The Lord of Fairfax
If you’re having trouble raising capital or growing your bank, maybe you shouldn’t read this story. First Virginia Community Bank, a four-year-old de novo in Fairfax, Virginia, raised $6.3 million last September to support its growth in the Northern Virginia economy. This is actually the third time that $255 million-asset First Virginia has raised capital from investors, starting when it rounded up $23 million in a little over eight weeks prior to receiving a state banking charter. Chairman and CEO David Pijor and his team are smart bankers who know their market, but this is also a story about being in the right place at the right time.
With a little over a million residents, Fairfax County sits due east of Washington, DC. Established in 1742 and named after Englishman Thomas Fairfax, the 6th Lord Fairfax of Cameron, Fairfax County has a highly diverse economy that includes both large employers (seven Fortune 500 companies have their headquarters there) and professional service firms. It derives much of its growth from technology companies that have sprung up to help serve the federal government.
Fairfax is also one of the wealthiest counties in the United States, and according to Pijor leads the country in marriages with “double masters,” where both spouses have master’s degrees. Fairfax has one more thing going for it, he adds. “There are a lot of other markets that have smart and rich people, but what I think has partially driven our success is we have smart (and) rich entrepreneurs—people who aren’t afraid to open up a shop,” he says.
The bank has 48 employees and three branch offices, and the main office is located in a low rise office building in a busy commercial district in the town of Fairfax. Pijor greets a visitor in dress slacks and a golf shirt with the bank’s name embroidered on the front.
The 58-year-old Pijor looks like a banker but didn’t start out as one. He grew up in Lorain, Ohio (where his father was a banker) and ended up practicing law in Fairfax County after getting his law degree from Georgetown University. Over time, he got to know a lot of the local bankers, and eventually helped organize James Monroe Bank in the late 1990s, where he served as chairman of the board. The bank grew to nearly $750 million in assets before it was sold in 2006. A year later, Pijor organized First Virginia, although this time he also became CEO.
When Pijor did the first capital raise for First Virginia, he would only take money from people who agreed to be customers of the bank. In fact, the subscription agreement in that first offering had a section where prospective investors had to describe in detail what kind of business they would bring to the bank and who else they would refer. “And when we received subscriptions I looked at those and if someone didn’t fill it out I’d call them and say ‘You don’t understand,’” Pijor explains. “’I’m serious about this. Are you going to help me grow our bank? I’m not going to make you rich by becoming an investor in this bank if you’re not going to help us grow.’”
Pijor knew that he could raise enough money to start a new bank, especially after having done it successfully at James Madison, but what he really needed were customers the bank could build on. “It was very unusual to tell prospective shareholders that you have to be a customer first and it was a very successful strategy,” Pijor says. “I don’t think many banks have ever done that.” Prior to its most recent capital raise, approximately 70 percent of the bank’s shareholders were also customers. Most are local businesses and professional service firms, although First Virginia banks some larger companies as well and has recently targeted the government contracting sector for growth.
De novo banks generally lose money during their first couple of years of operation, although First Virginia reported net income in 2010 of $809,000 after posting net losses for 2009 and 2008 of $1.5 million and $3.3 million, respectively. Through the first six months of 2011, the bank reported net income of $461,000—which means it’s closing on the million dollar mark. Pijor is quick to credit the Fairfax economy for a good portion of First Virginia’s early success. “I think this is the best banking climate in the country,” he says. “I’d rather be here than many other places.”
The bank is still growing like a weed—Pijor says it is a “voracious consumer of capital”—which means it will probably have to do another capital raise soon, possibly as early as 2013. Most of the $6.3 million First Virginia raised this summer came from its existing base of shareholders and customers, although it did offer some shares to the general public. Whether Pijor can continue to rely on that base to fund First Virginia’s growth remains to be seen—although he expresses little interest in attracting institutional investors, who surely would be more demanding than the bank’s current owners.
“I love it when a shareholder calls and says ‘How’s our bank doing today?’” Pijor laughs.
Feeding the Generals First
The recession has been nicer to the top executives of banks than the rank and file.
One of the findings of the annual Crowe Horwath Financial Institution Compensation Survey, which this year polled 280 banks, was that the fast growth in compensation has been among executives, while branch, investments and operations employees have seen the slowest growth.
Total average compensation for the CEO climbed 27 percent from 2005 to 2011, to $265,784. But the biggest pay jumps came for executives in roles with heightened attention, such as chief compliance officer, which saw average compensation rise 54 percent during the last six years to $93,695. The average loan workout officer, for example, had a 49 percent increase in pay to $93,058 from 2005 to 2011.
Meanwhile, the average branch manager saw just a 16 percent increase during the last six years to $59,136. An experienced teller saw a .4 percent increase in pay during the last six years to $24,421. Some job titles even saw a decline. Understandably, some of those jobs are tied to commissions, such as commercial loan officer, so they would see a decline when loan demand is down. Even personal bankers and customer service representatives saw declines in compensation during the last six years.
In contrast, the average chief financial officer compensation climbed 32 percent to $158,096.
What gives? When in battle, shouldn’t the generals wait until the troops are fed?
Tim Reimink, head of the survey for Crowe Horwath, explains that pay is tied to how difficult it is to find someone who can do that job. There aren’t that many banks CEOs and CFOs who can guide a bank through difficult times. People qualified to work out problem loans at a bank became hard to find during the recession, when demand for them rose. There are a lot more people able and willing to take a teller job.
Jobs or Deficit Reduction? You Pick.
Bankers have become a pessimistic bunch lately.
The swing in outlook for the U.S. economy couldn’t be more dramatic. In May, Grant Thornton’s Optimism Index quarterly survey found 61 percent of bankers and securities leaders thought the U.S. economy would improve in the next six months. That fell to 24 percent by August. Only 60 percent felt optimistic about their own business; down from 92 percent in May. One-third planned to decrease staff, double the percentage who said so in May. Twenty-five percent planned to increase staff, down from 43 percent from May.
“There is pessimism about the economy, about the steady unemployment, the increase in regulations, and the overall confidence about our political system right now,’’ says Nichole Jordan, national banking and securities industry leader for Grant Thornton LLP, a few weeks after a threat of a government shutdown over a partisan fight on the federal budget.
That’s basically the same gist of a FICO survey of 188 risk managers at banks and credit unions in August, sponsored by the Professional Risk Managers’ International Association. Forty-eight percent thought the U.S. is headed for a double-dip recession. Nearly 60 percent felt housing prices will remain below 2007 levels until at least 2020. More than 73 percent think mortgage delinquencies will remain at elevated levels for at least five more years.
“People are very uncertain about the future,’’ says Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “You have the sovereign debt crisis and people still wondering whether these mortgages (in foreclosure proceedings) were correctly described. And consumers certainly aren’t feeling optimistic about their prospects.”
So what can be done about this miserable state of affairs, both for bankers and the U.S. economy?
The bankers in Grant Thornton’s survey overwhelmingly think job creation is the public policy initiative that would make them most optimistic about the country’s future, 73 percent. That was followed by 22 percent who thought deficit reduction would make them most optimistic about the country’s future. Only 5 percent chose the third and final option: reduction of the effective corporate tax rate.
“Most economists, this is true not just in the U.S. but in Europe, too, think we need to reduce deficits in a controlled way over a longer period of time,’’ says Jennings, who has a Ph.D. in economics. “The austerity measures, when you look at countries like Greece, only make matters worse. A jobs plan coupled with a longer-term agreement to reduce deficits is what is needed.”
Jordan says she thinks bankers are particularly concerned about jobs, because they see the impact on their own lending portfolios for everything from mortgages to auto loans to credit cards. “Most leaders in this industry recognize the economy will be crippled unless something significant happens with job creation,’’ she says.