As Blackstone approaches $60 million in assets, therefore, another round of capital will soon be called for. Three options are currently being contemplated: issuing more common stock; creating a class of preferred stock; and floating subordinated debt, convertible to common stock. Whichever route they take, the founders know that they will draw the regulators' close scrutiny. Already they've been audited twice in the past year.
"If one bank fails because its capital-to-assets ratio falls too low," notes Hartman, citing the example of one Texas bank used as a personal piggybank by an unscrupulous developer ("You supply the dirt," went its slogan, "and we'll supply the green'), "the regulators come into yours next and set the ratio at, say, 10%. They can't hold you to that legally, but they can make life tough if you don't comply. Taking out the systemic abuses on the next guy may seem unfair, but that's the way the game is played.'
Which is not to say that community banking is a no-risk proposition for Blackstone. At $5 million in growth per month, the danger of burnout is real. Macroeconomic issues aside, bad loans could result from management's inability to scrutinize each application thoroughly enough. And then there is the question of whether Dart and Hartman can maintain their personalized approach to customer service without working 14-hour days -- never mind bankers' hours.
"The two main asset-management issues are interest-rate risk and credit risk," explains Dart. "Credit risk -- borrowers being unable to meet loan obligations -- is a fact of life with small-business customers, because growth companies don't always manage their finances well. Interest-rate risk arises when what you pay depositors exceeds what you make off investments. Because we're not burdened with a lot of long-term, fixed-rate investments, we believe that risk is minimal.'
Dart concedes that New England's move toward interstate banking could open up the playing field soon. As more banks are bought up and consolidated, he figures, more small-business customers will fall through the cracks. And that will open up further opportunities for low-cost/high service providers like Blackstone.
"We're operating in a $3- trillion industry," he points out. "To get hung up on market share would be dumb. All we're looking for is a solid reputation in our community and a profitable niche in our marketplace.'
Plus a nice chunk of those Florida retirees.
EXECUTIVE SUMMARY
The company: Blackstone Bank & Trust Co., Boston
Concept: Create a small, low-cost community bank, offering high rates to depositors and personal service to borrowers
Projections: Assets of $115 million by June 1990, with return on equity of 21%; income per share of $0.21
Hurdles: Maintaining a stable deposit base while soliciting price-sensitive, mobile deposits; keeping loan quality high and contact with borrowers frequent as the funds that need to be loaned grow rapidly
FINANCIALS
Blackstone Bank & Trust Co. Operating Statement
June 1988 June 1990
(actual) (projected)
Revenues
Interest and fees from loans $344,000 $1,121,681
Interest on investment securities 82,000 108,100
and federal funds
Noninterest income 16,000 25,000
(miscellaneous fees,
appraisals, reports)
Total revenues 442,000 1,254,781
Cost of revenues
Interest paid on deposits 224,000 698,625
Provision for loan losses 58,000 30,000
Total cost of revenues 282,000 728,625
Gross profit 160,000 526,156
Operating expenses
Salaries and employee benefits 52,000 90,000
Rent and utilities 8,100 16,200
Office services 13,800 27,600
Furniture and computers 12,100 24,200
Marketing and PR 10,000 20,000
Miscellaneous 20,000 40,000
Total operating expenses 116,000 218,000
Net pretax income 44,000 308,156
Provision for taxes 0 104,773
Net income 44,000 203,383
Income per share 0.10 0.21
COMPETITIVE ANALYSIS
Blackstone
Blackstone 6/90 Industry
6/88 (projected) Average*
SIZE
Total assets $44.5 mil. $115.0 mil. $83.3 mil.
Total deposits 34.1 mil. $103.5 mil. $74 mil.
Employees (full-time
equivalent) 13 18 52
PROFITABILITY
Return on average assets NA? 2.57% 0.86%
Return on average equity NA? 21% 10.54%
Interest-rate spread 3.62% 3.76% 3.86%
*Averages for all U.S. commercial banks in the $50-million to $150-million asset range. ?Not available.
Source: Veribanc Inc., Wakefield, Mass.
THE FOUNDERS
Ann O'D. Hartman, 37, senior vice-president and chief lending officer
Daniel J. Dart, 32, president and chief executive officer
Ann Hartman graduated from Smith College in 1973 and immediately joined Bank of Boston as a management trainee. Ten years later, having served as a loan officer for, among others, Bill Rodgers's running-clothes company ("Heartbreak Hill," April), she was elected a vice-president in commercial lending. Her interest in small-business customers convinced her that a new era in banking signaled a new career opportunity for herself. "There's an aura about starting a bank," Hartman admits. "People would hear what Dan and I were doing and faint away. Most had no idea how banks work -- nor any desire to learn.'
Dan Dart did. At State Street Bank, Dart had risen to the position of vice-president of marketing of the mutual-funds services division when he hit the proverbial wall. Eager to develop an insurance strategy at the bank, he instead was spending most of his time troubleshooting for unhappy mutual-fund customers. The more displeased clients he saw, the more turnover he had to deal with among bank personnel. At the same time, Dart recognized that the distribution system for mutual funds (primarily phones and mail) made sense for the low-overhead, high-yield banking profile suggested by industry deregulation. A call to the Massachusetts State Banking Commission in November 1985 gleaned the necessary information on how to start a bank of his own. Dart was encouraged to get in touch with another young banker who understood the local market: Ann Hartman.
