Sofas And Loans

 

Already concerned about challenges from other segments of the financial services industry, banks now have a new competitor to contend with: McMahan's Valley Stores Inc., of Carlsbad, Calif. The U.S. Comptroller of the Currency has granted McMahan's request to operate a national bank in its chain of furniture stores. The first branch of Western Family Bank N.A., with $3 million in capital supplied by McMahan's, is scheduled to open this spring. As a result, McMahan's customers will soon be able to shop for a loan when they come in to pick up a sofa or choose a nice checking account to go with their new coffee table.

Actually, the idea isn't as far-fetched as it may seem. Founded in 1919, McMahan's operates one of the largest furniture chains west of the Mississippi. Officials of the privately held company declined to give figures, but, according to Dun & Bradstreet, the chain has annual sales of $70 million and about 700 employees. Its customers tend to be lower- and middle-income families, many of whom pay cash by installments because they don't have bank accounts. McMahan's -- which has long provided financing for its customers -- decided to establish the bank in an effort to fulfill a customer need.

"It's a ripe market to move into," says P. J. Roberts, senior vice-president and chief lending officer of the new bank. "There is a customer base wide open for our activity." The bank's charter precludes loans to businesses, but "other than that, we are prepared to service any and all that walk through our doors. To be quite honest, we expect a tremendous response."

To be sure, McMahan's isn't the first retail chain to get into the banking business. Sears, Roebuck & Co. led the way (opening up eight financial service centers last July), and others have followed. But McMahan's is the first of its size and the first to start a bank from scratch. Other retailers have purchased existing banks or savings and loan associations.

Curiously, a new bank enjoys a certain advantage at a time when interest rates remain relatively high. "Established banks have gotten caught with long-term loan portfolios that are earning at lower rates, while [having to attract new money] at higher rates," explains Paul Lockwood, spokesman for the Federal Home Loan Bank Board. "The new ones can start right out asking higher rates" and are not saddled with low-yielding investments.

McMahan's case is somewhat unusual, of course, since it will be offering services to its current lower- and middle-income clientele. Asked about the risk of bad loans, Roberts said, "We've had good experience in arranging financing for these people. And there are some advantages to this type of consumer lending. Your losses are smaller on an individual basis, and they're spread over more customers. I'd rather make a loan to a lower-income person than to International Harvester, if you know what I mean."

What is more, McMahan's may find that it can carve out a comfortable banking niche by targeting the low-income market. "You'd be surprised by the number of people who do not have a bank or checking account, especially in the lower-income groups," says Ellen Stockdale, spokeswoman for the Comptroller of the Currency, in Washington, D.C. "Many poor people pay their bills with either cash or money orders."

And if McMahan's "sofas and loans" concept is successful, who knows what will follow? Maybe a bakery offering "savings and loaves." Or, what about fast-food place called "Bank 'n' Burger"?