FALLS CHURCH, Va. -- Barry J. Fitzpatrick has a tough act to follow.
As chairman and CEO-designate of First Virginia Banks Inc., Mr. Fitzpatrick must deliver the same consistent earnings performance, year in and year out, that has characterized the nine-year reign of his predecessor, Robert H. Zalokar. Mr. Zalokar, 66, announced in September that at yearend he would hand over both top titles to Mr. Fitzpatrick, who is 54.
Mr. Zalokar will still be around in January, as chairman of the board's executive committee, but it will be Mr. Fitzpatrick's show from that point on.
"Bob and I worked together for years, and I was always quite willing to give him advice without worrying about the full ramifications," Mr. Fitzpatrick says. "Now you'll find that I'll be looking at the advice I get with different eyes than when I was providing it."
The ironic comment is typical of Mr. Fitzpatrick, a relaxed, easygoing man with a ready laugh who describes his hobbies as "golf, golf, golf."
During a recent interview with the American Banker, Mr. Fitzpatrick revealed some of the thinking that will guide his tenure as First Virginia's new boss.
In his precise, well-focused speaking style, he made it clear he will adhere to First Virginia's rock-solid credit culture and its cautious approach to acquisitions. He also expressed confidence that 1995 will be a good year for indirect auto lending, which is the bank's most important line of business.
Q.: What is the major strategic focus of First Virginia?
FITZPATRICK: We consider ourselves to be a consumer bank. But we also throw under that umbrella the business community in our local area. We focus on the people and the businesses that populate the areas around our banks. We don't go looking for national or international accounts.
We have 20 separately chartered banks, and each has a chief executive officer and a voting board of directors. We give them a significant degree of autonomy to operate as a local bank in their market area.
Q.: In terms of lines of business, are indirect auto and home equity the most important?
FITZPATRICK: That's right. Indirect auto is a major focus for us. We've been in the business for some 30 to 40 years. The second-largest part of our portfolio is our home equity loans, which we do directly through our branch offices.
It's been a very good year for both businesses. From the first of the year through September, we had double-digit growth in both portfolios. But there is a softening here in October and the beginning of November, which I think has to do with the increase in interest rates and the time of year.
Q.: A lot of banks are retrenching now in indirect auto because of price competition. Is First Virginia following suit?
FITZPATRICK: We pride ourselves on never pulling back from the indirect auto business. We think it's the engine that we built the profitability of the bank on. Our dealers really have a feeling of comfort, I believe, that First Virginia does not get in the market, get out of the market, and get back in.
I don't want to be too general about it, but price competition in the indirect business is there every single day. There are always multiple providers. I don't see any lessening of that intensity. And, of course, it always comes down to the loan price.
We think we've developed a niche -- because we stay in for the long term -- that we manage to get more than our share of the volume that's out there at any given time.
Margins are tight right now. In fact, for the last nine months to a year, you could borrow on your automobile over 48 months and sometimes 60 months at the prime rate or less.
But you have a risk-reward relationship when you talk about rate. If you can minimize your losses, you can afford to offer a lesser rate. It's obvious that cost of funds plays a part there, but losses in the indirect portfolio are what drive your cost.
First Virginia almost has minimal losses in the indirect portfolio, even though we have one of the largest portfolios in Virginia. Right now our losses in that portfolio come down to just a few basis points.
Q.: How do you do that?
FITZPATRICK: Our credit quality has been good for decades. We pride ourselves on that. This year is rather unique. The chargeoffs have never been this low. But we do it by the fact that we buy every credit with an experienced loan officer. We do not credit-score. Each deal we buy is reviewed by an experienced loan officer.
In our dealer department, it is not uncommon to have one of our buyers with 15 to 25 years' experience with us. That's the norm in that area. That type of experience, and the fact that we're looking at all of the factors of a credit, means we can then minimize our losses.
Q.: Isn't credit-scoring the wave of the future in indirect auto?
FITZPATRICK: I'm told that. But we have a basic philosophy at First Virginia that when anything new comes out that is touted as something that eliminates the individual credit decision, we want to see it proven over the long term before we buy into it.
The second thing is, as you can tell by our numbers, what we're doing is not broken so we don't intend to fix it. For the foreseeable future, you can count on us continuing to look at every credit. We call it the "touchy-feely approach" to indirect lending.
Q.: Isn't that more expensive, though, since you have to pay these guys a good salary?
FITZPATRICK: I don't know if I can give you a good answer to that, because we'd have to study the relative costs of bringing that other system on-line. Because our results are so good, we haven't made that cost analysis.
Q.: What's your outlook for 1995 in indirect auto?
FITZPATRICK: We think there are several factors that are going to be good for those of us in the indirect credit arena. One is, the average age of the car on the street today ranges from eight to 10 years. We have a great deal of confidence that the American consumer has reached his tolerance and will want a new car soon. And we think that's coming. We think we see it now.
Secondly, we're beginning to get to that time when the leases that were put on a couple of years ago are coming to fruition. And all of those must be refinanced. And we think that is an area of good credit business for banks.
There is, obviously, some concern in the industry that a flood of these "used cars" will depress used-car values. That's of concern to anyone who relies on the automobile for the collateral to support the loan.
But we're more on the bullish side. We think our loss ratios and our delinquency ratios are such that that vulnerability is far outweighed by the opportunity to make more loans when these cars are refinanced.
We think those two things bode well for 1995.
Q.: What's First Virginia's strategy on acquisitions?
FITZPATRICK: We like to describe ourselves as a disciplined acquirer. What we're looking for are a couple of things. We want to acquire a bank that either gets us in a market where we'd like to be or expands the franchise we already have in a market.
The other is, we generally look for banks that are of such a size that we can assimilate them very quickly, without a great deal of disruption to their staff or their customers. We find that if we stay in the $100 million to $500 million range with our acquisitions, we can accomplish those things.
Q.: Would you rule out acquisitions larger than $500 million in assets?
FITZPATRICK: No, because we've just made one. Farmers National Bancorp in Annapolis is about $725 million. That represents three banks in that holding company. But again, it met our criteria. It really filled a niche between Baltimore and northern Virginia that we wanted to get to.
At the same time, even though it's $725 million, their systems are so compatible to ours and their branch network, while it's certainly big enough to serve their market area, it's small enough that we thought we could handle the conversion as easily as a $300 million bank.
It did fit the test, even though the asset dollars kind of went outside our boundaries. That's the largest purchase we've ever made.
Q.: Would First Virginia ever consider a merger of equals?
FITZPATRICK: We have no interest in a merger of equals. We think that's definitionally unsound.
Q.: Would you consider a takeout offer?
FITZPATRICK: Our board has adopted a policy, and they've had it for years, that we intend to remain an independent banking organization.
We think our numbers over the long period of time support the fact that we have returned value to the stockholder at rates that exceed most of our peers. As long as we do that, I can't see the board changing its mind.
Q.: National interstate banking is coming next year. Has that caused you to rethink your strategy at all?
FITZPATRICK: Our policy about being acquired doesn't change. As far as acquiring is concerned, I don't think that poses much of a change for us either. We're not going to jump to Illinois or something like that to buy a bank. We do natural extensions of our market area.
Basically, at this time, we follow an expansion plan that would follow Interstate 95 and Interstate 81 north and south. We find that those two interstates are really good avenues of commerce. There is good growth and good income demographics along those roads.
Q.: Since First Virginia is such a heavily consumer-oriented bank, what is your view of the future of traditional branches?
FITZPATRICK: We think that electronic banking -- all of the nonbranch deliverable financial services that are being touted -- are viable. But at the same time, we don't buy into the general premise that consumers are going to stop using their branch offices.
As far as we're concerned, we're going to continue to branch. But our branch strategy is similar to our acquisitions strategy. We only branch in those markets that have population growth, where you have high disposable income, low unemployment, and steady economic trends. We think those areas are still branchable. And we find that consumers still come to the branches in large numbers. A lot of them access electronic transactions by coming to our branches to do it.
We still think the neighborhood branch bank, properly located, is as viable today as it was 20 years ago.
Q.: First Virginia avoided the commercial real estate problems that crippled so many other banks in this region. How did you do that?
FITZPATRICK: I'll tell you, the pressure was intense for us to get there too, for the fees.
If you take a 10-year period of time, First Virginia might be characterized as humdrum and maybe a little bit behind the curve for seven out of those 10 years. It always turns out that there's three years in that period of time when we're characterized as geniuses. And I believe that cycle will repeat itself.