Bank Rises Without Hype by Hewing to Market in Middle
By some appearances, Lincoln National Bank isn’t trying very hard to develop new business.
Its loan officers don’t knock on businessmen’s doors to try to win over new corporate customers. The bank, the operating arm of the Lincoln Bancorp holding company, also generally scoffs at making car loans or other consumer loans.
And, unlike many of its competitors, Lincoln National rarely advertises to heighten its profile. “If you looked at our lines in the lobby, you’d think these guys don’t do any business,” said John J. Keating, the bank’s chairman.
But Encino-based Lincoln National has been among the fastest-growing financial institutions in California since it opened three years ago. With assets of $122.9 million as of March 31, it has become the fourth-largest bank headquartered in the San Fernando Valley.
Thrives on Referrals
The bank has thrived by cultivating referrals from lawyers, accountants and insurance agents and by tailoring its services to the needs of small- and medium-sized companies, instead of pursuing less-profitable business from consumers or large corporations.
Although banking industry experts are impressed with Lincoln National’s management, a few say the bank may be inviting some problems by growing so quickly. In fact, according to Lincoln National officials, largely because of the bank’s rapid growth, they were asked informally by federal regulators late last year to raise more capital to offset the risk of potential loan losses.
“If they continue to do as well as they have, then things will be fine. But most of the banks that grow that fast, three to four years down the line they start having loan problems,” said Pam Findley-Flor, president of the Brea-based Findley Reports, a banking research firm.
Lincoln National officials, however, brush aside suggestions that they have taken on extra risks by expanding rapidly. Moreover, they say they intend to double the bank’s current size over the next three to five years by continuing to run their business the way they have. They also hope to expand by acquiring a mortgage banking company and possibly another bank.
Deposits Climbed 61%
The executives point to Lincoln National’s recent financial performance as evidence of their success. During the 12 months ended March 31, assets grew by 60% and deposits climbed 61% to $114.2 million.
Although declining interest rates curbed profits during the first quarter of 1985--they were up just 2%, to $127,884--earnings climbed 44% during 1984, to $780,684.
Findley-Flor placed Lincoln National’s growth rate among the top 15% for California banks last year. She said the bank’s expansion was especially impressive in that most of its fast-growing counterparts were much smaller banks that could show big percentage gains by adding small amounts of assets and deposits.
On the basis of its profitability, growth and return to shareholders last year, Lincoln National was among the 80 banks picked from the 440 in California for Findley Reports’ list of “premier performing banks.”
Product of 1980 Idea
Lincoln National’s track record is the outgrowth of an idea that Steven C. Good, the chairman of Lincoln Bancorp, and Jeffrey Katzer, a Los Angeles mortgage broker, began wrestling with in 1980. Good, a partner in the Sherman Oaks accounting firm of Block, Good & Gagerman, said he believed there was room for more regional banks serving businesses with annual revenues in the $1 million to $20 million range.
His theory was that the acquisition and expansion of many of the banks that had served those businesses prompted the banks to shift their attention to larger clients. Good’s plan was to scoop up the customers the big banks were leaving behind.
To capture that market, Good and Katzer (who no longer is associated with the company) recruited a group of directors and investors who would go after business themselves. They went for professionals such as accountants who could bring business to the bank, instead of big-name corporate executives who they felt wouldn’t want to get their hands dirty hustling to bring in depositors and borrowers.
“It was easy to get people who would lend their credentials,” Good said. “But we wanted people who would lend their time, support and a willingness to go out and get deposits for the bank.”
Lincoln National officials say the effectiveness of the strategy is demonstrated by the fact that about 25% of the bank’s deposits were generated by referrals from its directors.
Much of the rest of Lincoln National’s deposits and loans were brought in through the outside network of lawyers, accountants and insurance agents with whom the bank exchanges referrals.
“They understand how the world works,” said one accountant familiar with the bank who asked not to be identified.
Lincoln National’s business world extends beyond the San Fernando Valley, reaching clients from Orange County to Santa Barbara. Only about 15% to 20% of the bank’s clients are in the Valley.
Good said Lincoln National was established in Sherman Oaks in April 1982--it moved its headquarters to Encino a year ago--mainly because federal regulators were more willing to charter a bank situated there than on the Westside. In February, the bank opened a branch office in Beverly Hills.
Shuns Corporate Lending
Wherever it does business, Lincoln National shuns lending to major corporations. Keating, the chairman and chief executive of Lincoln National and the president of Lincoln Bancorp, said he has done so because the interest-rate competition among banks for that business narrows profit margins.
Likewise, the cost of dealing with individual consumer accounts persuaded Lincoln National to largely stay away from that sort of banking. Nearly all of Lincoln National’s slim portfolio of consumer loans are to the top executives of corporations that do business with the bank.
“We do that stuff, but we do it as an accommodation,” Keating said. “On a per-capita basis, we probably have more Mercedes loans than any other bank in the country.”
“They stick to what they know best,” said Ezra E. Ezra, a bank stock trader for the Drexel Burnham Lambert brokerage firm.
Quick Loan Decisions
Keating said Lincoln National has competed against other banks by providing quick decisions on loans, often giving an answer within a day, and by offering services such as a courier who picks up deposits.
Like many successful small- and medium-sized banks, Lincoln National boasts that one of its main strengths has been the stability of its management, enabling it to escape the costly turnover that plagues many of its larger counterparts. Keating said banks that lose key employees often alienate customers by upsetting personal contacts.
The key executives running Lincoln National know that fact from first-hand experience. Many brought business with them when they defected from others banks to join Lincoln National.
Keating was a regional vice president with Union Bank in Century City until September, 1981, when he took over operations at Lincoln National and Lincoln Bancorp. He eventually brought most of his staff of 11 loan officers from Union.
Bonuses to Loan Officers
Good, who rarely gets involved in the bank’s day-to-day affairs, and Keating said they have been able to keep those loan officers, in part, by paying them well and providing incentive bonuses. Keating said the average loan officer earns $50,000 to $55,000 in base salary and can draw another $6,000 to $15,000 in bonuses.
A notable exception to the overall stability in Lincoln National’s management was the departure three months ago of Morris Danon, who was president and chief operating officer of the bank, and the executive vice president and chief financial officer of the holding company. Keating attributed Danon’s resignation to differences they had in management style. Danon, now a senior vice president with National Westminster Bank in New York, said he left Lincoln National because he wanted to work for a larger bank and he received a good offer.
In any case, competitors and analysts agree that Lincoln National’s strategy is working smoothly.
Daniel Geary, the president and chief executive of Warner Center Bank, said it is “very difficult” to avoid making poor loans when a bank expands as quickly as Lincoln National has. But Geary, a shareholder of Lincoln National as well as an occasional competitor, added that “I haven’t seen any weakness in their financial statement.”
Few Bad Loans
Keating credited the experience of his bank’s lending officers for its light load of bad loans. Judging a borrower’s creditworthiness, Keating said, “is an art form.”
He said Lincoln National has only about $168,000 in loans on which no interest is being paid. Lincoln National’s short history, however, may be largely responsible for that statistic.
“They haven’t been in business long enough to see whether they’ve made any serious mistakes in lending,” said Gerry Findley, editor of Findley Reports. He said it usually takes three to four years before it is evident that a loan is turning sour.
Analysts credit Lincoln National executives with protecting the bank by setting aside ample loan reserves. Keating said the reserves, which are beefed up by $40,000 monthly, amount to about 1.3% of the bank’s $78 million loan portfolio. Most banks set aside loan loss reserves amounting to 1.0% to 1.2% of their loan portfolio.
Keating said regulators’ concerns about a possible shortage of capital are being resolved by the bank’s current sale of stock to its shareholders and customers. He said the bank expects to raise $3 million to $5 million by selling 300,000 to 500,000 new shares.
Capital Ratio Rising to 8%
Keating said the new money from investors will boost the bank’s capital ratio from about 6%, the minimum required for the bank by federal regulators, to 8%. (Capital includes the available money a bank has from investors, from retained earnings and in loan-loss reserves. The capital ratio is the ratio of capital to the bank’s assets.)
A more pressing concern for Keating may be the bank’s earnings this year because falling interest rates have made it tougher for Lincoln National to produce profits. Lincoln National’s profits dovetail with interest rates because the bank pays fixed interest rates on most of its deposits while receiving floating-rate interest payments on most of its loans.
Consequently, when interest rates rise, Lincoln National makes more money and enjoys a wider spread between what it pays for funds and the interest it receives from loans.
But Jim Alexander, a bank stock expert familiar with Lincoln National, said declining interest rates pose no major threat to the bank. Alexander, president of J. Alexander Securities, predicted that Lincoln National would show big profit increases in two years, following the pattern of other banks that have followed periods of rapid growth with periods of booming earnings.
For now, Keating said, the bank’s chief challenge is raising the deposits it needs to boost its assets, enabling it to make new loans. Unlike bigger financial institutions, it can’t raise the rates it offers on deposits to quickly draw fresh funds.
Instead, Keating said, the bank has to keep cultivating relationships with business executives to persuade them to put money from their companies in Lincoln National. LINCOLN BANCORP AT A GLANCE Lincoln Bancorp is an Encino--based bank holding company that owns Lincoln National Bank, which has two offices, in Encino and Beverly Hills. The company, founded three years ago, has 60 employees and 1.2 million shares of common stock outstanding. For fiscal years ended Dec. 31, in millions of dollars
Assets Total deposits Net income (loss) 1984 $125.0 $111.8 $0.8 1983 88.4 69.7 0.5 1982 42.5 37.7 (0.2)