NY-Based De Novo Bank Takes Advantage of Chaos

The founders of New York City-based Herald National Bank, which officially opened for business on Nov. 24, 2008, based their business plan on the conviction that, with big banks getting bigger (sometimes at the expense of customer relationships), there would be an opportunity in the New York metropolitan market for a smaller, more targeted and service-oriented institution with deep expertise in small- and midsized business banking. They could not have foreseen when they began their journey that the developments of the past year would make their strategy even more timely and on target.

"The way we planned to do business a year-and-a-half ago is to take advantage of dislocations in the banking business in New York City," points out Michael S. Carleton, executive vice president and chief operating officer with Herald National Bank. He points to the consolidation that has claimed long-time area institutions such as New Jersey-based Commerce Bank (now part of TD Commerce Bank) and Long Island-based North Fork (now part of Capital One Bank), as well as the credit crisis-induced restructuring or acquisition of large institutions such as Wachovia and Citi. "We're taking advantage of chaos," he says.

Or, as Herald National's executive chairman Daniel M. Healy said in an official statement at the time of the bank's opening, "The current financial climate has made this arguably the most opportune time to launch a commercial bank in our nation's history."

The mission of Herald National Bank, which currently is operating branches in Manhattan, and in Melville, N.Y., on Long Island (a Brooklyn branch, in the Borough Park neighborhood, is scheduled to open on Jan. 12, 2009), is to serve the commercial and private banking needs of small and mid-size businesses, their owners and senior managers in the New York metropolitan area. The bank opened with $62 million in total capital and 90 employees. It launched as Heritage Bank, but changed its name to Herald National Bank on January 2 after a trademark conflict with a New Jersey-based bank transpired.

In additional to individual investors, lead investment partners in the bank are Palladium Equity Partners, a New York-based private equity firm; Carpenter & Co. (Irvine, Calif.), a private equity firm that specializes in de novo banks; and FrontPoint Partners, an asset management firm and wholly owned subsidiary of Morgan Stanley. Herald National Bank recently completed an IPO of 6.2 million shares of common stock and on December 9, 2008, began trading on NYSE Alternext US (symbol: HNB).

But it's not just about timing and positioning. Herald National is implementing a technology strategy that its management believes further strengthens its competitive advantage. As a de novo, the institution doesn't have the legacy systems and integration challenges more established banks face. Furthermore, reports Carleton, Herald National is taking advantage of today's enhanced capabilities from hosted and shared systems.

"The key driving principles [were] to identify the best technology partners and where possible acquire software as a service (SaaS) or outsource," he says. "We're buying as little infrastructure as possible." For example, Herald National is using an ASP-based project management solution called @task that is available on the Web, so that "the people running the bank can get to it from any computer on the Internet," Carleton says. Another aspect of Herald National's IT environment is a VOIP hosted telephony and network management solution called ACBB-BITS (Banking Infrastructure and Technology Services) from the Atlantic Central Bankers Bank (Camp Hill, Pa.). At the same time, there's a high level of reliability and security within this operating environment, which Carleton describes as "bullet proof." He reports, "We've built a redundant processing site in Melville, [which consists of] a teller unit, an operational unit, and server. If there is a power outage, we will always have a facility to operate. We basically have a hot site out of the box." This is a direct benefit of "being able to acquire infrastructure cheaply," he adds.

This infrastructure strategy also is intended to support Herald National Bank's approach to the products and services it will offer to its business banking base. In the commercial banking space in which Herald National intends to compete, even newer products such as remote deposit capture "have become commoditized," according to Carleton. "We focus on a relationship-based model" " and selected technology partners to support that strategy.

This includes Metavante (Milwaukee) and Brasfield (Birmingham, Ala.) for core systems (including image center for check capture); Calabasas, Calif.-based Digital Insight (business banking for cash management, and retail internet for entrepreneurs); Fidelity National Information Systems ((FIS, Jacksonville, Fla.) for lockbox; Fundtech (Jersey City, N.J.) for wire transfer; DeLaRue (Basingstoke, Hampshire) cash recyclers in the branches; and Carmel, Ind.-based Baker Hill for business-to-business systems, commercial loan analysis and CRM. "This will interface through to [Lake Mary, Fla.-based Harland Financial Systems'] Laserpro," facilitating a "cradle-to-grave" approach to lending, according to Herald National SVP Nicholas R. Schiralli.

In the few weeks since Herald National Bank opened, Carleton and his team have been concentrating on making sure all the systems are delivering as promised. "A lot of the emphasis at the beginning is sitting on top of everything," says Carleton, who prior to joining the institution was chief information and services officer at Levitz Furniture. He also was co-founder, president and COO of Bpass Inc., which deployed an online banking account aggregation tool. Before that, Carleton was one of four former Republic National Bank of New York executives who in 2000 launched Signature Bank (New York).

"From a risk management perspective, we're really paying attention to what's coming into the bank in terms of customers," he adds. "Here, every client is a new client, even if we knew them in a previous life." Looking ahead, Carleton says, "One of the things we're going to be focused on is decision-support reporting " to monitor the performance of the business, down to the banking team level, and to manage the performance of the loan portfolio. We've brought the tools in to do this, but can't optimize those tools until we're up and running for a while."

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio