Bank Board Letter — February 2015
Elizabeth Whalen

It’s not always easy for banks of any size to distinguish themselves from the competition, but some of the best-performing community banks around the country have found an effective blueprint. Engaged, service-oriented employees form the foundation. Being the right size to serve local businesses solidifies the base. With those elements in place, banks can work to energize growth.

With assets of about $640 million, Yellowstone Bank, Laurel, Mont., caters mainly to small businesses, a segment that needs personalized service, said President Jay S. Harris.

“They all have individual needs, so we need to understand those needs and meet them,” he said. “Something might come up and they need to buy a piece of equipment or a building or have a specific inventory need, and they need an answer today or tomorrow. We can respond quickly to that.”

Harris also credits the bank’s sustained focus on efficiency for its success. He’s noticed many banks of similar size outsource their data processing in an effort to reduce costs. However, Yellowstone Bank has found that running its own data center is actually substantially less expensive than outsourcing. Those savings contribute to its efficiency ratio.

“Many banks work hard to break 60 percent,” he said. “We try to be less than 40 percent, and that’s a big factor in our success.”

The prolonged low-interest rate environment means investments that actively contribute to profitability are hard to come by, which re-emphasizes the need for high-quality business loans, Harris said. That, in turn, underscores the importance of skilled loan officers who can establish and build relationships while also maintaining high lending standards.

“It’s easy to oversell and accept credit risk we don’t want,” Harris said. “We’ve tightened our underwriting process at the same time we’ve increased our sales process. If the loan’s not a good one, we don’t do anybody any favors if we say ‘yes’ when we need to say ‘no.’”

In response to the recession, Yellowstone Bank also increased its internal management reporting so that senior management is always up-to-date on loan production, fees and amounts past due. Lenders also gather and discuss with each other ways to improve performance. High-quality employees want to perform well, Harris said, and they need useful tools that help them do that.

“There are so many banks out there now, and banking is a business where we all sell the same product, so it comes down to service and relationships. We need to take good care of our customers and of our people,” Harris said.

Treating its employees well is one of the keys to the success of The Cowboy Bank of Texas, located in Maypearl, said Larry Burns, president and CEO.

“My philosophy is to hire the best people you can find and pay them more than they can find elsewhere,” Burns said.

That compensation, in combination with generous benefits and ongoing training opportunities, virtually eliminates turnover and boosts productivity.

“When I came to this bank, we were a $20 million bank, and I had 10 full-time people. Now, we’re a $60 million bank, and I have 10 full-time and four part-time employees. We’re so much more efficient than any other bank I know,” Burns said.

When Burns took over in 2005, the bank’s name was First State Bank. Even though it was an independent bank, many potential customers assumed it was related to the large number of other banks in the state with the same name. The bank also lacked a web site and an ATM, which led local residents to look elsewhere for banks with more modern offerings, Burns said.

After changing the name, redecorating, re-branding and upgrading its technology resources, local money returned to the bank. It is now known throughout the region for its fast, personal service. Burns cites the example of a fire chief who lives about 25 miles from Maypearl in a town with a wide variety of banks to choose from. The fire chief needed a loan to purchase land and build a home. He applied at a local branch of a large bank, waited months for a response and eventually realized the banker had missed important details. The fire chief related the story to his builder and to another colleague. Even though neither person lives in Maypearl, both told him he should have gone to The Cowboy Bank.

“He was here the next day, and we had him closed in about 25 days,” said Burns. “It’s an example of, if you do it right, you don’t have to advertise. People will advertise for you.”

In 10 years, the bank’s legal lending limit has grown from $235,000 to $1.5 million, Burns said. That means the bank can service nearly every kind of loan its customers need, but it remains a cautious lender.

“We virtually never have losses. If somebody walks in with something weird, we let them take that to another, bigger bank that wants to take on the risk. In 10 years, we’ve had $130 million in real estate loans and have never lost a cent. We have only had four foreclosures.”

Both Yellowstone Bank and The Cowboy Bank of Texas were among the community banks with the highest return on average assets, according to American Banker.

In September, financial information company Sageworks named Carolina Alliance Bank, Spartanburg, S.C., to its list of top 15 community banks; the ranking was based on ROAA and efficiency ratio.

With assets of $420 million, a merger helped spur growth for Carolina Alliance Bank. In addition to higher lending capacity and increased efficiencies in marketing, data processing and other expenses, the merger with Forest Commercial Bank of Asheville, N.C., expanded the bank’s footprint.

The two markets are contiguous yet have distinct and diverse economies, said President John Kimberly. The economy in the upstate region of South Carolina rests on a solid manufacturing base, and that of western North Carolina relies on a large healthcare system. Tourism, retirement and higher education support both regions.

The merger, completed in April, expanded the bank’s service offerings into commercial leasing. Another acquisition in August of a small South Carolina-based leasing company further increased the bank’s capability.

“It’s typically vehicles, small fleet, and we do some heavy equipment,” Kimberly said. “It’s been a great business for us.”

Close customer relationships are just as important in leasing as in banking, he added.

“In leasing, as much as we’re providing financing for our customers with competitive interest rates, we’re also providing a service. We can help with the acquisition or disposal of vehicles. Our leasing customers value that relationship with our leasing executives.”

Maintaining that level of service for customers as well as growth for the bank requires employees who have the ideal combination of technical and people skills, Kimberly said.

“To find that special combination is tough,” he said. “They’re out there, so we will find them, and then we need to develop them to continue to grow.”

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