Community bankers are facing tough questions in an increasingly competitive digital banking market: How can we keep growing? How do we keep winning deals and building new relationships? For many community banks, the answer is building expertise in specialty lending.
Over the past 14 years, Bell Bank in Fargo, North Dakota, has used specialty financing to accelerate its balance sheet growth. The community bank’s asset size has jumped from about $2.2 billion in 2012 to $15 billion today. All that growth has been organic, thanks in large part to several specialty divisions, including Bell Capital Finance, Bell Bank Equipment Finance, correspondent banking, public finance, SBA lending and agriculture banking.
As a family and employee-owned bank, Bell Bank has a clear growth mandate. And specializing in areas where there are incrementally fewer competitors provides a pathway to achieve that goal.
“One of the things we have to keep doing is specializing,” says Todd Lee, executive vice president. “If we [only] offer all the same products and services as our competitors, we just don’t win at the rate that we want to continue to grow.”
Specializing in SBA lending
Niche lending might not be a good fit for every bank. But for those interested in expanding their lending activity, specialization is a solution that can pay big dividends.
Plumas Bank in Quincy, California, stepped into specialty lending nearly two decades ago with the launch of a small-business financing group that specializes in SBA lending.
“We have lots of money to lend, but it’s hard to find places to put it because of the rural nature of the bank footprint,” says Rodney Borges, senior vice president and small business lending manager at the $2.3 billion-asset community bank.
The small-business financing group helps to generate loan activity outside of its home territory of California and Nevada, with the added comfort level that comes with government‑backed SBA loan guarantees. In the competitive and complex world of SBA lending, Plumas Bank has also developed a subspecialty that focuses on business acquisitions, such as gas stations and convenience stores.
Now actively doing SBA lending in nine states, the group is the most profitable division within the community bank.
Find the right niche market opportunity
For community banks looking to enter a niche, the first step is finding the right opportunity. Experienced specialty lenders agree that it’s important to choose a sector that can deliver sustainable value, not simply another financing option. The specialty also needs to align with the bank’s strategy, people, processes and risk appetite.
For example, Bankers Trust in Des Moines, Iowa, developed an employee stock ownership plan (ESOP) program in 2012 in anticipation of the “silver tsunami”—the growing wave of baby boomers nearing retirement age.
As business owners began planning for succession, many were seeking solutions to preserve their company’s legacy, reward and protect employees, and provide liquidity.
Bankers Trust recognized the growing need and developed a comprehensive ESOP lending program, which has helped to position the community bank as a trusted financial partner in helping business owners navigate ownership transition, says Todd Wishman, executive vice president and chief lending officer at the $7.5 billion-asset bank.
In Pittsburgh, TriState Capital Bank is active in equipment finance for commercial businesses across a broad range of industries.
The $24 billion-asset community bank built the specialty around a clear client need: the desire for flexible financing solutions to acquire equipment that is essential to their operations and growth.
“Equipment finance also fits naturally with our relationship-driven banking model,” says Tim Moriarity, executive vice president of equipment finance. “It allows us to support clients beyond traditional commercial lending while combining the resources of a full-service bank with specialized equipment-finance expertise.”
Beyond simply financing equipment, TriState’s lenders work to understand the client’s broader strategy and structure solutions that support long-term objectives.
Benefits of niche lending for banks
Specialty areas can be a way to attract new customers, enhance profitability and bring in new capital that funds other growth areas for a bank. Community banks also have an opportunity to take advantage of efficiencies of scale and leverage existing fixed costs to a broader audience, such as it relates to shared staffing and technology.
For example, $440 million-asset Citizens Bank of Edmond in Edmond, Oklahoma, has existing small business lending expertise that it can now use at ROGER Bank, a digital-first military bank that it launched in 2023.
Although open to all, the focus of the bank is to serve active military, recruits, veterans and military families. In addition to personal banking products and mortgages, ROGER Bank recently launched a business banking and small-business lending platform.
“We’re really excited to scale our small-business lending operations through ROGER Bank to support military spouse and veteran entrepreneurs, as well as those in the military with a side business,” says Jill Castilla, who is president and CEO of both Citizens Bank of Edmond and ROGER Bank, as well as chairman of Citizens Bancshares Inc.
A strong niche lending platform can deepen client relationships and create value across the bank, as TriState Capital Bank has found.
“When lenders bring true industry expertise to the table, clients gain confidence that their bank understands both the asset and the business behind it,” says Moriarity. “That confidence can lead to broader relationships, including treasury management, deposits and other commercial banking services, as well as referrals within the client’s industry.”
The challenge is that niche lending requires constant discipline. Markets change, the value of underlying collateral can move and client needs evolve. So, staying close to those dynamics is essential, adds Moriarity. “The most successful niche lenders know their lane, understand their risk appetite and avoid stretching for volume at the expense of credit quality,” he says.
For Bankers Trust, its ESOP lending program creates geographic and industry diversification, which allows the bank to reach a broader customer base. However, expanding outside of its established markets in the Midwest and Arizona can present challenges, too, such as reduced market intelligence and lower brand recognition. In some cases, additional effort is needed to build trust and establish credibility, notes Wishman.
5 tips for screening niche lending opportunities
Selecting a niche that is going to be a good fit for the bank requires careful analysis and due diligence. Here are five simple questions to consider when screening specialty lending opportunities.
- Is there a market opportunity? “There’s got to be something that makes us think there’s demand,” says Todd Lee, executive vice president at Bell Bank in Fargo, North Dakota. For example, Bell Bank launched its leverage lending business in 2014 after another bank in its local market that focused on leverage lending was acquired by a larger bank. Bell Bank was able to step in and fill that gap in the market via the formation of Bell Capital Finance.
- Do we have the subject-matter expertise, or can we recruit and hire the people we need? A bank needs to have the right human capital in place to seize the market opportunity. The subject-matter experts also can help to develop a business plan and strategy for entering a new niche.
- Is it compatible with the rest of our company? Just because there’s market demand and an opportunity to hire an expert to take charge doesn’t mean it makes sense in the context of the bank’s overall strategy, mission or culture.
- How does a new niche fit operationally? Can a bank plug a specialty lending platform into the bank and its existing systems with relative ease? “Sometimes there’s a great idea and a potentially profitable market opportunity, but the [operational challenges are] just too high to execute on it,” says Lee. As part of its diligence process, Bell Bank conducts a cost-benefit analysis that focuses on the operational aspects of a new niche.
- What are the potential risk-adjusted returns? The bank needs to generate appropriate returns for the risk it’s taking, and the risk of adding a new niche needs to be consistent with the bank’s overall risk appetite.
Build a commercial lending strategy roadmap
Developing a business plan for a specialty lending niche helps to provide a roadmap for successfully launching and scaling a new platform. It’s important to work with the subject-matter experts who will be running that area to create that plan, advises Lee.
Before launching Bell Capital Finance, a division that provides senior cash flow loans to lower middle market businesses, Bell Bank hired two individuals with deep industry experience in leveraged lending. Bank executives worked with the two subject-matter experts for nearly a year to evaluate the market opportunity, analyze the risk–reward proposition and develop a business plan before it officially launched the new division.
Finding the right people to lead and grow a niche is essential, agrees Borges. Plumas Bank relies on an experienced team of business development officers to grow its SBA lending business, which is typically more transactional compared with traditional relationship lending.
“We look for what I term as the best available athlete or player, with good technical skills and a similar credit philosophy to what we do,” he says.
Plumas Bank’s SBA team is heavily focused on financing business acquisitions. And the key to building a successful platform in the competitive SBA market is developing “spheres of influence.” Its salespeople develop strong referral networks and market to referral sources, such as business brokers, CPAs, consultants and other bankers to educate them on what Plumas Bank can do, notes Borges.
The salespeople are important, but it’s also critical to have strong back-office support, he adds. SBA lending has a well-deserved reputation as being complex, with a 400-page rulebook that defines eligibility for the government guarantee. If mistakes are made, that government guarantee is at risk. So, it’s important for everyone on the team to understand the SBA program, understand the bank’s credit policy and work together to get to the finish line, Borges says.
Use industry partnerships and referral networks
ROGER Bank has found success by engaging with the military community it serves and leveraging partnerships. “Once you get into a niche, you start to really understand the other players that are also supporting that community,” says Castilla. “That’s where you find opportunities for synergies well beyond what you’re just providing yourself.”
For example, Citizens Bank of Edmond has a partnership with the Chickasaw Nation to provide supplemental financing and grant opportunities for veteran service members. The community bank is also continuing to build on its legacy of engaging with other military and veterans’ organizations to provide financial literacy, small-business coaching and other resources.
Castilla is part of a proud military family and is involved in the military community. She served in the Oklahoma Army National Guard; her husband, Marcus Castilla, is a retired army officer; and two of their three children are active-duty service members. Castilla currently serves on the board of directors of the Association of Military Banks of America and as a civilian aide to the Secretary of the Army emeritus.
Those relationships helped ROGER Bank build its own strong advisory board of respected leaders in the military community.
“Engaging an external group with an advisory board helps us really accelerate the awareness and credibility behind ROGER,” says Castilla.
Lessons from specialty lending experts
One common challenge in managing a specialty lending area is balancing the desire for autonomy and decentralization with the need for efficiency and centralization. Decentralization can allow a specialty team to be nimbler, which can create a competitive edge. At the same time, a specialty platform is still part of the bank, and the benefits to centralization are operating efficiency and consistency around things such as HR protocols, IT systems, credit policy and regulatory compliance.
It can be a tricky balancing act to allow room for both. If a bank is too rigid and too centralized, it can be more difficult to fully capture a niche market opportunity. On the other hand, having multiple specialty areas that are all operating completely autonomously can create a real mess from an operational efficiency standpoint, notes Lee. So, organizational structure is something the bank must monitor and periodically adjust when things get too tight or too loose to strike the right balance, Lee says.
“As bankers, failure is not an option to us,” adds Castilla. But inevitably, there will be missteps when entering a new niche market. “You likely will have to adjust what you thought was going to be true in the beginning to something maybe a little bit different.”
She adds that having a network of people who are doing niche lending that you can reach out to can help you better navigate challenges and avoid some mistakes that others experienced.