Surety Bank Finds Niche Customers Other Banks Avoid – Florida Trend
Ryan James, 42 Chairman/CEO, SURETY BANK, DeLand
EDUCATION: Bachelor’s degree in finance and real estate from Florida State University in 2001
GROWING UP: James’ family worked in the fern industry in Pierson, Volusia County, and he spent his summers digging irrigation ditches, servicing diesel engines and clearing land. “Do you know the rose fern, the dark green fern? It’s either grown here (in Volusia County) or in Costa Rica – those are the only two places in the world,” says James.
EXPERIENCE: James had planned a career as a stockbroker, but an internship at a stockbroking firm soured him on the profession. At the suggestion of his father, shareholder and director of Surety Bank, he decided to try his hand at banking. Shortly after starting, the bank’s chief financial officer had a heart attack and James was cast in the role. “It was trial by fire, on the spot,” he says.
GENERATION GAP: When James was promoted to CEO of Surety Bank in 2009 at age 30, he was the youngest bank CEO in Florida. After 12 years, he says he still “stands out” at banking conferences. He says old-line banking executives tend to “complain about the same things they’ve had for 20 years” — regulations and credit unions. “I don’t have time to focus on them,” James said. “I have to do what we do best.”
When Ryan James took the reins as CEO of Surety Bank, a small community bank in DeLand, in 2009, he planned to focus on marketing and growth.
The Great Recession changed all that. Regulators debited 20% of the bank’s capital over what it said were bad debts. What followed was a three-year struggle between federal regulators and James, then 30 and the youngest bank CEO in Florida. James says he tried to work with his clients to restructure the loans, but regulators seemed determined to have him seize properties to get the loans off the books.
“Every six months,” James says, regulators would come to the bank “to review the same loans over and over again for about three years while we were under a consent order.”
By 2012, the financial storm had passed, but James decided that Surety needed to diversify its portfolio beyond commercial loans and certificates of deposit.
Almost perversely given his experience with federal authorities, he decided to explore a niche in providing banking services to a sector of businesses that was under intense regulatory scrutiny: the so-called money services businesses, such as check cashing companies and payday lenders.
At the time, these money-services businesses came under scrutiny for two main reasons: Some had been accused of exploiting customers with their business practices. Regulators also feared they were at a higher risk of being used in money laundering and terrorist activities.
In 2013, the US Department of Justice launched Operation Choke Point aimed at combating consumer fraud among money services companies by “stifling” access to banking and payment processing services by fraudulent companies. . Payday lenders, however, saw a different motive, claiming in lawsuits that the federal government was simply trying to shut down an industry that was not in favor politically — whether individual businesses broke the law or not.
Despite the potential for regulatory friction, James saw an opportunity. Most banks, rather than adopting compliance programs to monitor potential problems, had simply stopped doing business with money services businesses.
James says he sympathized with money services businesses — “because they were treated like me” by the FDIC. He created a special department within Surety Bank to underwrite, monitor and provide banking services to the industry. He says he’s been pushed back by regulators, who “keep throwing up new hurdles. We were doing more than the regulations said, but then they want to add more.
Initially, Surety only worked with local check cashing companies, but as the bank learned more about its customers and how to manage operational risk, it expanded its services across Florida and eventually to other parts of the country.
Having found a profitable niche, James led the bank to provide services to other hard-to-serve industries, including medical marijuana companies and crypto businesses, such as bitcoin ATM operators.
In the case of cannabis businesses, banks have been reluctant to work with marijuana businesses because the sale of cannabis remains illegal under federal law.
While most banks avoid doing business with marijuana companies because they fear retaliation from banking regulators, James says he’s not worried. For one thing, no government agency actually enforces “archaic” federal laws. Beyond that, Surety has concocted its own set of best practices to combat the divisive legal landscape. “The Florida Office of Financial Regulation has pretty strict money services regulations, so we use that as a base and then add additional state or federal laws to our minimum standards,” James says.
Cryptocurrency-related businesses have faced similar hurdles in establishing banking relationships. A bitcoin ATM operator told Florida Trend that he visited 460 banks before finding an institution willing to allow him to open a bank account. At the start of the company, employees often carried around $200,000 in cash in garbage bags.
James says money services businesses go through a rigorous application process before Surety takes them on – and transparency is a must. Ultimately, he says most compliance comes down to knowing your customers, monitoring unusual activity, and having software and procedures in place to verify transactions.
James says he would like to see tougher compliance standards in the cryptocurrency industry. To that end, he is a founding member of the Cryptocurrency Compliance Cooperative, a Washington, DC-based organization that aims to establish universal standards and best practices for regulating the cash-to-cryptocurrency industry.
Bitcoin ATMs – there are 42,000 across the country – have become an attractive option for criminals to launder money from drug trafficking and other illicit activities, with some crypto machine operators allowing transactions with consumers who provide nothing more than their phone numbers.
Strengthening standards will help weed out bad actors, legitimize the industry, and give banks the tools they need to ensure digital currency is safe for investors and businesses, James said. He thinks regulators will create regulations, “and they’re going to put that on the banks and the stock exchanges to do the right thing to monitor,” he says. The guarantor, he believes, will have an advantage by having already developed methodologies for monitoring transactions.
Notwithstanding the regulatory uncertainties, the new lines of business were beneficial to Surety Bank’s bottom line. It ranked second out of 98 Florida banks and thrift stores at the end of the third quarter of 2021 with a 2.68% return on average assets – a key indicator of bank profitability – and James says he helped the community bank to expand its customer base beyond Central Florida. “We see these industries as our communities. We are not limited by geography. We have a national community.
The surety earns his money on compliance and transaction fees, which vary. “For cannabis, we charge a monthly compliance fee and a cashback fee that varies with volume. For the crypto industry, we charge a percentage of volume, as this correlates with increased compliance and oversight,” says James. “We’re really keeping our fees reasonable as we don’t think it’s fair to take advantage of the current climate.”
The bank also provides loans to the three industries (crypto, cannabis, and money services companies), primarily for equipment and working capital.
Whether the surety can maintain its advantage as the laws change is an open question. The Secure and Fair Enforcement Banking Act – which would prohibit penalizing banks that do business with marijuana companies – has passed the US House of Representatives five times, most recently as an amendment to the defense spending bill of 2022, before being scuttled by the Senate.
If he passes, James predicts it will open the floodgates to a lot of competition. “You’ll see all the major payment networks, megabanks, etc. rushing in and acting like they’ve been helping from the start,” he says.
GUARANTEE BANK, DeLand
BRANCHES: Lake Mary, Pierson and DeLand
CUT: 82nd largest bank in Florida
THE STORY: The surety was founded in 1926 as a building and loan. Tradition holds that the bank survived the Great Depression with barely $2,000 in its safe. Surety also survived the savings and loans crisis of the late 1980s which led to the collapse of more than 3,000 thrift stores across the country. James says Surety was the only surviving building and loan in Florida, and at the suggestion of regulators changed its charter “from one building and one loan to a bank.”
TECHNOLOGICAL TRANSITION: These days, banks can lose money on consumers’ free checking accounts, James says. Part of the problem, he says, is the fees that many banking system software vendors charge banks for much-needed services such as online banking, bill payment and mobile banking. To solve the problem, he ditched the bank’s legacy software provider and went with Jacksonville-based startup Nymbus, which transitioned Surety to private cloud-based software and provided greater flexibility in services and pricing.
FILLING A VACUUM: When BB&T closed its branch in Pierson (population 1,913) in 2019, town officials scrambled to find another bank to replace it. The surety bank responded to the call. “A lot of people in the community need to be able to cash their checks on Fridays. They were really grateful,” says James. “A lot of our transactions take place at this small branch.”
Balance sheet of the surety
ASSETS: $184.8 million
LIABILITIES: $166 million
SHARE CAPITAL OF THE BANK: 18.8 million dollars
DEPOSITS: $164.2 million
NET LOANS AND LEASES: $77.8 million
LOAN LOSS ALLOWANCE: $963,000
Note: Third quarter 2021