Local Banking Boom

As big banks continue to buy out small ones, a new generation of community banks is finding a niche by providing more personalized service. And some of the banks are paying their investors handsome returns – quickly.

After big companies took over the two local banks in the small northeast Georgia mountain town of Cleveland, a group of business leaders got together and decided to take financial matters into their own hands. The result was the Mountain Valley Community Bank, which opened three years ago on North Main Street in a remodeled steak restaurant. The spruced-up brick and stone building still has a concrete cow statue out front.

Some might call that black and white Holstein a cash cow now. The bank celebrated its third anniversary with $125 million in assets, an impressive showing considering it’s in a town of 2,000 people and a county of 20,000. It has already opened a branch in the north Hall County community of Clermont, and is planning a new bank in Jackson County’s Jefferson.

“We started out with an aggressive business plan, and we thought if we ended up with $75 million in assets by this point, we would have done great,” says Marc Greene, president and CEO. “We’ve almost doubled our own projections.”

Mountain Valley’s story is being repeated around the state. As big banks have bought out small banks, a niche has opened up for a new generation of community banks. They’re taking customers and expertise from the giants and making something new. The state saw 21 new banks open in 2006 alone, and 13 in 2005, according to the Georgia Department of Banking and Finance. Headlines announcing the “largest new bank ever in Georgia” keep supplanting one another. And even the smaller new banks are getting bigger fast.

“It’s pretty common for even the de novos to be $200 million in assets by the end of the second or third year,” says Steve Bridges, president and CEO of the Community Bankers Association of Georgia.

Community banks are growing so much, in fact, that some of them are hardly community banks anymore. Of the community bankers association’s 325 members, Bridges guesses that 10 to 15 might soon exceed $1 billion in assets. That’s the limit the FDIC puts on its definition of a community bank.

Bridges defines a community bank by philosophy. “To sum it up, it’s local decision making,” he says. “Most of our banks, even the ones that have grown larger in their branches, can make decisions there rather than having to go to Charlotte or Greensboro or Birmingham. It’s a local decision. People who live and work in those areas are board members and are running the bank.”

Some of the biggest banking companies in Georgia market themselves as a chain of community banks. Of the state’s three biggest bank holding companies – SunTrust, Synovus and United Community Bank – the latter two have positioned themselves as a group of decentralized units with local decision-making.

Still, startup banks are drawing both customers and officers from existing banks. Look at the resumes of any of the officers in the new Georgia banks and you’ll see a roadmap of the past decade’s mergers.

Take, for instance, Brian Schmitt, chairman and CEO of The PrivateBank-Georgia. He moved to Atlanta in 1983 and started his banking career with Home Federal. He left to work for Prime Bank FSB and spent four years there as vice president of commercial real estate until SouthTrust Corp. bought the company in 1993.

He spent the next seven years working for Premier Lending Corporation, which became Premier Bancshares Inc. He helped Premier buy a lot of other banks until it was purchased by the North Carolina giant Branch Banking and Trust Corporation. After a year with BB&T, Schmitt left with a group to start the Piedmont Bank in Atlanta in 2001. Then last year, the Piedmont Bank took on a capital parent, The PrivateBank, headquartered in Chicago, and became known as The PrivateBank-Georgia.

This gave the new bank the resources it needed to grow, and grow it has – from $217 million in assets when the name change was announced in August 2006, to $305 million barely a year later.

“You spin it off and go do it again,” Schmitt says. “There’s an allure to having your own bank and being an entrepreneur. It’s a challenge.”

The driving force behind the increasing number of startups, he says, is the same in Metro Atlanta as it is around the state: frustration with banks getting too big and impersonal. “That in a nutshell is why we have as many new banks as we do.”

The new community banks are taking their business – and their personnel – from the big banks.

“Clients go from a large bank to a small bank because they want the personalized service. They don’t go from a small bank to a big bank. I never see them go from a small bank to a small bank,” Schmitt says. “The guy down the street offers the same services I do. I’d really have to make them mad to get them to go there.”

The Investment Payoff

But powerful as they are, the charms of community banking don’t tell the whole story of the surge in startups. There’s also the allure of the investment payoff.

“The de novo explosion,” says Chris Marinac, managing principal and director of research for FIG Partners, a four-year-old Atlanta-based financial consulting group, “is part of a broader trend in banking – grow, merge, create value, sell, come back and do it again. It’s what I call the lather, rinse, repeat cycle of banking.”

Consider the former Bank of Covington, founded in 1901 in the small town east of Atlanta. After 95 years, it changed its name to Main Street Banks in 1996 and started buying up and starting branches. In 2000, it merged with First Sterling Banks, Inc. of Kennesaw, creating a $900 million bank with 21 branches.

Although First Sterling was the surviving entity of the merger of equals, it adopted the catchy Main Street name and kept growing. Five years later, Main Street had grown into a $2.5 billion business and was the largest community bank in Metro Atlanta. Then, it was purchased by BB&T, which at the time had more than $100 billion in assets and was the ninth largest financial holding company in the country.

“Banks are making money quicker and getting harvested a lot sooner,” Marinac says. “It used to take eight years to sell. Now they’re selling after three years. That’s unheard of.”

In part, the change has resulted from lessening of legal restrictions on when banks could sell, Marinac says. And part is simply the explosion in population and business growth in the Atlanta metro area.

But how long can that cycle continue, and is it nearing the end? “The cycle is getting near the end,” Marinac says. “It’s going to be harder to make the quick easy money that’s been made in the last five years. I would expect that we should see a slowdown, but I can’t guarantee it.”

So, for now, the respected, award-winning analyst, formerly of the Robinson-Humphrey Company, advises investor caution, but still expects to see more growth – at least for a while.

“There’s no question that the vibrant economy in Georgia is behind the growth of new banks,” says Bridges of the state’s community bankers association. But, he adds, don’t discount the power of the community bank operating philosophy.

“People like local decision making. It’s generally quicker decision making, made by local folks who have an interest in the local community. They know the local environment and are able to make better decisions because they know the customer and know the marketplace. I think that helps them grow.”

Keeping local control has helped Blairsville-based United Community Bank grow to be the third largest bank holding company in Georgia, behind only SunTrust and Synovus, with more than $4 billion in assets across three states. But the growth of successes like United Community Bank has opened a niche for new startups such as Mountain Valley and so many others.

Filling A Niche

What makes Mountain Valley’s early success stand out is that it’s beyond the borders of the Atlanta metropolitan area, where rapid growth of new banks has become commonplace. Of last year’s 21 startups, 14 were in Metro Atlanta.

“They’ve experienced significant growth, even outside the metro area,” Bridges says.

To be sure, growth is a big part of the picture for Mountain Valley as well. The Cleveland and White County area has experienced a recent surge in population and is expecting more. Housing sales and starts remain healthy, even as Metro Atlanta starts to soften a bit. Retail development is showing more activity.

“I think we’re on the cusp of some real hyper growth in White County,” says Mountain Valley’s Greene. “As the area grows, we’ll get more than our share.”

Greene estimates about half his customers are newcomers to the area. But the other half is coming from the other banks in town. Bigger banks. And a lot of the 24 full-time employees came from them as well.

Some of the principals came from the former White County Bank, which is now a United Community Bank. Others, including Greene, came from what used to be the First National Bank of White County, which is now part of Birmingham, Ala.-based Regions Financial Corp, one of the nation’s biggest banks.

Working as president of the Cleveland Regions Bank is what led Greene to help start the new institution. It wasn’t just being unable to accomplish loan approvals on site that frustrated him.

“If you wanted to change your address, I couldn’t even do that without sending it to Birmingham,” he recalls. “I’d fill out the form and send it. But if the person in Birmingham didn’t change it, it didn’t get done. People would come to me and complain.”

At the same time, Regions was consolidating services and cutting employees. The staff was turning over. “The larger a bank gets, the less focused it is on individual communities and individual customers,” Greene says.

So three years ago, Greene formed his bank with a group that included colleagues from Regions, former competitors from United Community Bank and a variety of business leaders – a dentist, a pharmacist, a real estate agent, an oil distributor, a land developer, a builder, a barber, a convenience store owner, a poultry farmer and the owner of a local bowling alley. It was exciting, dramatic and stressful, Greene says. He recalls raising $7.2 million worth of capital in seven days, while hiring a staff and finishing renovations on the old steak house.

“It’s the most fun I’ve ever had in my career,” says the 51-year-old banker. “It’s much different than working for a corporation where somebody is telling you how you should run your local bank.”

All community bankers talk about more personalized, individualized customer service and ready decision- making. But Greene seems to take this philosophy to a whole new level.

“Do you know how I know when I’ve achieved my goal of becoming their relationship banker?” Greene asks. “It’s when they call me at home on Sunday night. They might say, ‘Marc, I’ve got to go out of town Monday morning, and I’ve got to write this check. The deposit won’t be there until Tuesday.’ I’ll say, ‘Yes. I can take care of that.’ And I can.”

Does Greene mind being called at home? Not at all. “I’m in the phone book. That’s how I know I’m their relationship banker. I like being able to tell people, ‘Yes, I can.’ Nobody else in town can say that.”

Ironically, success as a small town bank will take Mountain Valley to other towns. But Greene says the new Jefferson bank will have its own president, its own board of directors and its own shareholders. “We believe we can duplicate what we’ve done. We’re not going to centralize operations,” he says.

But what about the prospect of Mountain Valley selling out to a bigger bank?

“Our shareholders are looking for a return on their investment,” Greene says. The question, he says, would be, “Do you sell out to a company that has the same philosophy?”

For Mountain Valley, the philosophy of community banking seems to include a cow. The cow now standing outside the steak-house-turned-bank isn’t the original. The building’s former owner took that one. But people missed it. So just for fun, the bank bought a new cow, rolled it out front on wheels with balloons tied to it and offered it as a grand opening door prize. It was so popular that they tried to buy it back from the guy who won it. Offered $500. He said, “You know, my wife really wants that cow.”

So the bank bought a third cow, and that’s the one that remains out front. “When we opened the branch in Clermont, we said we wouldn’t have a cow there. That was a Cleveland thing. But then the people down there said they wanted a cow, too,” Greene recalls.

So, here’s the probing question to test the community bank philosophy. When the new Mountain Valley Community Bank of Jefferson opens, will it have a black and white Holstein out front? “They might have a cow,” Greene quips, “but it’ll be a local decision.”