banks opening up for quite some time, so there will still be some further consolidation in the industry. But to do well, a community bank is going to have to be larger than it was in the past. If you go back 25 years ago, the most profitable banks in the country were those with about $100 million in assets. Today, I think you need to be closer to $500 million.

Mr. English is a contributing writer to BAI Banking Strategies based in Chicago.

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