C. Paul Johnston, chairman and chief executive of First Colonia Bankshares, Chicago, admits that military pilots sometimes make daredevil flights before turning in their wings. You know, flying through the Gateway Arch or below the Golden Gate Bridge. Mr. Johnson won't say if he himself pushed the envelope of prudence before leaving the Air Force back in 1955. However, he does say that, nowadays just before landing his airplane at his Lander, Wyo., ranch, he likes to make a "gunnery run" -- roaring over his ranch hands and flashing past the windows of his hilltop house.

Mr. Johnson's presumption that the plane and its working parts won't fail him during his flybys is similar to his mandate for his 16 subsidiary banks -- which have their own presidents and directors.

"I expect them to keep up with the fairly dramatic developments and directors.

"I expect them to keep up with the fairly dramatic developments in our banking scene amnd run their individual banks like fighter pilots: Act quickly, decisively, and have a sense of urgency," says Mr. Johnson, 62.

Formerly president of the Illinois Independent Banker's Association, Chicago chapter, Mr. Johnson serves on the boards, breeds llamas out at his ranch, and particants in archaelogical digs.

Hehs also checking out a Cessna Citation airplane.

Q.: Whar did you do when you left the Air Force?

JOHNSON: I went right into investment banking into commercial banking in Milwaukee.

Q.: What was your motivation for owning your own bank?

JOHNSON: I'm an entrepreneur, so, for me, it went beyond money and power, and that sort of thing. I think all successful entrepeneurs have an instinct for competition, and I'd say that's what drove me.

Q.: What was your reason for buying Colinal in particular?

JOHNSON: I'd spent several years searching for the right kind of bank in just the right place. For me, that meant fining a bank in northwest Chicago that was fairly conservative -- as most Chicago banks are -- but First Colonial historically has been very conservative, with very few unsecured loans, and a superior chargeoff history.

We sell adhere to the three C's of lending -- character, capacity, collateral -- but we make character the most important criterion by far.

Q.: What sorts of people sit on your board? Are they all "text-book investors" or are some of them mainly concerned with community intrests?

JOHNSON: We have a very unusual franchise, and I think of it as the quintessential community banking group. Our 16 banks each have their own board of directors, taken from people who live and work in communities and have the touch and feel of their towns.

We have 100 outside directors, and I feel strongly that they're doing great marketing job for us.

At the same time, the presidents, more often than not, also live im communities they serve -- and that really is unusual.First ColonialBankshares at a GlanceHeadquarters Chicago, Ill.Assetsat midyear $1.56 billionFirst-half ROA 1.12%First-half ROE 11.24%Tier 1 ratioat midyear 8.48%Loan-to-depositratio at midyear 74.50%Source: Ferguson & Co.

Q.: What about the people on your holding company board?

JOHNSON: They are all high-profile, professional business people who know Chicago inside out.

Q.: To what extent are your subsidiary banks independent of the holding company?

JOHNSON: We come up with the products -- with the consesus of the presidents -- and we allow them to do some individual pricing on loans and liabilities.

Human resources, marketing, asset review, and the money desk are all consolidated downtown. But the banks themselves have quite a bit of autonomy.

Q.: How much autonomy do they have for small-business lending?

JOHNSON: Any loan requests over $500,000 are put before the central loan committee, which is composed of our best lenders. Our turnaround time is a lot faster than it ordinarily is at other banks because we have a sense of urgency about the requests.

Q.: How important is small-business lending to Colonial?

JOHNSON: It represents our main source of income and 80% of our lending. That's our niche.

American National Bank is a bank for business, and among the larger banks here, they've done the best job in that area. But the really big banks have a hard time because they don't have the mentality for small-business lending. Their loan officers are acclimated to working with Fortune 500 companies.

Q.: I've noticed that your employees are remarkably friendly and helpful when I've telephoned. Is that typical of your employees?

JOHNSON: It's extraordinarily important for us to cultivate a penchant for personal service.

We have training for it, we have "mystery shoppers" who shop our own banks and grade the service and the personality of individual employees.

We've had our tellers wear earplugs and gloves to help them appreciate the hardships of our elderly customers -- who represent a huge portion of our deposits.

In fact, we've built up the best "seniors' clud" in the Midwest, and we started early with mutual funds -- we were way ahead of everyone else -- and that shows you how an entrepreneurial banking group can stay ahead of the big banks.

Q.: How important are pricing and promotions to your marketing efforts?

JOHNSON: We don't try to buy market share because the people who bank with us won't move for price.

I don't agree that price and promotions necessarily are where marketing efforts should be. We put the advertising money into service training and incentives.

As I say, I'm an entrepreneur, and I know that people respond to two things -- incentives and recognition. That's what entrepreneurs do well, and others will never understand.

Q.: Last year, your bid to buy GNP Bancorp and Hi-Bancorp was blocked by the Federal Reserve because of a Community Reinvestment Act problem. At the time, you were quoted as saying you were "shocked" by the Federal denial. What happened, and what was the shocker?

JOHNSON: It was a shocker in view of our overall CRA record.

We made a very simple technical mistake at our Oak Park bank. We missed the statutory deadline to explain why we denied a loan request. Then we were sued, and that lawsuit got quite a bit of publicity. It was out of all proportion to the error, but the bank that made the error was given a "needs to improve."

We paid for it: Our purchase was blocked, even though all our other banks had "satisfactory" or "outstanding" grades. Since then, the Oak Park bank has been graded "satisfactory," so maybe it helped wake them up. Maybe they didn't do as well as they should have, so I suppose they probably deserved a "needs to improve."

Q.: How are investors grading your bank?

JOHNSON: Our tangible book value is $10.72, or $12.93 with goodwill, and our stock recently hit a historical high of $20.

Book value has been increasing faster tahn it has among our peers, and that's because we don't pay out quite as much in qividends -- about 30% of quarterly earnings to a 35% average for the peers. But we're not interested in quarter-to-quarter spectaculars. We're determined to enhance shareholder value, but we're owner-operators, not hired guns. I own 10% of the stock, and I vote 75% of it. So, when we make loans, it's money out of our own pockets.

Q.: During board meetings, do you bat around the numbers you'd have to see before proposing to sell the bank?

JOHNSON: There used to be 17 independent banks of $1 billion or more in Chicago, and now there are only four of us left. In addition, the area is underbanked, and that's because we didn't get a branching law until this year, and "brick and mortar" is a hurdle to expansion when it's easier to increase your pricing.

The other phenomenon of Chicago banking is that it's extremely fragmented. No one has a big market share of the Chicago metro area, but it's regarded as the most economically viable area for the 1990s, so, naturally, the superregionals want to be here.

That said, I'd point out that since 1986, independent banks have been selling for two or three times book, or 15 times earnings.

Q.: Would the independent boards have a say if an offer were made?

JOHNSON: It would be up to the holding company board, and just a few of us have a lot of stock.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.