The Power Behind Community Banking

When the board members of California Community Bancshares hired a new chief executive earlier this year to lead the company’s pursuit of a supercommunity banking strategy, they went straight to the source: Anat Bird, a well-known industry figure who, as a consultant a decade earlier, coined the phrase “supercommunity bank.”

“We wanted a star,” says Jaynie Studenmund, a CCB director and chief operating officer of Overture Services, an online search engine firm formerly known as GoTo.com. “Hiring a CEO is the most important thing a board does. We needed someone who had multibank holding company experience and the ability to articulate a strategic vision and rally the troops.”

For Bird, a 49-year-old former Israeli Army tank commander, who at the time was president of Wells Fargo & Co.’s northern California bank, the idea of running a $1.2 billion holding companyu00e2u20ac”just one-eighth the size of the operation she headed up at Wellsu00e2u20ac”was a gimme. CCB, based in the Sierra foothill town of Auburn, between Sacramento and
Lake Tahoe, had a pristine loan portfolio, low cross-selling figures and an “underutilized sales force,” she says. “I’m an entrepreneur at heart. When somebody gives you the opportunity to grow something, and it has most of the necessary ingredients … How could I not take it?”

The hiring of a high-profile leader was merely the latest step taken by a board charged with transforming a collection of underperforming banks and thrifts into a well-coordinatedu00e2u20ac”and profitableu00e2u20ac”banking company. Now, in the face of an economy gone south, the board has new challenges: After eight months on the job Bird has resigned, and in the face of an executive changeover, CCB must maintain its progress and aggressively pursue capital-raising opportunities. 2001 has been an eventful year for CCB, and along the way, the nine directors have learned some universal lessons about the value of good execution, change management and striking the appropriate balance between centralization and local management.

Battle scars and vision

CCB was born in 1997, the vision of a group of seasoned banking executives who saw plenty of consolidation potential among the hundreds of community banks that dot the West Coast and a lack of opportunities for institutional investors that might want a piece of that action. The result: Belvedere Capital Partners LLC, general partner for a fund that has thus far acquired seven California banks, combining them under the CCB banner. Investors include the pension funds of telecommunications giant Verizon, AllState Insurance Co., and the California Public Employees Retirement System.

Belvedere owns 95% of CCB’s equity, and its four executives boast nearly 100 years of collective banking experience. Richard Decker, Belvedere’s chairman, is a former CEO of WestAmerica Bank and executive vice president of the old First Interstate Corp. J. Thomas Byrom, the chief financial officer, worked for several banks, including Wells Fargo, while Anthony Frank, another co-founder, is a former postmaster general and former chairman of First Nationwide Bank, a successful thrift in the 1980s. Ronald Bachli, recently reinstalled as the new CEO and president, was the senior banking partner for the San Francisco law firm Lillick & Charles.

“There was hardly anybody that was providing capital from major pension funds to invest in the financial services sector,” says Decker, who also serves as chairman of CCB’s board. “This is a group that has a lot of scar tissue and experience. We felt we provided a very unique combination of operating and deal experience that could make this very successful.”

Over the past four years, Belvedere has spent about $160 million acquiring banks and thrifts in the Golden State, consolidating them under two separate charters, one in the Sacramento area, the other in Orange County. Each of those institutions has retained much of its own individual identity and management while seeking to capitalize on the higher lending limits, product capabilities, and efficiencies that being part of a larger company affords. Top managers, many of whom received cash for their ownership stakes, now have stock options in CCB.

This is the strategic shell of the typical supercommunity banking model that has produced some notable successes around the country, ranging from Cincinnati-based Fifth Third Bancorp to Community First Bankshares in Fargo, North Dakota and Sterling Bancshares of Houston. “The idea,” explains Bird, who named the concept while helping a mid-sized New Jersey bank position itself in the early 1990s, “is to create a franchise that looks like a small bank to customers, but acts like a big bank in terms of capacity and strength.”

But while the strategy is easy to articulate, getting the proper pieces in place, all while retaining the character and strength of local banks, is far more difficult. Consolidating key functions, such as securities portfolio management or technology platforms, can dramatically slash costs, while the ability to leverage a larger balance sheet and make bigger loans is an undeniable advantage when competing against larger regional and national players. But too much centralization can hurt the loan- and revenue-generating capabilities of bankers who know better than anyone the needs and dynamics of local communities.

“There’s a constant dynamic tension between centralizing and decentralizing, between revenue growth and cost reduction, between finding the benefits of standardization and the benefits of local-market control,” Bird explained, before she left. “The most convenient and cost-effective thing to do is make everything cookie-cutter. But when you’re creating those economies of scale, you have to resist the temptation to centralize too much, or you jeopardize the specific character of each bank and lose your local advantage.”

The board in control

CCB’s board, a collection of lawyers, accountants, technology executives, former bankers and other business leaders, has aggressively embraced the challenge. Directors have been unusually hands-on in the labor-intensive exercise, devoting more of their time and energy than is typically demanded of bank board members.

They’ve been prodded by Decker, who has made “change” the company’s watchword. He says that Belvedere has screened 75 banks and conducted due diligence on 13 institutions, en route to acquiring seven. He says while many companies, and even directors, say they desire change, most don’t “walk the talk of change.”

To help them better think about the process of change, he’s given each CCB director a copy of “Who Moved My Cheese,” a parable by author Spencer Johnson that encourages readers to be alert to seek out change and embrace it. “I want them to understand that the only constant we have here is change,” Decker explains.

Such strong convictions, combined with Belvedere’s ownership stake, could make for a contentious relationship between independent directors and the three Belvedere representatives on the CCB board. It would be understandable, some directors say, if Belvedere simply tried to call the shots itself. Instead, an understanding, built on mutual respect, has emerged.

“The board makes the decisions, and there isn’t anyone on it who’s willing to let the Belvedere partners steer us in a direction we don’t want to go,” says Larry Mitchell, a CCB director and former executive with Hewlett-Packard. “We have to make sure we’re fulfilling our fiduciary responsibilities to investors and operating in a way we think is best. We’ve had many discussions with Belvedere about that, and it’s the way they want things to operate, too.”

Says Decker: “We’ve invited some very smart, talented people to be on this board, and if they felt we weren’t open-minded and receptive to their input, they wouldn’t want to be a part of it.”

That devotion is reflected in the roles of directors and the frequency of their meetings. The holding company’s board meets every month. In addition, many directors pull double shifts, serving on one of two subsidiary bank boards, which also meet monthly, or on board committees that have tackled what are traditionally considered operational management issues.

Studenmund, a former executive vice president in charge of retail and business banking for First Interstate, spent two years on a marketing committee that helped forge an identityu00e2u20ac”both inside and outside the companyu00e2u20ac”that blends the strengths of the holding company with those of the individual banks. Similarly, Mitchell, who managed several HP divisions before retiring in 1997, served as chairman of CCB’s technology committee, charged with creating uniform standards and platforms for the company.

The institutions acquired by CCB, ranging from a large, underperforming thrift to a smaller business bank with expertise in commercial real estate, had been pursuing wildly divergent technology strategies. Some, for instance, had begun to outsource all of their back-office and data-processing needs, while othersu00e2u20ac”including the largest, $670 million Placer Savings Banku00e2u20ac”were in the process of bringing everything in-house. Several different operating systems were in place.

Mitchell’s technology committee spent months researching its options. Should they pursue a single platform? What sort of solution would best meet the company’s needs? Should it be run in-house or outsourced? And what tools should front-line customer-contact employees have at their disposal?

After much research and debate, the committee ultimately decided to outsource its core processing and other back-office IT functions, slashing costs by about 20%. It also put all of its customer-contact people on Windows-based individual workstations, with the same communications standards.

Building what, in essence, was a new technology infrastructure from scratch was both “significant and expensive,” Mitchell says, resulting in significant write-offs. “But we had to do it, or we’d never achieve our objectives. One of the reasons you buy a bunch of banks and form a supercommunity bank is for the cost savings you get from consolidating technologies. You can’t get that leverage if everyone’s headed in a different direction.”

Elusive profits

Despite such initiativesu00e2u20ac”or perhaps because of themu00e2u20ac”CCB has struggled to turn a profit. Since completing its last acquisition in early 2000, the management team had done an admirable job of reducing costs. The company consolidated operations under two charters, centralized data-processing functions, and brought the underwriting and servicing of SBA, commercial, and real estate loans under one umbrella. Fifty-six jobs were eliminated during 2000.

But for all that, the company’s returns were abysmal. In 2000, the company’s net income was $71,000u00e2u20ac”an improvement over the $3.1 million lost in the previous two years, but still nowhere near the returns expected by Belvedere’s well-heeled investors. CCB’s return on average assets last year was 0.01%, while return on average equity was 0.06%.

Much of the loss was attributable to one-time technology expenditures and merger-related charges. Since the deals were accounted for as purchase transactions, they amassed large amounts of goodwillu00e2u20ac”more than $43 million for just two banksu00e2u20ac”that must be amortized over time. In 2000, an additional $2.5 million in charges for reorganization, severances, systems conversions, and contract terminations were registered. But even the company’s “net operating income” of $6.3 million for the yearu00e2u20ac”less the goodwill and one-time chargesu00e2u20ac”produced a substandard ROE of 11.58% and ROA of 0.61%. Revenue generation was a problem.

Against this backdrop, CCB’s board in the summer of 2000 began a nationwide search for a permanent CEO. While Bachli had done a good job of beginning the consolidation efforts, he already had served longer than planned. The company was now at a stage of development and size where, Decker says, it needed a full-time operating CEO to “take us to $3 billion to $5 billion” in assets.

Search for a leader

The board hired the executive search firm Korn/Ferry International to aid in finding good candidates. And while it didn’t appoint a search committee, the three Belvedere principals on the boardu00e2u20ac”Decker, Bachli, and Byromu00e2u20ac”took on the task, with the full board’s consent, of running a nationwide search.

Early on, Decker led the board member through a careful prioritization of the expertise and traits desired: What sort of operational background did they want? How important was finance, acquisition, and integration experience? Was a background in business and real estate banking desirable? Would a person who had run a large regional bank be preferable? Or would it be better to find an up-and-coming senior executive at a larger bank?

The views varied among the directors. Studenmund thought it was important to target someone who had operated in a larger-bank environment. “We needed someone who could help us change around the car while traveling at 90 miles per hour and get things implemented quickly,” she says. “These kinds of jobs are best done by someone who has done bigger versions of the job in other environments.”

For Mitchell the requirements were simpler: “I was looking for someone who was a great leader,” he recalls. “We needed someone who could energize the place, innovate, and make quick decisions, but who also had a track record.”

With help from Korn/Ferry, the Belvedere directors whittled the list to 25 candidates, then to 15. The board was kept apprised of their progress, but didn’t get fully involved until the candidate list hit 10. Many of those were from California, and most were men. Their backgrounds were varied, but all had banking experience.

After several hours of discussion, the board settled on three finalists, including the head of a smaller family bank, and a man who had successfully built a regional banking system.

The third remaining candidate was Bird, who began her banking career in the 1970s while a student at American University in Washington, D.C. Over the past two decades, Bird has made a name for herself, first during a five-year stint as national director of financial services consulting for BDO Seidmanu00e2u20ac”and then as an operating manager. She was chief operating officer of Chesterfield, Missouri-based Roosevelt Financial Group when it was acquired by the old Norwest Corp., and she eventually played a key integration role in Norwest’s 1999 acquisition of Wells Fargo, helping boost the performance of its northern California regional bank. Many in the industry know Bird for her high-profile speaking engagements and as a frequent columnist for the American Banker.

Early this year, the full board gathered for a 12-hour meeting, during which it interviewed each of the three finalists individually for two hours, then discussed their qualifications. Again, Decker led directors through each evaluation: How would the candidate fit in? Were they capable of taking CCB to the next level? Could they work with the various bank constituencies? While each made a strong case for themselves, directors say the decision was relatively easy. “After our interview with Anat, we didn’t deliberate for more than a few minutes,” Mitchell says.

“You can have all the great ideas you want,” adds Studenmund. “To me the real magic of financial services comes in the execution; figuring out how to deliver the results promised by the model. Anat had the operating and financial experience to make that happen.”

Big hairy audacious goals

As last year’s profit indicated, CCB was already capitalizing on some of the efficiencies of a larger company when Bird formally took the job in March. While there was still work to be done in that area, the bigger challenge was in boosting cross-selling numbers and revenues. “The company was well put together,” she says. “But our team members lacked the context and the drive to perform better.” One of her first dictates: boost home-equity loan volumes by 500%. “We’re daring to dream big, hairy, audacious goals,” she told her staff.

Before setting her agenda, Bird sent questionaires to the top 80 managers in the organization, to better understand their needs. The queries were simple: Name three words to describe the company today and tomorrow; name three accomplishments it had achieved; and list the three biggest opportunities and the three largest impediments to future success. The fact that she was willing to solicit input won her points with employees and the board.

“Anat could have come in and said, ‘Hey, I’ve been with these big institutions, and here’s my plan,’” Studenmund says. “Instead, she took the time to meet with the troops and listen to their solutions. It was very smart and helped build a base of support.”

The impediments that arose had little to do with lack of resources or training. Rather, employeesu00e2u20ac”most of whom had grown up in a smaller community banking or thrift environmentsu00e2u20ac”were confused about their roles in this new, larger company and how they could best contribute to the greater whole. “The company had been so inward-focused, there was no opportunity to create a single umbrella culture,” Bird says. Employees “wanted a clear set of directions and goals.”

The survey results served as the foundation for a company mission statement that leans heavily on harnessing employee creativity to better serve customers and shareholders while making CCB a good place to work. The statement, crafted with heavy input from directors, establishes a set of core values upon which the company operates and provides rules intended to guide employee interactions with fellow workers, customers, shareholders, and the community.

This was merely the first step toward creating a corporate culture that was at once more uniform and more zealous in leveraging the advantages of the supercommunity structure. Next was implementing a more aggressive sales program to create a stronger sales environment. For that, Bird turned to the Cohen Brown Management Group, a Los Angeles firm that designs needs-based sales management programs for financial institutions.

Cohen Brown’s approach emphasizes profiling customers by questioning them about their other financial relationships and goals, and then “mass customizing” solutions to meet those needs. Employees unaccustomed to holding in-depth conversations with customers often feel that they’re prying when using Cohen Brown’s methods. “Our people thought at the beginning that it was very intrusive,” Bird recalls. But a combination of coaching and role-playing to learn how to execute the plan has paid big sales dividends at all of Bird’s former banks, and she’s already beginning to see strong results at CCB. “It’s very ethical and customer-centric, and those who do it get such good responses from customers that they wind up loving it.”

The sales emphasis has been especially targeted at Placer Savings, which has been reincarnated as Placer Sierra Bank.

A 55-year-old thrift, until recently it still offered passbooks to customers. The Auburn-based bank has a well-known local name and accounts for 28 of CCB’s 36 branches. Leveraging that distribution channel by introducing more products and a stronger sales mentality is considered key to CCB’s long-term success.

Still, managing change has been, at times, difficult. Mitchell, who also serves on the Placer Sierra Bank board, recalls having heated debates with older managers over eliminating passbooks. “They’d say, ‘We’ve had passbooks for 50 years. We can’t get rid of them,’” he remembers. “The mentality was that 2% or 3% growth per year was OK. We needed to make changes like 50%; increase earnings in big chunks. That was something people there weren’t used to.”

At Placer Sierra, and at other subsidiaries, many of Bird’s boldest moves have been personnel decisions. The banks under CCB’s fold had some sharp people. But the company, as a whole, was overstaffed, and many executives lacked either the skills or willingness to change their approach. Many top managers “were given reasonable severances and pretty much nudged out,” Mitchell says. “We needed different attitudes, and Anat has been very effective at weeding the organization of people who weren’t making the contributions we needed.”

Tapping the board

Bird hasn’t pursued this streamlined work forceu00e2u20ac”or myriad other issuesu00e2u20ac”without plenty of director input. When she first arrived, Bird thought that dealing with three sets of directors was overkill. “I thought, ‘Can’t this all be streamlined?’” she recalls. But with all of the change and growth that’s occurring, she came to realize the value of having nearly three-dozen well-wired individuals to call on for insights on local economic conditions or advice in particular industry areas. So in addition to monthly meetings of both the holding company’s board and the boards of the two subsidiary banks, Bird met individually with each director at least once per-quarter.

Mitchell estimates he talked one-on-one with her about twice a month. The topics varied, depending on the issues at hand. Often it was a detailed follow-up of something discussed at the latest board meeting. “For a couple of months, it was pretty centered on whether a specific executive was going to make it,” he recalls. “She wanted to know my opinion, my thoughts on the person and the institution.”

The informality of these personal chats allowed Bird to understand and tap the specific skills of each director. Studenmund shared dinners with her, and once hosted the CEO’s visit to GoTo.com’s Pasadena offices. In those meetings, discussion inevitably flowed to issues that Studenmund, a former large bank executive, has experience in: organizing the workforce, the types of people needed to fill certain positions, where to look for new employees. “She really made an effort to engage in topics that were germaine to each of the individual board members,” she says.

Director involvement doesn’t stop there. One of the key precepts behind the new culture is that working for CCB should be fun. The company used to hold only an annual holiday party. But aside from some informal gatherings at local watering holes, that was the extent of the social interaction. However, the management now understands the importance of the social aspect of work, and there are company-sponsored parties and other events that enable team members to look forward to being together Monday morning.

Many of those events are part of the incentive program. Employees now face measurement on key goals. Retail bankers get daily reports on their own sales performance, cross-selling efficiency, and profit. Commercial bankers get weekly reports with goals, run rates, and expectations for the coming week. Those that do the best are rewarded.

These have been some of the cultural changes at CCBu00e2u20ac”a tangible part of Bird’s legacy. One recent staff gathering, a reward for attaining sales goals, was held in a tent at the company’s headquarters’ parking lot. “We burned our own CDs and brought hot dogs and hamburgers,” the former CEO says. A larger bash in June included karaoke singing and drew several directors. “People didn’t expect to see their co-workers dancing and singing,” she recalls. “We had a 200-person conga line and board members were there, dancing with us. It was awesome.”

None of the directors interviewed for this story will admit to participating in conga lines. But Mitchell has attended the parties and says the benefits are tangible. “You pick the right people and make sure they know where they need to go,” he says. “And when we do something significant, we celebrate it. It’s a spontaneous thing that erupts from performance.”

Net results

By most counts, this formula of sales, measurement, and celebration being instituted by Bird and her boards is paying dividends. During the first half of the year, CCB reported net income of $1.4 million. Operating earnings, before amortization and other merger-related costs, were $4.1 millionu00e2u20ac”a 110% increase over the previous year. ROA stood at .76% for the six months, while ROE was 14.96%.

Growth in earning assets powered the results, highlighted by a surge in home-equity loans of 900%u00e2u20ac”easily dwarfing the “big, hairy, audacious goal” of 500% set when Bird arrived. Profit-per-banker has increased by 60% during the first six months of the new CEO’s tenure, while cross-selling ratios have risen 50%.

Directors say they’re happy with the progress but not nearly satisfied. As with most other companies owned by investment funds, the ultimate objective is to provide the original investors with an attractive exit. In the summer of 2000, the board came within inches of an IPO, but pulled back on the plan when market conditions soured. The economic conditions this year, along with the ongoing conversion of Placer Sierra will continue to challenge CCB’s board.

A recent outside appraisal of the company found that, at present price-earnings multiples, CCB would likely fetch a premium that would provide investors with a 17% internal rate of return on their investment, Decker saysu00e2u20ac”still below the 20% to 35% Belvedere aims for. As the company continues to grow, Decker anticipates either an IPO, reverse merger, or outright acquisition to provide his “patient” investors with a liquid stock.

In the meantime, the work of building an ever-stronger supercommunity banking franchise, all while keeping a wary eye on changing economic conditions, continues. Bird wants to improve communications between the various banks so they can leverage each others’ strengths. She also wants to build a stronger “specialty business” to generate more fee incomeu00e2u20ac”another trait of successful supercommunity banks. At Fifth Third, for instance, data processing subsidiary Midwest Payments System generates close to $300 million in annual revenues. Bird thinks that building a powerhouse mortgage origination machine, selling the loans and servicing rights, can produce similar levels of fee income for CCB.

At the same time, Belvedere is gearing up for more acquisitions. Decker is now raising an additional $400 million for a follow-on fund and expects to close on the first component of between $150 million and $200 million, in the first quarter. With that, CCB eventually hopes to be hunting for more acquisitions. Decker says those institutions will probably be larger than in the pastu00e2u20ac”somewhere between $500 million and $1 billion in assetsu00e2u20ac”reflecting the bigger size of the company. But where will those deals be? That could be one of the biggest sticking points.

But several directors say that expanding beyond California is a distinct possibility. “We’re talking with banks in Oregon and Washington right now,” Decker says. “If you have the right CEOs, the right boards, and the right checks and balances, it’s doable.”

Based on CCB’s evolution thus far, it seems his instincts have been on target. |BD|

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