Return to Virginia Business - March 2004

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by Garry Kranz
Virginia Business
March 2004

James Browning has a simple credo about banking: familiarity breeds contentment. His Virginia Beach boat dealership, Browning Marine Inc., is two years shy of its 50th anniversary and growing strong. With plans for a second retail location in Hampton Roads, as well as diversifying into other businesses, Browning needed capital. So he turned to a familiar face: G. Robert Aston Jr., president of TowneBank in Portsmouth. Having banked at other Aston-led lenders in Hampton Roads, he was comfortable he’d get a square deal.

“We could tell TowneBank’s people had our best interests at heart,” says Browning. Fast turnaround on his loan request didn’t hurt, either. Browning says he got the money within a day of completing his loan application.

Though Aston is a familiar face, the bank he leads is not. TowneBank opened its doors in April 1999 and in its short life has seen explosive growth. It made a profit its first year and is about to pass $1 billion in assets, with growth driven by its “hometown banking” pitch. For instance, seniors receive special consideration at TowneBank’s three branches — customers 62 and over are eligible for discounts, product offerings and even invitations to social events such as a recent dinner theatre outing. As a convenience to commercial customers, the bank picks up deposits in logo-embossed black Volkswagen Beetles.

Five-year-old TowneBank underscores the emergence in many communities of successful small banks, a product of the wave of mergers and acquisitions that swept through the banking industry a few years ago. Since the last big merger year of 1998-99, 25 new banks have been chartered by Virginia’s State Corporation Commission. Not since the mid-1980s has Virginia witnessed a similar flurry. “There’s no question that the mergers had a lot to do with this,” says Bruce Whitehurst, deputy executive vice president of the Virginia Bankers Association, which provides training and other services to banks. “I don’t think there’s any way we would have seen this level of activity (of new Virginia banks) if the mergers weren’t taking place.”

Other experts agree, noting that the merger shuffles thrust a host of experienced bankers into the job market. This sizable labor pool, combined with surging interest by investors in the safe — albeit low-return — shares, provided the fuel for launching start-up banks. Although their assets and deposits are modest compared to mega-banks, these newly formed companies have great appeal. TowneBank shares opened on the NASDAQ at around $8 and rose to nearly $30 in the first year. All told, Towne investors snapped up more than $80 million in two stock offerings. “The capital markets have been very friendly for start-up banks. It’s rare to see the stock of new banks double in value within 12 to 24 months,” but that is happening, says Steve Marascia, a banking industry analyst with Anderson & Strudwick, a Richmond-based financial services firm.

Towne draws most of its investors from Hampton Roads, an attempt to build depositors within the local community. “We said, ‘If you’re not going to be banking with us, please don’t buy our stock,’” says Aston, who walked away from a 10-year employment contract with BB&T Corp. of Virginia to spearhead TowneBank.

TowneBank recently gave shareholders a dividend of 10 cents per common share, the second in the bank’s history. But stock in new banks isn’t usually purchased to make a killing in the market anyway. Rather, investors — who often are depositors with the new banks as well — scoop up the equities to help ensure the bank’s long-term survival.

At the same time TowneBank was recruiting depositors, veteran bankers Marshall Groom and Larry Warren seized on a similar concept for Northern Virginia in 1998. With a combined 60 years in banking, they sensed opportunity amid the merger-driven turmoil and founded Potomac Bank in Fairfax.

Armed with nearly $9 million from stock sales to local investors, Potomac Bank began touting “one-on-one banking relationships” as a way to differentiate itself in a crowded market. Customers responded, helping assets grow modestly but steadily to $154 million through early January 2004. Potomac operates two branches in Fairfax and another branch in Reston. Not even the travails of Virginia’s high-tech sectors dampened its growth, as the bank has been profitable since its fifth quarter.

Most of Potomac Bank’s $98 million in loans goes to provide working capital to professional services firms, including real estate agencies, law firms and entrepreneurs. “That’s the market that is most poorly served by large banks,” says Warren, who previously ran a bank-consulting firm. “The larger banks are missing a golden opportunity as a result. I just hope they don’t figure it out.”
One of Potomac’s customers is Valador Inc., a Herndon-based company started in 2001 to provide a range of professional services, mostly to federal agencies. Kevin Mabie, Valador’s founder, went looking for a line of credit to get his business off the ground and says more than a half-dozen banks, most of substantial size, made offers. But “their terms were draconian,” he says. The most onerous stipulations: interest rates that ranged well above the prime rate, often by as much as four percentage points. “They pretty much told us, ‘These are our terms, take it or leave it,’” Mabie says.

A frustrated Mabie almost couldn’t believe it when Potomac Bank agreed to provide an unsecured credit line up to $1 million, enabling Valador to borrow against accounts receivable. Having ready access to capital helped the fledgling company earn some important government contracts, including providing technical analysis for NASA’s investigation of the Space Shuttle Columbia accident. “Before we needed the money, we had the money,” says Mabie. “Not only that, but they keep checking on us to make sure we have enough money available.”

Other bankers say they, too, are able to fly under the radar of larger competitors. At SuffolkFirst, one of four Virginia banks launched last year, the emphasis is on remaining independent. The bank is locally owned and managed, a point underscored by the “not-for-sale” signs in front of and inside its main branch, situated just blocks from downtown Suffolk. The bank opened in January 2003 with $10 million in capital — money raised by selling common stock to about 1,400 local residents and business owners.

By the end of the year, asset growth ballooned 400 percent to nearly $41.5 million, while deposits soared to $32 million. SuffolkFirst expects to show a profit within five years, after posting a loss of more than $740,000 during its first 11 months. Expansion also is in the offing, with a second branch already planned in Suffolk and other locations on the drawing board. Acquisitions of other local banks are another possibility. “I don’t think the big banks (consolidating) have anything to do with our success. We’re successful because we try to make our bank like one big family, and that includes our customers,” says Darrell G. Swanigan, who heads the 19-employee bank.

Up the road from Suffolk in Windsor, federally chartered Citizens National Bank also launched last year. Led by Doug Chesson, who grew up in nearby Ivor, CNB saw deposits jump 77 percent its first year, from $5 million to more than $9 million. That’s expected to double this year to $18 million and approach $40 million by 2007. “We’re in a growing market and the military presence in the peninsula has insulated this area from the economic downturn,” says Chesson, who left an executive post with BB&T Corp. in Wakefield to start the Windsor bank.

Chesson is emblematic of the risk-taking mentality behind starting new banks. He knows many of the bank’s customers from his previous stints at other area banks, and some customer’s he’s known since he was a schoolboy. His familiarity with customers certainly helps. CNB’s deposits come mainly from area small businesses, such as Big 8 Cycle. The local motorcycle sales and repair shop incorporated in 2003, thanks in part to a $50,000 loan for inventory from CNB. Owners Guy and Shelly Hardy didn’t consider going through a large bank branch. “We’re big on buying local, and we’ve known most of the people at CNB our whole lives,” says Guy Hardy. “We filled out the paperwork and they asked us, ‘When do you want the money?”

It’s not surprising that customers got confused and sometimes frustrated watching hometown banks change their names and morph into larger organizations, as still-bigger banks acquired the acquirers. For example, Signet Bank was purchased in 1997 by First Union Corp., which subsequently merged with Charlotte, N.C.-based Wachovia. Central Fidelity Bank and investment bank Wheat First Butcher Singer, both of Richmond, along with Jefferson Bankshares of Charlottesville, each became part of Wachovia in separate transactions. Another longtime Virginia banking powerhouse, Crestar Financial Corp., was acquired by SunTrust Banks Inc. of Atlanta.

BB&T Corp. has been the most ravenous out-of-state corporation, though. In a span of about five years, BB&T added F&M National Corp. of Winchester, Fredericksburg State Bank, Life Bancorp Inc. of Norfolk, MainStreet Financial Corp. of Martinsville, Richmond-based investment bank Scott & Stringfellow Inc. and several smaller insurance and financial consultancies. The last to join the fold and the last big Virginia bank was Falls Church-based First Virginia Banks Inc., acquired by Winston-Salem-based BB&T last year. The acquisitions boosted BB&T’s assets above $90 billion.

The eye-popping premiums paid for the brand equity of these established Virginia banks put pressure on consolidators to provide a rapid return on investment to shareholders. That speedy execution sometimes alienated customers. Personalities were replaced by toll-free automated service numbers. The diminished underwriting decisions of local branches enabled community banks to swoop in and pick up new depositors. Plus, these banks added jobs at a time when larger banks were shedding workers because of mergers.

Changes in federal banking laws were partly responsible for the wave of consolidation. Legislation in 1994 allowed banks to break across state lines and enter new markets. Five years later, Congress changed laws to allow banks to merge with related financial institutions, such as brokerages, insurance agencies and various real estate-related services companies.

Many of the small, new banks that emerged in the wake of consolidation favored rural communities. New People’s Bank, for instance, opened offices in the southwestern Virginia communities of Honaker, Weber City and Castlewood in 1998 — the first state community bank to simultaneously open multiple branches. New People’s now operates 13 branches in the region. Highlands Community Bank in Covington garnered first-year asset growth of $30 million, which was nearly $8 million higher than bank organizers anticipated. The bank, which opened in 2002, counts industrial and logging companies as key customers. “The big banks make them jump though so many hoops, whereas we usually know the business owner and will do anything we can to make things happen for them,” says President H.C. Rhodes.

Larger banks, though, are not sitting idly by. Wachovia recently gave local branch managers greater authority to make underwriting and credit decisions on business loans, says Jim Cherry, a Richmond-based executive who oversees its mid-Atlantic operations. “Small businesses employ the vast majority of the U.S. work force, and we consider them the backbone of our economy. It is part of our responsibility to help them be successful,” Cherry says.

Likewise, BB&T of Virginia is decentralizing its loan-making authority at branches across the state, specifically to give quicker turnaround to businesses. Its business deposits in Virginia totaled more than $3 billion in 2003. It loaned $4.42 billion to Virginia companies, with small businesses accounting for $834 million.

BB&T Virginia also is a large employer in Virginia, with nearly 6,600 employees. Despite reducing headcount 16 percent when it absorbed First Virginia, key customer service people were retained. “Those are the people who have banking relationships with customers, and that’s what we wanted to protect,” says Andy Hughes, the Richmond-based president of BB&T’s Central Virginia region.
Despite their early success, the question for small Virginia banks is one of survival. Most of their revenue comes from spread lending, or the difference between what they earn in loan interest and what they pay depositors. Those margins have been shrinking for all banks, especially as interest rates remain low. That’s one reason multibillion-dollar banks began adding other lines of financial services. For small banks, offering such a diversified portfolio usually isn’t an option, making them even more dependent on revenue from spread interest.

TowneBank may be an exception, with a modest portfolio in home mortgages, title and other insurance products, even group health coverage. Usually, though, it’s tough for smaller banks to make much money that way. “To offer those types of services, a bank needs to be highly specialized. There also is a lot of risk” associated with selling insurance, mortgage refinancing and related services, says Arnold Danielson of Danielson Associates, a bank-consulting firm in Rockville, Md.

Meanwhile, some smaller Virginia banks are emerging as consolidators in their own right. First Community Bank of Bluefield, the largest state lender with assets approaching $2 billion, recently expanded into Tennessee with the acquisition of PCB Bancorp. That gives it holdings in Tennessee, Virginia, West Virginia and North Carolina. Added to the fold in 2003 was CommonWealth Bank, based in Richmond, and Stone Capital Management, a West Virginia investment firm.
Union Bank & Trust of Bowling Green continues widening its footprint, buying Charlottesville-based Guaranty Bank in a $54 million deal in December. That pushed Union’s total assets to $1.3 billion, second behind First Community. Close behind, and perhaps ready to surpass Union with its acquisition of Harbor Bank, is TowneBank.

But does gaining assets and market share inevitably mean these young banks also will be bought up? TowneBank’s Aston, for one, dismisses such talk. “It’s not part of our business plan. … We started with the idea of building this company for the next generation. We’re not interested in having institutional owners of our stock (and) that should help us remain independent,” he says.

Analysts, though, say that despite their fierce independence, some of these newer banks may not be able to resist the overtures of monolithic holding companies. Return-hungry investors may leap at the chance to cash in. At a certain asset level, the cycle of consolidation begins anew. “Once they reach the $1 billion threshold, banks have got to decide whether to continue growing or sell themselves to larger banks,” says Marascia of Anderson & Strudwick. So while customers will still get come-ons about hometown banking, the bosses inside are hearing a new mantra: acquire or be acquired.

Return to Virginia Business - March 2004