4/6 four community bankers, six questions

What do you do when you have a question (or six) that you'd like to have answered? You do what any other RMA Associate would do: Ask another RMA Associate. In this article, four community bankers provide their perspectives on topics ranging from communicating goals to what makes their institutions appealing to employees.

Each community bank is unique--whether it's by geography, commercial/retail orientation, industry focus, distribution strategies, management focus, incentives used, or any number of other considerations. The banks in this article--ranging from $125 million to $2.3 billion in total assets--address challenges familiar to all community banks. The answers they provide reveal distinctive as well as similar aspects of their institutions' cultures.

1. How does your CEO communicate your bank's goals to everyone throughout the organization?

Jim Hilty, CRO of The Bancorp Bank, says the CEO chairs both the Loan Committee and Senior Officers' Committee. "Both forums open the lines of communication to discuss the bank's goals and to measure our year-to-date progress," be says. Many members of the management team have worked together for more than a decade, and Hilty feels this has helped them assume a proactive leadership role, and offering additional assurance to the CEO, board of directors, and shareholders that their expectations are being met.

Columbia Bank's communications process begins once the CEO and executive management group have established the ROE/ROA, revenue and expense targets, and other key objectives for the coming year, says Mark Nelson, EVP. The line managers use these objectives in their budgeting process. Once the budget is finalized and approved by the board, each line unit's specific budget is provided to the respective manager as his or her goal for the year.

After senior management (which includes all executive vice presidents, senior vice presidents, and the regional commercial banking managers) develops Mid-State Bank and Trust's plans, the objectives are delivered to all officers at an annual President's Meeting and then to all employees through an intranet message. "We continue to focus on the goals at staff meetings throughout the year," says Paul Mistele, SVP and credit administrator.

Incentives serve as one communication device for Midland National Bank (MNB). Once the budget and return objectives are set by the executive committee, the department heads relay the goals for each area to their associates. Vice President Susan Downey says all officers have access to the bank's financial statements and analysis within five business days after each month-end. If the bank maintains a return on assets of 1.30 or better at year-end, the officers receive a bonus from a formula-based pool of money.

2. How do you assess your competition and find advantages to exploit?

Word travels fast in Kansas, where three important factors are reputation, reputation, and reputation. "Midland National Bank is known around town as the bank to see if you have commercial financing needs," says Downey, and the bank has 73% of its loans in commercial and commercial real estate while its local competitor has just 29%. Further, most MNB customers are willing to discuss terms offered by other banks, which gives the bank the opportunity to demonstrate the advantages it offers. "Also, we participate with a number of institutions on the sale and purchase of loans," says Downey, which allows MNB to find out the terms and conditions being quoted at other institutions.

Oxnard may be the largest city in Ventura County, California, with a population of 182,000, but Mistele says it's still a small community, and Mid-State's approach is pretty direct. His bank's officers ask the competitors directly about products and prices, and they also ask their competitors' customers when they call on them. However, like any successful community bank, Mid-State has its specialty niches, which offer a competitive advantage. The bank also capitalizes on its small size to respond quickly to compete with the "big guys" as well as other small banks. "The authority level is close to the line officer," says Mistele. But in the final analysis, Mid-State, like MNB, works hard on its reputation to follow through on promises in an accurate and timely manner.

Columbia Bank's marketing group performs monthly analyses on competitors' deposit and loan pricing for various products, which are then presented to the bank's pricing committee for review and recommendations. In addition, line officers readily share competitive information that they learn about on their sales calls.

The Bancorp Bank views its lending activities in two separate baskets; competitive assessment is done differently for each. "Commercial lending to family-owned businesses, high-net-worth individuals, and professionals is a regional program executed by experienced lenders coming from a range of institutions," says Hilty. However, his bank focuses on what it knows how to do and so expands its loan base vertically. "On the other hand, the extensive referral network established within our private-label groups is a national business limited to lending type, such as home equity loans, fleet auto leasing, and other lines that can be pursued comfortably in a variety of markets," he says. "For this segment, opportunity is identified by adding referral sources that meet our private-label lines of business."

3. Has your bank changed its approach to documentation for loan-loss provisioning?

Size of an institution probably plays a role in the sophistication of its provisioning. Then again, if a formula works, stick with it. Downey says MNB calculates a minimum of 1% of the principal balance of all criticized and classified loans, then calculates 1% of all commercial real estate and large loans over $300 million. A 0.75% allocation is used for all remaining loans. Limited losses in the 1990s discouraged the use of a historical loss calculation. "We do track and monitor our concentrations of credit through type and location, which helps to assess risk," says Downey.

Similarly, "the challenge presented to The Bancorp Bank is the accelerated growth within the commercial and commercial real estate portfolios over the past year while having virtually no measurable loan loss," says Hilty. Loan portfolios are segregated and risk-weighted by type, and bank management sets its provision quarterly to compensate for growth.

Mid-State Bank has adopted a sophisticated and analytical approach in the past several years. "Our analysis of historical loss rates by product line is far superior to what it was just a few years back," says Mistele. "We've worked closely with our external auditors and other outside resources to ensure our techniques are matched with banks in the $5-10 billion range."

Columbia Bank updated its approach several years ago. However, Nelson says, "our documentation for how the process works and how the decision points and limits are defined has been greatly expanded, based on recommendations by our outside auditors, to provide the audit committee of the board additional detail."

4. What is your bank's response to the current interest rate environment?

Downey says her bank uses the Baker Group (www.jamesbaker.com) to track MNB's investment portfolio, monitor cash flow, and match short- and long-term assets. "In the past year we have laddered investments with a very short duration, and we're now looking at starting the barbell approach to investments," says Downey. "The loan side appears to be well positioned, with the majority of loans tied to prime in some fashion. Also, we keep $5 million of fully amortizing home mortgages in-house, and we're willing to fix the interest rate for up to 10 years and amortize the loan for up to 30 years. The customer gets a fixed rate and the bank books a higher-earning asset."

The Bancorp Bank uses floating interest rates for 75% of its commercial loan portfolio. "Generally, interest rates are fixed for no longer than 36 months," says Hilty. "In anticipation of rate changes, the bank acquires wholesale, fixed-rate certificates of deposit to lock the spread on the fixed-rate portion of the loan portfolio."

Fixed rates at Mid-State Bank are limited to terms of three, five, or seven years, allowing the portfolio to be repriced over time. "We also add sufficient margins on those products to account for upswings in rates," says Mistele. Like MNB, commercial lending in general is priced off prime, but floats on a daily basis. Home equity loans are tied to prime and repriced with changes on a daily basis. Single-family residential loans are sold into the secondary market, and Mid-State carries minimal exposure on its balance sheet.

On a regular basis, Columbia Bank brings in various consultants to test its ALCO process, which, early in the last down-cycle, set about defining the bank's deposit strategy, establishing acceptable parameters for loan maturities and pricing, and overlaying an investment strategy to bridge the link between strong deposit growth and declining loan demand. "We have been very successful in developing low-cost core deposits, and we were cautious about extending maturities of commercial real estate during the refinance boom," says Nelson. Columbia Bank hasn't needed to make any major changes to its Al,CO process, but does communicate its strategy to line managers in more detail "so they can employ the strategy in their business development efforts."

5. What steps has your institution taken to ensure well-qualified and talented staff?

Some banks are "virtually" lucky. Hilty says his virtual bank has "enjoyed the luxury of hiring experienced employees, many of whom were employed by Mrs. [Betsy Z] Cohen's previous bank, Jefferson Bank." (1) Contrary to the beliefs of some banks, large-bank mergers do not deliver a ready-made staff to community banks through job cuts. Nelson believes that may have been the case in the past, but that the pool is drying up in recent years. Mistele has found that officers from large banks "either expect salaries out of line with our market or they are not trained in a wide enough range of skills to work effectively as a community banker." So Mid-State hires graduates from local universities, rotates them through a program of on-the-job experiences in various departments, and then has them work in a commercial lending unit with an experienced mentor. "We are in the process of making this a more formal program; we currently have postings out for four loan training candidates. We're working with the deans of the business schools within the local colleges," Mistele says. Also, the bank has sent several of its people through a commercial lending school started by the California Bankers Association.

Downey says that MNB sends a survey out to all employees each year to identify the types of training they want. "Once the top two or three topics are determined, we schedule in-house training for the entire bank, usually two or three times over the course of the year," she says. Training for individual departments is left to the department heads, who use RMA classes, the Center for Financial Training, and Kansas Bankers Association courses. Key individuals are sent to graduate banking schools. "Also, the bank has employee meetings every other Friday to keep everyone up to speed on changes in bank policy and procedures, regulations, compliance, or departments," she says.

Columbia Bank has had a basic retail training program for years, but in the past two years has added a training and development position to coordinate outside training resources and to develop an internal commercial lending program. "This has been very successful for junior officers," says Nelson. "The program is run two to three times a year and is always overbooked. It also forms a basis to focus individual career development efforts and to recommend additional outside training opportunities for individuals. Each of our line managers is involved in the development process for his or her officers."

6. What have new employees said they particularly like about working at your institution?

A supportive, open environment was mentioned in some form by all four bankers. Also important are flexibility and training opportunities. A good salary doesn't hurt, either.

"The Bancorp Bank presents a truly unique work environment for its employees," says Hilty. "Many employees, as well as visitors, comment positively on our completely open environment--aside from the loan production offices, only five employees (executive management) have offices. Each employee is therefore able to communicate effectively with the people in his or her work group and create a more team-oriented environment. A casual dress code adds to the relaxed atmosphere of the organization. Also, new employees are very receptive to our flexibility in work hours as well as the tremendous benefits package."

A survey of new MNB employees revealed that they like the people they work with and appreciate that other bank employees are willing to answer questions and provide help when needed. Like The Bancorp Bank, MNB is flexible in working around employee schedules, which new employees say is an important benefit.

Nelson talks about Columbia Bank's very focused customer-service culture. "We differentiate our service style from our competitors by avoiding a product-of-the-month mentality. We train our staff to identify needs and then to find what's right for the customer," he said. "Our philosophy is that if we train and take care of our staff, they take better care of our customers, and our shareholders benefit as the end result. This resonates well with our staff; as a result, we tend to have very high scores on customer-satisfaction surveys and branch mystery shopping."

Mid-State Bank and Trust employees most value guidance at the front end of credits from senior lenders and credit administrators. Lenders feel a connection with management, and management in turn gains a direct understanding of the skills and talents of the newer employees. "We also are able to attract, and retain, the better lenders around town by making sure we're in the top half of the pay scale," says Mistele. "We're generous on the base salary, have an effective bonus plan, provide a great 401(k) match, and make a profit-sharing contribution that is basically unmatched by other banks in our marketplace. Finally, our commitment to continued education is received well. As RMA knows, when classes are put on by the local Tri-Counties Chapter, Mid-State Bank and Trust is a key supporter with several attendees coming from our ranks."

Who They Are

James D. Hilty (left, top) is chief risk officer for $575.3 million The Bancorp Bank, Wilmington, Delaware, a publicly held virtual bank founded in 2000 that provides private-label Internet-enabled banking services to affinity groups and demographic constituencies.

Susan Downey (right) is vice president of commercial lending at $124 million Midland National Bank, a third-generation family-owned bank with six branches in south central Kansas, where aircraft manufacturing and machine shops related to the aircraft industry dominate the local economy.

Mark W. Nelson (left, bottom) is executive vice president and chief banking officer at publicly traded Columbia Banking Systems, Inc., a $2.2 billion bank holding company headquartered in Tacoma, Washington, with 34 branches in Washington and five branches in Oregon.

Paul E. Mistele (right) is senior vice president and credit administrator at Mid-State Bank & Trust, a $2.3 billion bank with 41 branches serving coastal communities from Cambria to Oxnard, California.

Notes

(1) Cohen sold Philadelphia-based Jefferson Bank after 25 years of operation and subsequently founded The Bancorp Bank in 2000. Jefferson Bank's experienced executive team has over 140 combined years of banking and technology experience.

Contact Beverly Foster e-mail at [email protected].

Beverly Foster is editor of The RMA Journal.

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