"We found we shared similar backgrounds, philosophies, and ideals," explains Dart. "The more we talked, the more we realized what a good fit this could be.'
WHAT THE EXPERTS SAY
OPERATOR
CARL J. SCHMITT
Founder, chairman, CEO, University National Bank & Trust Co., a small, eight-year-old bank in Palo Alto, Calif. Former head of California State Banking Department
What Hartman and Dart are doing is the Schwab approach -- raising deposits not on the quality of service, not on building loyalty, but on brokered deposits: nonloyal, price-sensitive, broad-based accounts. And they even say they're going to regulate how much business they get merely by adjusting their interest rates to turn the spigot off and on.
That's OK, as long as they know that when rates start moving away from them, they'll have to chase the deposits with price -- and when that happens, they'd better have a variable loan portfolio. Because if they're having to chase deposits on price, then costs are going to be moving up based upon the credit market. For example, when prime is at 21%, the six-month T-bill might be at 18% -- and you might be paying 18% to your CD customers. If you had taken your deposit base in former months and put it into fixed-rate mortgages at 10%, you'd be 8% underwater -- a gross negative spread.
That's the classic problem of many banks: they get into a position of lending long and covering short. Much of our industry has passed off the rate risk and ignored it, based on doing variable-rate mortgages. That's fine, but those mortgage rates are not as variable as the deposit side is; typically the variable-rate mortgage has an annual cap of 2%, and we have seen periods in which the deposit interest rates have run up more than 2% -- which means you can still get your spread squeezed.
If the deposit side of banking is science, then the lending side is art. There's no reason Blackstone's strategy can't work. You can get a little higher price by providing service on the loan side, there's no question about that.
Is Blackstone a riskier bank because it's going into traditionally redlined areas? Absolutely not. The risk is in the quality of the lenders. If they're good lenders and good loan officers, and they know how to structure and read the community, it will probably be less risky than many major Boston banks that have got large portfolios in South America, in tankers, and in the oil patch. It's that simple.
I like their concept, but it will be three to seven years before we'll know how well they'll do, because we'll need to see how well they'll manage their loan portfolio. That's the Achilles' heel, and the main question mark.
OPERATOR
KENDRICK BELLOWS JR.
Founder and chairman, The Burlington Bank & Trust Co., a community bank in Burlington, Vt., due to open shortly; formerly CEO of Bank of Vermont
It's a tough thing to perpetually chase money with high rates, but they're doing it.
On paper they've got what appears to be pretty hot money -- money that, because it's been wooed in at a high rate, could leave. If someone else's rates go higher, some portion of those deposits will shift. They may be hedging against that by running at a somewhat lower than average loan-to-deposit ratio (average in my terms would be something around 90%). They're more like 70% to 75% -- though it's hard to say for sure, given that they're in a growing business. On the surface that appears to manifest some concern with what we call liquidity -- the possibility that some segment of those hot funds could be withdrawn. They would be wise to keep that loan-to-deposit ratio lower than average.
One of my concerns for them is that, as they grow, they'll lose that close contact with customers, which is one of the harbingers of loan difficulties. They've really got to project their personalities and their experience. If you're paying attention, you don't get surprised very often. The bigger banks tend to build layers, and those layers are like walls between customer and decision-maker. I think that's more often the cause of loan payment difficulties than is the underlying character of borrowers. The same borrower will be a better borrower at a small bank than at a big bank; the difference is contact with the decision-maker, and the advice and counsel of the banker/manager.
I don't see much risk in competition from larger banks. I think larger banks will regard Blackstone as sort of a gnat for a long time to come, and gnats don't do much to elephants.
Their numbers suggest that they're growing faster in asset terms than in profitability terms. That's not unusual, but they're 18 months ahead of their asset forecasts and just about on target for profitability, which suggests that their margins aren't quite what they hoped they'd be.
I think they've got a good chance of making it. Time will tell. They may need some capital. They're running around 8% on capital-to-assets, which in the big picture is OK. But they may get some regulatory pressure to raise additional capital, in part because of their dependence on high-rate purchased money, and in part because of the nature of the loans they're making -- questions about loan quality.
ANALYST
HASSELL MCCLELLAN
Professor, Boston College School of Management; teaches strategic management of financial institutions
The big issues will be how quickly Blackstone wants to grow, and how it will ensure that it's managing that growth. It's amazing to see repeatedly how banks can't resist the temptation to get big -- which adds to costs. With Blackstone I don't think it's a question of how big is too big as much as ensuring that as it grows, a gap does not develop between the size of its loan portfolio and its deposit base. As the bank grows,
