Ordinarily, reaching them would be a problem. By law, Blackstone is limited to advertising only in New England. Nevertheless, it currently has depositors in 48 states. How does it pull this off? Free publicity. Week after week, Blackstone's rates on money-market accounts place the bank high up the list of average yields posted by The Wall Street Journal and the newsletter 100 Highest Yields. Both have national circulations. Voilà: coast-to-coast depositors.
By advertising with direct-response coupons in The Boston Globe (which has distribution in Florida), Blackstone also reaches those nimble-fingered retirees. It was a Globe ad, in fact, developed by the Boston firm of Witham, Childs & Siskind, that truly put Blackstone over the top. "No branches, tellers, velvet ropes, marble lobby or toaster ovens," boasted the headline, "just the best rate in the State." Not only did the campaign win praise from the trade industry (AdWeek mentioned it in a piece on the bank last February, and Bank Marketing named it January's Bank Ad of the Month), but it also drew an astonishing response from customers. In one week, $4 million in new deposits came in, quadrupling the expected $1 million windfall.
Marketing to its other customer base, borrowers, is more a one-on-one proposition. "The community knows we're here," says Hartman, who has pulled in a number of former Bank of Boston loan customers herself. "When Dan and I were out selling stock, we spoke to a lot of groups and met other people socially. Our best marketing tool is basically word of mouth -- customers referring other customers. We probably get two or three refugees from big banks in here every week.'
Keeping overhead down has its risks. By locating outside Boston's financial district loop, Blackstone pays a certain price in terms of lost prestige and visibility. In Dart and Hartman's view, they more than make up for that by paying a modest $21 a square foot for office space, versus up to $40 per square foot downtown (they hold a five-year lease on their current site). Blackstone's monthly operating costs, including rent, insurance, computer time, salaries, benefits, and the like, comes to about $100,000. It incurs no costs from branch banks. By way of contrast, New England's two leading lending institutions -- the Bank of New England and BayBanks -- have 486 and 222 branches, respectively. Big nut, big difference in profitability.
Given Massachusetts's tight labor market, another concern of Blackstone's founders was attracting qualified help. They started with 10 employees and have added 3 more -- with room for an additional 13 as the need arises. The hiring problem was solved through a combination of job flexibility and competitive compensation. Blackstone pays half again as much as a starting teller's salary for its account executives, puts its small staff of loan originators on commission, and provides equity kickers for key management people (5 bank officers in all). The bank has no chief financial officer and no secretaries -- if Dart wants to send out a letter, he types it himself. Three employees are working mothers, one of whom does bank work on a part-time basis.
* * *
Blackstone started looking for capital in the summer of 1986, a go-go season for bank stocks. Hartman and Dart initially offered 400,000 shares of common stock at $10 per share, with the stated policy that dividends would be forsaken for retained earnings. According to Dart, lending institutions were going public at "outrageous multiples" that summer, creating the impression among potential investors that they could make a quick killing trading in new-bank issues. Because they understood that equity turnover often resulted in management turnover, the founders set forth a strategy that would minimize their own risk of being tossed into the street.
"Our personal goal was to be able to manage the bank over the long haul," Dart explains. "It was really nonspeculative in nature. We wanted to sell the stock ourselves, but we also wanted a diversified group of [investors] who shared similar investment goals, who were willing to let the bank grow with us. We probably could have found three or four investors who wanted to kick in $1 million each, but instead we deliberately went after a much broader base.'
Over a six-month period, Dart and Hartman succeeded in lining up 90 buyers, at an average investment of about $50,000 apiece. Some were friends, some movers and shakers in local communities. No investor was allowed to purchase more than 15% of Blackstone's equity. At the same time, written into the bank's bylaws were several antitakeover provisions. One specified that any move to unseat a director (board terms are staggered over three years) would require a two-thirds vote of the board. Another, termed a "poison pill" provision, allows the bank to issue preferred stock to current shareholders. A third states that in the event 10% or more of the bank's outstanding stock is sold, that block of shares cannot be voted.
Advised by their attorneys that such restrictions could make it difficult to market their offering, Dart and Hartman stuck to their guns. Yes, they'd invested personal savings jointly to the tune of about 15% of Blackstone's equity. No, they were not looking to cash out soon. Or, for that matter, to feel pressured by one or two investors to take the money and run.
"The problem with taking it and running," explains Hartman, "is what do we do next? Start another bank? Retire? Even on my worst days, that has no appeal.'
The capital needs of lending institutions do not, of course, remain static for very long. By federal law, banks must maintain a 6% capital-to-assets ratio (the ratio of thrifts is only 3%). Otherwise, the regulators fear, a bank can weaken its capital base to the point that a rash of nonperforming loans could wipe it out. That's especially true in today's shaky banking climate, where the vagaries of local economies (the Texas oil industry, to cite one dramatic example) can shred a portfolio.
