In Era of Consolidation, Niches Reward Start-Up Banks

How many banks will the United States have in the year 2000? Ask an industry consultant and the answer is usually about 8,000 - down a third from the 12,000 of today.

Ask a community banker and the answer is, about 12,000.

A recent survey of 40 chief executive officers of successful community banks found that, with just one exception, the CEOs predicted no such shrinkage.

The executives said that, as regionals and superregionals consolidate among themselves and absorb smaller banks, de novo community banks will open, keeping the total at about today's 12,000.

Some New Banks Prospering

While these times do not seem auspicious for de novo banks - those started from new community banks are prospering. An example is the Bank of South Carolina, with one branch in Charleston, which opened in 1987.

The CEO, Hugh C. Lane Jr., resigned from his position with C&S Bank of South Carolina when it was acquired by C&S Bank of Georgia, and organized his new bank with "a group of local business and community leaders who shared his antipathy for interstate banking."

Mr. Lane raised $10 million in capital. Today the bank is thriving: $70 million in assets; a ratio of tangible equity to assets of 16.37%; a risk-based capital ratio of 28.70%; no nonperforming assets - zero! - and a respectable return on average assets of 1.07% despite the limitations of what is clearly a conservative credit culture.

Approach to Expansion

Mr. Lane plans to expand the franchise eventually, although not necessarily by opening another branch: a courier service picks up deposits from customers. So "targeted marketing" is the key to expansion.

Even in some of the nation's toughest economic climates, community bank start-ups have met with immediate success.

First Bank of Philadelphia ($80 million in assets) opened in July 1987 - only six months before the City of Brotherly Love began to feel the economic downturn that still haunts has reported profits in every full year of its existence, posting returns on assets of 0.82% in 1989 and 0.71% in 1990.

A Niche in Philly

First Bank's profitability has been sparked by its ability to find its niche in Philadelphia.

"Our focus is the small guy," First Bank's president, Samuel Miles, said.

Service has been the key to First Bank's success in its dealings with the small to medium-size Philly businessman: it maintains the longest hours (8:00 a.m. to 6:00 p.m.) of any bank in central Philadelphia and is the only bank in the market that offers free checking to both commercial and personal accounts - with no minimum balance required.

Quality service means success for First Bank, which doesn't advertise. "All our business is basically referral," Mr. Miles said.

Staying Independent

Some older, larger community banks that might make attractive targets for a regional are taking a different track to maintain independence.

Take Irwin Union Bank, with $375 million in assets, in Columbus, Ind.

Irwin Union started in the last century in much the same way as Bank of South Carolina did in 1987 - one person, a known and respected community businessman, decided to open a bank.

The original Mr. Irwin owned a dry goods store in Columbus in 1871. He had a good reputation and the safest safe in town, so people kept their money in his safe.

One day a customer dropped in with a note from a "depositor" that said: "Please give [the bearer] $5.00 from my money in your safe."

Just Like a Bank

Mr. Irwin realized that the note was a check and the safe a bank, and so Irwin's Bank was opened in the rear of the dry goods store, and remained there for 10 years until Mr. Irwin closed the store and expanded the bank.

While the Bank of South Carolina and First Bank are making no effort to emulate larger banks - operating in much the same spirit as Mr. Irwin's rear-of-the-dry-goods-store bank, Irwin Union is emulating the regionals' services.

The bank's holding company now includes credit insurance, investment brokerage, mortgage banking, medical equipment leasing, venture capital, and financial counseling.

These nonbanking businesses, says chairman John A. Nash, give Irwin Union the capability to "offer the sophisticated banking services of the regionals while retaining the personal service of a community bank."

It remains to be seen if bank consolidation will be counterbalanced by the opening of de novo community banks.

However, the consolidation process just recently accelerated, and in the last two years Resolution Trust Corp. and FDIC transactions have been so lucrative that most savvy investors had little incentive to look for de novo banking opportunities.

With the RTC and FDIC getting better prices, and the inventory of failed institutions starting to decline, de novo banks may again become attractive.

Mr. Ron McRae is senior editor of Bank Mergers and Acquisitions, a newsletter published by SNL Securities. The data base and publishing firm, based in Charlottesville, Va., specializes in the banking and thrift industries.

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