Americans can be a funny lot. As consumers, we say we want to “buy local,” but we keep cardboard box makers busy as we order everything from Amazon. We speak highly of community banks, but we scout around, even out of state, for higher interest or a better mobile app. Do we really care about “local”?
That may be an open question, but on the business side of banking, at least, sticking closer to home seems to matter more than ever.
Beneficial Bank, largest bank headquartered in Philadelphia, at $5.9 billion-assets, maintains offices in eight Pennsylvania and New Jersey counties and does business with customers in five more. That puts it up against over 100 other banking organizations, including players who arrived from New York and elsewhere in search of additional commercial real estate lending opportunities as their home markets yielded less growth.
“Over the last 18 months or so, the New York banks came down to Philadelphia, seeking to expand the reach of their expertise,” says Gerard Cuddy, president and CEO. “With their relatively new entrance to our market, there’s no shortage of competition for all types of deals—good and bad.”
As a hometown bankBeneficial has emphasized “local, local, local” for years. Many years.
The bank began life in the mid-1800s as an offshoot of a Catholic savings service for the working class.
“We thought local mattered a lot,” says Cuddy, who joined the bank in his current job in 2006. “But ‘local’ didn’t seem to matter to anybody else until about two years ago.” Institutions with headquarters in faraway states had gained traction.
What changed? Customers, especially commercial real estate and commercial loan customers, found that outsider entrants weren’t delivering service in a timely way.
“All of a sudden, decision making in our market kind of stalled at some of those larger banks,” says Cuddy. “Customers couldn’t wait for Charlotte, Chicago, and other headquarters to make loan decisions.” He says that proposals for commercial credit in the range of $2 million to $25 million seemed especially slow.
Suddenly, local mattered more. “We’ll get in our cars and head out to a company and we’ll say, ‘OK, we can do this transaction’,” says Cuddy.
What prospective borrowers wanted more than anything was a definitive answer, he said. “It’s just as critical for them to get a ‘no’ as it is to get a ‘yes’,” Cuddy explains. “But they need a decision.”
The flip side of being local and willing to make a decision, Cuddy adds, is that “we can’t run from a decision, because we’re right here.” While out-of-town lenders could plead that they were at the mercy of headquarters, “we’re here. We can’t hide from anybody,” says Cuddy.
Transitioning to a business bank
For much of its history, into the mid-1990s, Beneficial stuck to its savings institution origins, chiefly gathering deposits and putting them back out as mortgages. Then the bank began to expand on the commercial side, beginning with housing-related commercial real estate lending, chiefly catering to local developers. In time, the bank began to expand beyond this familiar base into other types of commercial real estate, and then the bank moved into C&I lending.
“Those decisions were driven by the need to safeguard our franchise from competitive restraints and to obtain growth,” says Cuddy. “And we’ve been fairly successful.” In 2016 the bank’s loan portfolio grew by 36.3%. Of that, 17.6% came via acquisition; 14.7% via organic growth; and 4% through CRE loan purchases. In the first half of 2017, commercial loans grew by 11.2%.
The Philadelphia market felt the impact of the financial crisis somewhat later than other markets, he recalls, and Beneficial had its share of lumps in that period. But he says it didn’t have capital issues, liquidity problems, lawsuits, or adversarial workouts.
“We had our chargeoffs like everybody else,” says Cuddy, “but we jumped into our cars, ran out to our developers, and worked with them. It’s the nature of the way we run the place.” To this day Beneficial stresses the physical presence of lenders at the operations of commercial borrowers. And the top 50 borrowers receive at least an annual visit from Cuddy himself.
“Ours is a relationship model that offers access,” he explains. Customers get to know not only their commercial account officers, but also the support team surrounding that lender. While the bank is technologically adept, he says, he considers the human element of significance to getting the job done right.
In the wake of the crisis, he says, the bank “pivoted a little bit, going kind of up market in terms of the local developers we worked with. “We wanted quality project sponsors, and I feel that now that book of business is really sustainable because we’re dealing with some of the best developers in our market.”
Even with rising rates, “we’re a margin business, first and foremost, so C&I is a good outlet for our talents and for our balance sheet.” Cuddy says that going forward Beneficial will continue to “skew away from consumer products into commercial products.”
Building and maintaining a commercial team
Growth, Cuddy continues, will come on the commercial side by deepening the bank’s relationships with the customers it already has.
“We need to do more with our existing clients,” he says. “We tell our people all the time that our best prospect list is sitting in front of us. And we’ll also scale through acquisitions.”
The bank has built its team steadily over the years. Cuddy’s own beginnings were in Philadelphia-area business lending 37 years ago, when 30 banks were headquartered in the city and each had its own self-contained lender training program.
“Very few banks have that kind of program in place anymore,” says Cuddy. “We have a hybrid of that in our organization, today.”
That is the result of having grown to a size where the bank can grow its own commercial lenders. The bank uses experienced lenders to train newcomers, as well as materials from Omega Performance and the Risk Management Association.
Back when the expansion began, he says, the bank began with some key hires and built a team of about 16 lenders—“We hired friends, we didn’t use recruiters.” Today the bank has 27 commercial lenders aboard, only one of whom was there when the expansion began.
Today acquiring other in-market and contiguous market banks comprises both a tool for building market share and adding to the lending team, selectively. “There are enough targets that we can continue to acquire and continue to grow over time,” says Cuddy. “The first thing we look for is like-minded people. We have financial metrics, but aside from that, we have passed on deals where we thought we’d be buying an aggressive book of business that had flight risks.”
The acquisition of Conestoga Bank, about a year and a half ago, makes a good example, according to Cuddy. First, “there wasn’t a get-to-know-you phase. We knew them, they knew us, and our organizations were very similar.”
Then in the due diligence Beneficial scrutinized both the portfolio and the target’s lending team. The intent was to be sure of low flight risk both for borrowers and lenders.
Over a year later, Beneficial retained over 90% of commercial loan outstandings acquired in the course of the Conestoga deal. A similar portion of deposits were also retained, which came as a surprise to Cuddy because he’d anticipated greater runoff.
At this point in the conversation, Cuddy says he wants to “confess our sins.”
Beneficial acquired nine commercial lenders in the course of the merger. Management, however, believed some of the bank’s own lenders could take on portions of the acquired commercial portfolio and so retained just five of the nine Conestoga lenders.
“We liked those five and we made it a clear priority to hold on to them for the sake of customer consistency as well,” says Cuddy.
“We’re down to two of those five now,” Cuddy says, “so we lost three.” One, the chief lender of the acquired bank, chose to retire after a long career and the other two took more attractive new jobs.
“On one hand, we consider that to be a failure,” says Cuddy. “On the other hand, we didn’t lose any customers. Next time we have to figure out a better way of retaining lenders. It would have made things easier for us, although there was no real financial impact.”
Building the business function
Lending is only part of the commercial banking equation, with treasury management representing a significant, and competitive part of the mix.
“I don’t often give them attribution, but we think PNC has the finest cash management offering of any bank in the country. Two years ago, we started intensely studying PNC, because as we benchmark ourselves, that’s what we want to be,” says Cuddy.
On top of product development has come acquisition of talent in this area.
In the second quarter of this year, Beneficial won three large relationships based on cash management service alone.
“We told them we were in beta,” Cuddy explains, “and that they were going to be part of our process.” He says this has worked out and that while relationship building remains a key part of Beneficial’s approach, “without the technology we wouldn’t have even been in the room” when the three companies evaluated new cash management offerings.
What company shops only on the basis of cash management? Cuddy notes that one of these customers is a family-owned holding company that operates three different subsidiaries. These all throw off so much cash that funds pushed up to the holding company function as a self-contained “bank,” according to Cuddy—the organization doesn’t require credit. The two other accounts are both nonprofit organizations that also don’t need credit, but require assistance managing large cash holdings.
Looking ahead at the market
Because the financial crisis continues to dominate political debate in the banking arena, it is sometimes hard to remember that it ended some time ago. Already, discussion of another downturn comes up.
Cuddy doesn’t believe the local economy is in a bubble, but does think markets are cooling off a little bit. Some of this reflects projects coming to their conclusion, he says.
In Philadelphia proper, a lot of hospitality development came after construction of a large convention center that often sat empty until recently, for example. Major educational institutions have been completing major projects for classroom space, student housing, and medical facilities.
Office construction is slow, with the exception of the major Comcast Center project, which will become the city’s tallest building and the largest in square footage.
One darker spot is retail, with a great deal of flight. “Our malls are hurting, and in the city, retail is still searching for its identity,” says Cuddy. The departure of a major Ralph Lauren store, anchor tenant for a prominent city hotel, “is a huge loss,” he adds.
These ripples from the Age of Amazon cause concerns for Beneficial, although the bank doesn’t typically finance that kind of retail operation. Beneficial tends to fund six-to-twelve-unit strip centers in neighborhoods, with a mix of tenants like card stores, nail and hair salons, and fast food shops.
In multifamily financing, Cuddy says the bank recently termed-out a major project and recently approved what he thinks will be the last such project for a while for the bank.
“Rental’s been good and it’s rewarded the developers,” says Cuddy. “I’m just starting to worry a little bit about cycle risk.”
Unlikely sources of trouble
Two past sore spots for the banking industry that won’t be troublesome for Beneficial are credit card lending and subprime lending. That’s because Beneficial won’t touch either product.
“Those are business lines that just aren’t consistent with where we came from,” the concept of thrift, says Cuddy.
The bank devotes significant resources to consumer education on financial topics. “We in fact speak against credit cards,” says Cuddy, “because we think they are somewhat abusive to the customers they serve. And not having cards helps discipline people to operate within their means.” He adds that potential rewards programs shown to the bank “seemed kind of schmaltzy.”
From the customer perspective, says Cuddy, “we think there’s just as much of a value proposition, if not more, from using your debit card. We don’t offer rewards per se, but we offer a really attractive cash-back program.” A bonus for the customer, he says, is not “waking up one morning and realizing that you’ve got thousands of dollars of lifestyle debt.”