Bank Board Letter — February 2014
Elizabeth Whalen

As the national economy slowly recovers, some community banks are enjoying high performance, and there is no one secret to their success. From serving customers who have grown dissatisfied with big banks to remaining flexible during challenging economic times, community banks across the country are breaking their own paths to high returns.

“In this interest rate environment, this softeconomy, there are many potential pitfalls,” said James Anthony, president and CEO of Chesapeake Bank and Trust Co. of Chestertown, Md. “For instance, specific to the softeconomy are workout and collection issues. Having management go after those issues with the vigor of a shareholder is very important.”

Nearly all of Chesapeake’s employees own shares in the bank, Anthony said, and he credits that alignment of incentives for the bank’s ability to avoid pitfalls.

“It permeates everything the bank does. It comes back to every employee thinking about what is in the long-term interest of the organization in everything they do, from how vigorously they manage the collection workout effort to how they answer the phone to how they help a customer open an account,” he said.

The bank, which has about $100 million in assets, had approximately 10 percent year-over-year growth in loans as of the end of 2013. It also focused on accumulating efficiency gains throughout its operations. Success, Anthony said, comes from everywhere in small increments.

For New Mexico’s Southwest Capital Bank, close relationships with customers are a major source of its high performance.

“You can have lots of acquaintances and say that’s a relationship, or you can have friends,” said Greg W. Levenson, president and CEO of the bank, which is based in Las Vegas and has $235 million in assets. “We put a lot of our emphasis on having friends.”

That emphasis makes the bank more cautious when it lends, but it also allows the bank to focus on the individual customer rather than on a sector or specific loan type. That, in turn, allows the bank to serve customers that big banks have turned down.

“It’s my opinion that banks that have a can-do spirit, that have a little more of an entrepreneurial zeal, backed by capable individuals in the bank, are going to be more successful. There’s a bunch of customers out there who have lost their relationship with their bank,” he said. “They’ve been told they can’t have a loan because the bank already has too much in commercial real estate, for example. Even though customers are putting down 50 percent, they’re not getting a loan.”

Some banks also take weeks to respond to loan applications, but Southwest Capital Bank quickly informs customers of the decisions on their loan applications, Levenson said. As the bank gains customers, Levenson is careful to keep the focus on managing growth in a way that allows it to maintain personal relationships; he believes communication is one of the keys to doing that.

Prudent lending is also one of the reasons for stable, efficient growth at Liberty State Bank in Powers Lake, N.D., with $80 million in assets. The bank does not sell its housing loans, said president and CEO Randy Streifel, a move that helps limit the bank’s interest rate risk.

The bank balances that stability with flexibility, he said.

“I’ve been really fortunate that I’ve been able to keep and hire some of the best employees possible. We do not have a lot of turnover. We let our employees grow with our organization. We find people who are self-starters and let them run with it.”

Managers do not second-guess loan officers about lending decisions, he added, and employees can be proactive if they need something to improve their performances.

“If they need some training, we set it up for them. If they need software to do their jobs, they don’t have to ask me. They can talk to purchasing and get it done.”

That employee autonomy has paid off; over the past five years, the bank has had a zero Texas ratio, so it does not have a lot of risky loans, Streifel said.

In the near future, the bank will look for opportunities to shorten the duration of its bond portfolio in case interest rates rise, but Streifel is confident 2014 will be a good year. His projections, which account for various interest-rate scenarios, all show the bank will be able to accomplish its goals. He is also focusing on managing the bank’s growth and wisely investing the bank’s growing deposits.

“We’ve more than doubled in the last five years,” he said. “That’s one of the hardest things to keep with when maintaining high performance.”

Santa Cruz County Bank was only a few years old when the recession hit, but the $400 million bank, founded in 2004, did not let that dampen its growth.

“As a community bank, when you start, you’re doing business with people you know,” said David V. Heald, president and CEO of the bank, which is based in Santa Cruz, Calif. “Our process was knowing the customer, working with them and providing them with the tools to be successful.”

The bank also carefully monitored — and still monitors — performance metrics. Senior management and the board review the metrics every month, Heald said, which helps the bank easily identify areas that need extra attention.

Although Santa Cruz is a comfortable commute from San Jose and Silicon Valley, it is also surrounded by agriculture. To be closer to that industry and the opportunity it presents, the bank relocated a lending executive to the southern part of the county.

“That has proven to be an extremely good move for us. The lender has been there less than a year, and it has grown 50 percent,” Heald said. “The people there were very hungry for somebody like us. Identifying that opportunity, making a strategic plan around it and executing has been one area that has helped us be successful and increase our revenues.”

Santa Cruz County Bank has also expanded its Small Business Administration loans, Heald said, a trend he expects to continue in the future. He also sees more opportunities to increase efficiency.

Chesapeake Bank and Trust Co.’s future focus will also be efficiency and loan growth, said Anthony.

“Ultimately, the profitability of a bank is built on fundamentals,” Anthony said. “And it’s been the same fundamentals forever and ever, and it’s a matter of focusing on those fundamentals and getting them right.”

Elizabeth Whalen is a contributing author based in Berkeley, Calif.