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April 15 — Adam Avery knew just where to turn to when he needed a $30 million loan to expand his craft brewery in Boulder, Colo.
He approached Narciso Garibay, a loan officer at a large regional bank, with whom he'd played pickup basketball while Garibay attended the University of Colorado in Boulder. But the loan didn't come together until Garibay moved to the much-smaller Colorado Business Bank, which specializes in lending to craft breweries.
The resulting $30 million deal benefited both Avery and Colorado Business Bank, a 12-branch bank owned, along with the four-branch Arizona Business Bank, by Denver-based CoBiz Financial Inc. Craft breweries account for no more than 2 percent of the bank's loan portfolio, yet a focus on the beer business and a handful of other niches has helped fuel 12 percent annual growth since the financial crisis.
“When we develop specialty areas, it allows us to differentiate ourselves a little bit better from the bigger banks,” said Scott Page, chief executive officer of Colorado Business Bank. “Business leaders want to deal with people who understand their industry,” he told Bloomberg BNA.
Finding niches is key to the survival and future growth of community banks at a time when post-financial crisis regulations and startup financial technology companies threaten the already shrunken industry, analysts say.
It is a lesson Colorado Business Bank has taken to heart as it focuses on craft brewers, as well as slices of the health care industry, public finance and the not-for-profit sector.
“We're always looking for little niches to exploit, and this is one of them,” Page said of his bank's brewery clients. “We don't advertise — we don't do magazines, we don't do TV ads — it's all about branding our bankers and how they cultivate expertise in different industries. That's how we get business.”
The “very good margins” enjoyed by craft brewers along with the high demand for their product makes it a particularly attractive industry. “It gives us a chance to help them finance their growth,” Page said.
Nowhere is a focus on brewers a more natural fit than in Colorado, where the beer industry last year accounted for the largest share of the economy (6.31 percent) and highest concentration of jobs (one in 89) of any state, according to the Beer Institute.
Colorado Business Bank's brewery loans date back at least a decade. In 2006, the bank loaned Longmont, Colo.-based Left Hand Brewing Co., about $250,000. Subsequent financing has come in what the brewery’s president, Eric Wallace, refers to as the “stair-step” borrowing method: “$1.8 million, $1.5 million.”
The most recent loan — $6 million — made it possible for the company to set up an employee stock-ownership plan that will provide an exit for current owners while keeping the brewery independent.
Greg Atkinson, senior vice president at the Denver office of Colorado Business Bank, said his bank has more confidence in Left Hand than some other commercial clients because of the connections the brewery has made in Longmont.
“About five, eight years ago, we were thinking that if Left Hand ever has a problem, if they swing big and it doesn’t work, then they can always reach out, go back to the community and say, ‘Hey, we need some help,’” Atkinson said. “They can do that because they have been so integral with community. The guy down the street manufacturing chairs can’t do that.”
The focus on niche markets comes at a time when some view smaller, community banks as outdated and unable to compete against ubiquitous big banks' array of products and online marketplace lenders which can approve loans in minutes.
The wave of bank failures caused by the 2007-08 financial crisis exacerbated a longtime trend of declining community banks. The number of smaller banks with $10 billion or less in assets dropped 27 percent from 2000 to 2014, according to a recent study from the Mercatus Center at George Mason University.
Meantime, community banks and their advocates continue to protest new burdens imposed by the 2010 Dodd-Frank Act. Regulators have granted smaller lenders exemptions from some of the law's requirements, but community banks continue to raise concerns about compliance costs and legal risks.
The head of Houston-based Wallis State Bank, for instance, said his institution exited the business of underwriting residential mortgages altogether because of new Dodd-Frank rules. “The risk was too great for us to stay in. From a risk and profitability standpoint, it was just not worth it,” Asif Dakri, Wallis State Bank chief executive officer, told Bloomberg BNA.
Not all the news, however, is gloomy for community banks. The sector performed well in 2014 and 2015, according to data from the Federal Deposit Insurance Corporation (FDIC). Net income at community banks increased 7.5 percent, compared with a 5.1 percent increase for the banking sector as a whole during the period, according to the FDIC data.
Future success in gaining and retaining business will require community banks to focus on niche industries and developing business acumen about what those commercial customers do, DePaul University assistant finance professor and community bank researcher Lamont Black told Bloomberg BNA.
Community banks can still provide more customized and personal service than online marketplace lenders or the country's largest banks — at a higher price. But there's a willingness to pay for the extra attention, Black said.
Garibay was a development officer at Bank of the West when Avery, his former college pickup basketball opponent, was looking to expand.
At its old location on the east side of Boulder, Avery employees worked in 10 industrial units spread throughout a warehouse district.
“There was no efficiency and their production was at about 45,000 barrels,” Garibay said. “In order to grow, they were going to have to expand and add new equipment.”
Avery recalls he asked, “Will you give me 30 million dollars? Yes, I did say ‘give.’”
“And we said we can lend you 30 million dollars,” Garibay said. “It was a going to be a two- or three-year project,” he said. “They became an official client of mine in December 2012.”
But it soon became clear that Bank of the West, which has more than $75 billion in assets and 700 branches throughout the West and Midwest, would not put together a loan package for the full $30 million Avery wanted.
In 2013, Garibay moved to Colorado Business Bank, which has branches around Denver, Vail, Colorado Springs and Fort Collins. The bank and its parent holding company, CoBiz Financial, have $3.3 billion in assets.
Avery “gave us a look,” he said. “Our personal relationship played a role. And our consistency of message from start to finish helped us get their business.”
When the final decision was made to approve the loan, the decision maker — Page — was in the room with Avery, Garibay and Paige A. Norton, president of Colorado Business Bank’s Louisville, Colo., office.
“I think it’s really passion — I can try to write up the deal, but you really have to hear it from the owners,” Norton said. “That made all the difference for our execs, that first meeting with Adam. It was a huge selling point to meet other employees too.”
In Avery's new 67,000-square-foot brewhouse, which began producing beers with such names as Hog Heaven and Mephistopheles Stout in February 2015, beams of sunlight and the malty smell of fresh beer fill the building's atrium.
A sign with the company's iconic big red “A” reads, “Welcome to our New Digs.” Since the $30 million loan was closed, the brewer has borrowed an additional $2 million for an on-site yeast plant, which will nearly double the facility's yeast capacity. Production at the new brewery has increased to 75,000 barrels per year and could go as high as 150,000.
On a recent day, Avery stood on a walkway above the floor of the new brewhouse, his voice raised just above the level of the noise of production: boiling, malting, separating, clarifying — the spinning and whirring and moving of large-volume beermaking.
Large stainless-steel pipelines shoot through the roof while smaller pipes connect mash tuns, kettles and lauter tuns. Above one catwalk, brewery employees sit in a glass-walled meeting room, their notes on a whiteboard fully visible to visitors.
“You can see the process all the way through to our packaging lines,” Avery said. “Our centrifuge has to be closed to make it soundproof, so we put glass ceilings on it so you can look down into it.”
Loan proceeds will also help finance a new canning line. Next, the company wants to add six 800-hectoliter tanks, introducing even more pipelines.
“With more infrastructure, our runway is easily 150,000 barrels. We want to get bigger, but at the right rate, smart growth,” Avery said. “I don’t see us not getting bigger. You gotta grow.”
Niche lending has helped Colorado Business Bank in other ways besides banking brewers; it has helped the institution sharpen its business focus.
“It's tough to be a generalist because when you go out to market, your referrals tend to be scattered,” Page said. “But when you're a specialist or at least have a niche, you tend to hone down your referral sources and then, when you meet with potential clients, you have such a higher level of knowledge about the industry.”
Colorado Business Bank has launched what it calls CoBiz C-Suite Collaborative (C3) groups, which bring together C-suite executives from specific industries in an effort to help them resolve problems and grow their companies while providing a sense of camaraderie among industry players.
A law firm and an accounting firm are invited to help answer questions at group meetings where participants decide the topics, and overt marketing and sales pitches are prohibited. It costs nothing to join one of the groups, which meet regularly for lunches and similar events.
Page describes the beer companies as “the most collaborative group you'll ever see,” with brewers sharing recipes, discussing their unique flavor profiles and commodity sourcing at C3 meetings and elsewhere.
“The big guys help the little guys,” Page said. “You could never get a bunch of general contractors in the room. They'd kill each other.”
Page said his bank currently facilitates about a dozen C3s for various industries it serves, and is not adverse to setting up more. While group members hope to enhance profits, they also want to be part of a community benefiting both the bank and its niche-market customers.
“We give back to the community when there's a need and when we have a relationship to that need,” Wallace said. “These are our friends and neighbors and the people who support us, and this is how we say thank you.”
Ultimately, Wallace said, the key leverage point in the craft brewing business is “vibe.”
“That’s our leverage point, the vibe we have within our community, when you walk into the tasting room and it’s alive and going. That’s what life is all about,” he said. “People want to feel they are a part of something that’s cool and real and meaningful.”
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