The Second Time Around

It’s a familiar tale. An enthusiastic, fresh-faced college graduate returns home with a new diploma, ready to settle down and start a family. He gets a job as a teller in the town bank, working his way up through the ranks: to head teller, lending officer, and then credit manager, learns the ins and outs on the operations side and eventually finds himself the well-regarded, sought-after chief executive of one of his community’s pivotal enterprises.

That is, until the worldu00e2u20ac”in the form of a deregulated, radically restructured banking industryu00e2u20ac”catches up with him.

When the chairman of the bank suddenly decides to sell out to a bigger institution, at least the new bosses are people the CEO has dealt with over the years. Thus, as the head of an important outlying branch of a growing state bank, he can reasonably expect an invitation to join the parent company’s board. But what about when the new parent is acquired by a regional holding company that is itself soon to be swallowed by a First Interstateu00e2u20ac”just before it is taken over by a Wells Fargo?

Maybe it is not so surprising that for many bankers with deep roots in a local community, long-established ties to its business sector, and perhaps tidy profits from the sale of stock in a bank that was acquired, the answer to “What next?” has turned out to have an entrepreneurial cast.

There is a measure of dissatisfaction among customers who miss the responsiveness they took for granted at their vanished local banks and who reject the impersonal style of the giant financial institutions that have taken their place. Thus, many bankers who have exited an institution see a niche to fill. Often urged on by former colleagues and customers, such bankers, by the scores these days, are saddling up againu00e2u20ac”rounding up investors and chartering new community banks to meet their fellow citizens’ desire for the individual attention and good old-fashioned personal service to which they are accustomed.

“As banks have gotten larger and larger, they’ve lost the personal touch,” says James Biggers, chairman and chief executive of River Valley Bank in Russellville, Arkansas. “At the last bank where I worked, the president’s office was on the second floor, in a corner in the back. You had to go all the way up the stairs before you even saw his office.”

Biggers left Boatmen’s Bank in 1997 just days before the announcement that it would be acquired by NationsBank. He says the physical layout of River Valley Bank, which opened its doors in August 1997 and had about $30 million in assets at the end of last year, was designed with personal contact in mind.

“I’m over here in the corner in a glassed-in office with a view of the whole lobby,” he says, adding that he takes advantage of the layout by making it a point to try to greet every customer entering the bank. Occasionally, Biggers admits, he even risks creating a minor disruption by calling out to an acquaintance at the other end of the room.

Unhappiness with large-scale banking is a two-way street, community bankers say. It is not only customers whose banks have vanished who feel an acute sense of dislocation, but also bankers themselves who, accustomed to exercising control over their own turf, find that, overnight, they have become accountable to managers in another city or state.

Don Waters spent 11 years as president of the lead bank in a four-bank holding company in Fort Worth before it was acquired by Los Angeles-based First Interstate. It became clear to him during the course of the negotiations to sell the company that he would not stay on after the deal went through.

“I like to say that I am a community banker, and that means I am used to interacting with customers on a daily basis,” Waters says. “I had a large following of customers. I’m a decision maker, and I wanted to keep on banking my customers the same way I always had. I knew [the management of First Interstate] had their own systems and their own way of doing things, and it’s not that it’s right or wrong. It just wasn’t right for me.”

Waters, who had been a banker in Fort Worth for 27 years, accepted a position with Summit Bancshares, a 24-year-old Fort Worth institution that was looking to expand and had decided to start a branch rather than acquiring an existing location. As president of Summit Community Bank Northeast, which opened up directly across the street from his old bank in the North Richland Hills suburb, Waters says he found a situation that permitted him to continue doing what he knew and lovedu00e2u20ac”providing efficient, personalized service to local small business customers.

The arrangement certainly suits Philip Norwood, chairman and chief executive of the $530 million Summit Bancshares. With a leased facility, the de novo branch has very little overhead, and Waters has brought $42 million in lending business to Summit over a three-year period. “We’ve gained what we wanted without having to make any capital outlay,” Norwood says. “And he has his autonomy. As a result, that location has already made us over half a million dollars.”

There are, of course, risks involved in starting a new bank, consultants and analysts point out. Perhaps the first obstacle that must be overcome, says Richard P. Hunt, chairman of Kendrick, Pierce & Company, a bank consulting firm in Tampa, Florida, is the need to draw the $5 million to $10 million out of a community that is required to capitalize a start-up bank adequately.

Chet Fenimore, an attorney with the Dallas law firm Jenkens & Gilchrist, who has worked on de novo charters in Texas and surrounding states over the last five years, says that the $3 million in capitalization bankers were raising when he worked on his first charters would no longer be sufficient. “Now the regulators would probably say they would need capital of $5 million, or more,” Fenimore says.

After the bank is successfully capitalized, according to Fenimore, the principal challenge is attracting deposits. “Where I’ve seen people fail, it’s been because they haven’t been able to attract as much of their former business as they anticipated and because the competition has been more aggressive than they anticipated.”

Another question, says Jay Tejera, a banking analyst with Dain Rauscher Wessels in Minneapolis, is whether the management of a small bank has the ability to make itself heard above the roar. “In places that have a good economy and that have undergone a significant degree of bank consolidation, there is a customer out there who will seek out a small bank,” Tejera says. “But can you provide a 15% return based on that strategy?”

Tejera notes, though, that there is what amounts to natural turnover as community banks are acquired or closed because their owners retire or simply want to cash out. And as consolidation has reshaped the banking industry over the last decade, leading to a sharp reduction in the number of local competitors, entrepreneurial bankers in nearly every part of the country have spotted opportunity in mid-market niches.

It was just such an opportunity that lured Mark Giles, president of Virginia National Bank in Charlottesville, Virginia, away from Sterling Bank in Houston. The Virginia banking market is dominated by giants like Wachovia and First Union after a wave of consolidation of community banks across the state. Giles calls Charlottesville a “textbook oligopoly.”

“People say you’re in trouble when you’re in a situation where there’s an oligopoly,” Giles says. “But to me, an oligopoly spells opportunity. If you can come in and focus on a set of customer expectations that you can meet better than anybody else, then you have the opportunity to pick up enough customers to build an institution with significant critical mass. And whether you’re talking about a market like Houston, Texas, the fourth-largest city in the United States, or Charlottesville, with 160,000 people, that dynamic remains.”

Giles helped build Sterling from $55 million in capitalization and $580 million in assets to $320 million in capitalization and $1.2 billion in total assets during three years as chief executive. But he pointed out that Sterling’s rapid growth meant that improvisation was unavoidable at times.

“The attraction here was to prove it up from scratch,” he says of Virginia National, which began operation in July 1998 with 963 investors and $18.6 million in capital. “There were a lot of things we had to figure out as we went along at Sterling. The chance to do them right from the ground up was good.”

He points to human resources, marketing strategies, productivity, and skills development as distinct but interrelated aspects of bank operations that can benefit from the fresh perspective of a start-up institution.

“There is a tendency to concentrate on those things one by one, but each of those areas has positive and negative interdependencies,” Giles says. “The chance to recognize those interdependencies, both positive and negative, as a team, and to work on them from the very start is a tremendous advantage.”

In almost every case, the personal service theme dominates veteran bankers’ descriptions of the strategic opportunity they have identified.

“In California, like everywhere else, we’ve had so many mergers that there is a real need for a community bank in many places,” says Steven Hoffman, president and chief executive of Canyon National Bank in Palm Springs, California, which was chartered in July 1998. “To be able to maintain a large bank is terrific. But what you get with a local community bank is the presence of senior directors and officers who are totally involved with the community. They bring a keener knowledge of what’s needed in the town.”

And, adds River Valley Bank’s Biggers, people are willing to pay a little bit extra for good service.

“The single most important thing is an emphasis on and a commitment to the customer and to giving that customer the personalized service we were accustomed to giving 10 or 15 years ago,” says Jeff Smith, chairman and president of First Trust Bank of Illinois, which opened its doors in Kankakee, Illinois, in August 1998.

On the prosperous stretch of Florida’s West Palm Beach,

there hasn’t been anybody that has taken the place of the banks that were absorbed through consolidation, according to David Skiles, an organizing director of First Peoples Bank, a start-up set to open for business in March or early April.

“Most of the major banks aren’t looking to cater to small business loans,” says Skiles, who will serve as the new bank’s president. “Those people just get lost in the shuffle, from a service standpoint.”

Philip Young, president and chief executive of Trustbanc in Mountain Home, Arkansas, which opened in July 1998, says the thing his customers complain most frequently about is the “lack of personality” at the big banks. “We get feedback from the public about how dissatisfied they’ve become with banking,” Young says. “With the banks that have come in and acquired local systems, they’ve set up phone systems where, instead of talking to a person, you have to go through an electronic system. They are unhappy with the overall level of service, whether it comes to getting a car title or a loan payoff, whatever it may be.”

Staffing is a key element in most of these bankers’ plans for executing their personal-service strategy, and they observe that they have found a deep pool of potential recruits among the experienced but disenchanted employees on the big banks’ payrolls.

“The people we’ve brought aboard besides myselfu00e2u20ac”both directors and employeesu00e2u20ac”all had a vast amount of experience at other community banks here at the beach,” says Mike Witherspoon, chairman and president of Oceanside Bank in Jacksonville Beach, another Florida coastal community.

“They had all been bought out, and they were all working for bigger banks, but they liked the small bank environment better,” says Witherspoon, whose $46 million institution opened in July 1997. “We had our pick of whomever we wanted, and we still do.”

Many of the bankers starting new institutions aimed primarily at the small business market count on what they call “relationship banking” as a key facet of their strategy to draw customers.

“We take a philosophy that people bank with bankers, not with banks,” says Roy Salley, president and chief executive of First Mercantile Bank in Dallas, which opened in January 1998 and has attracted about $72 million in assets in its first year of operation.

“Everything we do is based on relationships with people,” says Salley, adding that his bank’s top seven employees have an average of 17 years’ experience in the city.

Robert Althoff, president and chief executive of Pinnacle Bank, a two-year-old, $65 million institution in Little Rock, says he has found such “relationship managers” to be the most effective hires he can make.

“We have five commercial lenders, and we’ve hired most of them from our competitors,” Althoff says. “It’s been particularly successful when we’ve hired them from banks that have been recently acquired. In those cases, there has been a customer base that has felt displaced by the loss of their bank. I’ve turned around and hired their loan officer and said, ‘Come on down.’ And it’s worked. They have come on down.”

Strong ties to the business communities in which the start-ups are located has also played a central role both in the selection of shareholders and in the formation of boards of directors, the executives say.

“We wanted a very diverse and active set of shareholders who would help us build this bank,” says Jim Canton, president of First National Bank of Edmond in Edmond, Oklahoma. “Ownership is a very important element in building a community bank.”

And the board of directors at First National, which opened in November 1996, was selected with the same criteria in mind, Canton adds.

“We selected our board at the same time we picked our organizers and in the same way we picked our shareholders,” he explains. “We wanted diversity. We wanted young, energetic directors who were a vital part of the business community. And as a result, what we have is a board of directors who have relationships with people who want banking relationships.”

Other bankers offer similar observations. When Pinnacle Bank was being formed, according to Althoff, the goal was to disperse the stock widely among people who were prominent but still relatively young and to build a board with an eye toward the future.

“In a sense, we put together a baby boomer board,” Althoff says. “Instead of putting the 65- or 70-year-old dad on, we asked the 35-year-old son. It’s kind of a second-generation boardu00e2u20ac”up-and-coming community leaders who will be taking over their fathers’ businesses or who are already successful in their own right.”

Nearly all of the bankers interviewed for this article explained that their strategies rested heavily on offering the attentive personal service to small business owners whose former banks had disappeared. Even so, there was widespread agreement among them that appealing to that class of customers will increasingly involve the appropriate use of new technologies.

They cite the ability to pick and choose among the latest technologies in order to offer products tailored to their customers’ needs as an enormous advantage. Furthermore, many expressed profound relief that they do not face the worry associated with computer systems that must be modified to recognize the year 2000.

“One of our biggest advantages has been relative to the Y2K situation,” says Fred Martin, chairman and chief executive of Independent Community Bank in Tequesta, Florida. “I celebrate the fact that we don’t have an old system that we would have to completely change around, like the big banks.”

But the technology is yoked tightly to the service theme, according to the bankers.

“In our mission statement, we talk about being high-touch and high-tech at the same time,” says Pinnacle Bank’s Althoff.

It is that combination of technology and service that bankers like Giles at Virginia National see as their best chance to establish franchises that will be viable over the long haul. Giles calls service the “threshold” on the road to building a successful institution.

“There is a flight to quality going on in business after business,” Giles says. “But quality means more than just knowing your customers’ names. It also means technology.

“Longer term, and by that I mean three years out, the people who will win the game will be the ones who can combine the delivery channel that people want with personal service, when it is wanted, at the opportune time.”

At Independent Community Bank in Tequesta, Martin says customers have their choice of options like Internet banking, automated voice response systems, and other high-technology conveniences, along with more traditional services like a courier service to pick up deposits from customers. “When you’re talking about service,” he says, “you’re talking about convenience.”

But Martin, who headed Jupiter Tequesta National Bank from its founding in 1987 until just before it was acquired by Wachovia eight years later, summed up the feelings of many veteran bankers at the helm of start-up banks at a time in their lives when they might reasonably be thinking more about golf and a little fishing.

After he left Jupiter Tequesta National, Martin says, he thought about trying his hand at financial planning or becoming a stockbroker.

“But the bottom line was that I think I’m a pretty good banker and I enjoy it,” he says. “And you know, being president of a bank, you have a lot more leeway than stock brokers do. I know some pretty successful brokers, who probably make three times what I do, but I don’t know that they enjoy coming to work as much as I do.”