Civitas CEO’s Mission Is Efficiency

Richard E. Herrington, who built Franklin Financial Corp. in Franklin, Tenn., into one of the country’s best-performing community banking companies, is now looking to do the same at Civitas Bank Group Inc., a loosely tied collection of banks that have been struggling to become more efficient.

Mr. Herrington became the chief executive officer of the $766 million-asset company in December and since then he has hired dozens of employees, established strong risk management, and centralized its accounting and processing systems.

Two weeks ago he changed the company’s name, from Cumberland Bancorp. (Cumberland Bank of Carthage, Tenn., is the biggest of its five subsidiaries.) And later this year he plans to raise its profile by moving its stock listing from the Nasdaq Stock Market’s OTC Bulletin Board to the Nasdaq itself.

“We recognize that we are in the business of making money,” Mr. Herrington said. “And we hope to be one of the more profitable banking companies in the country.”

His 14 years at Franklin, which he founded, culminated last summer with a deal to sell the $886 million-asset company to Fifth Third Bancorp of Cincinnati. (The deal has not closed; regulators ordered Fifth Third in November to put acquisitions on hold until it straightens out problems in its bond portfolio).

Mr. Herrington, 56, who jumped to his new berth in December, insists he has no plans to sell Civitas, also based in Franklin.

“One the primary reasons I joined,” he said, “was the firm commitment by the board and primary shareholders that we are not going to grow the bank with the intent to sell.”

Civitas’ chairman is John S. Wilder Sr., Tennessee’s lieutenant governor. He said the company had not been looking for a new CEO but decided to pursue Mr. Herrington when the Fifth Third deal was announced.

Franklin “became one of the most profitable banks in the United States,” Mr. Wilder said. “We said we wanted him because he has what we needed.”

Franklin’s return on equity was 23.27% last year, against a 13.97% average for banks with $500 million to $1 billion of assets, according to the Federal Deposit Insurance Corp.; the efficiency ratio was 48.76%, versus 58.54%.

In October, when Mr. Herrington decided to accept the offer, Cumberland Bancorp had only three employees at the holding company level and a part-time CEO. All its banks, in western and central Tennessee, operated independently.

That was the way it had been from the beginning, when Cumberland Bank and Community Bank of Nashville joined to form the holding company. It then began acquiring other banks to boost capital, but lacking any larger plan left them almost entirely on their own, Mr. Herrington said.

“We were five autonomous community banks that did not have a central administration or vision, and the holding company did not go much beyond the paper document,” he said.

Joel Porter, a lawyer who is one of the company’s largest shareholders, managed it part-time and without pay. He stepped aside as CEO to make way for Mr. Herrington.

Though the company has been profitable — it made more than $1.8 million last year — it is far less efficient than others its size, and its returns on assets (0.23%) and equity (3.04%) were well below industry averages.

Cumberland Bank has $293 million of assets; the company’s smallest unit, Bank of Mason in Tipton, has $11 million. Civitas also has 50% stakes in two start-up banks, the $45 million-asset Insurors Bank of Tennessee in Nashville and the $107 million-asset Murray Bank in Murray, Ky.

Mr. Herrington said the biggest flaw of the skeleton holding company was inadequate oversight of the banks’ policies and procedures. Case in point: Its $185 million-asset BankTennessee in Collierville made dozens of Small Business Administration loans to out-of-market hotels that eventually went under. Not only did the loans go bad, Mr. Herrington said, but many ended up not being covered by the SBA, because of poor documentation.

Civitas, which now has stricter underwriting guidelines, is working to get rid of most of these loans, he said. In the first quarter it charged off nearly $1 million and classified $24 million as nonperforming. As a result, first-quarter earnings dropped 20% from a year earlier, to $402,000.

The other big problem, Mr. Herrington said, was inefficiency — because the banks shared nothing. The efficiency ratio hovered around 70% for the last three years and worsened to 80% in the last quarter.

To help centralize operations Mr. Herrington has added about three dozen employees. Ten, including his two sons — Kevin, who is now the head of information technology, and Jason, who manages the company’s investment portfolio — came from Franklin Financial.

The name change reflects these changes. “Civitas” is meant to convey the idea of membership in a community, as opposed to separateness, Mr. Herrington said. By September all of the banks will have the same logo — a five-pointed star, representing the five banks — and the tag line “a Civitas bank” will be added to each bank’s signs and printed materials.

The name, though unusual, is not unique. In 1999, CNB Bancshares of Evansville, Ind., said it would put the Civitas name on 144 midwestern branches to avoid confusion with the dozens of other banks named “Citizens.” Within months of the conversion, however, the company was sold, also to Fifth Third.

Mr. Wilder said he is confident that the new Civitas is headed in the right direction. He is especially pleased that the thinly traded stock is up 50%, to around $6, since Mr. Herrington came aboard.

Mr. Herrington is not promising a quick turnaround. The cost of new staff, new systems, and loan chargeoffs will probably delay any significant improvement in the bottom line for at least another year, he said. But building a holding company essentially from scratch takes time, he observed.

“This year we are trying to build a foundation for growth and profit as we nurse our banks back to health,” Mr. Herrington said. “In three years we should be back to being a leader among community banks.”

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