Midsize Banks: A Tough New Breed Arises

Some medium-size banking companies are out to disprove one of the widely held assumptions of the merger wave - that the future belongs only to very large, efficient banks and to small, community banks.

Not accepting the notion they may be "too small to be big and too big to be small," this emerging breed is adopting an identity of its own - super community bank. It is the subject of a special report on pages 9 to 12 of today's American Banker.

"Super community" has not yet gained the currency of "superregional," the last great addition to bank-structure terminology.

But a growing number of multibank holding companies are striving to meet the super community definition.

They seek to combine the centralized operating efficiency and product standardization that are characteristic of many big banking companies with a decentralized management that makes key pricing, lending, and marketing decisions in and for their local communities.

These companies have good reason to try to preserve the community focus even as they grow into multibillion-dollar networks.

A survey of 125 super community banks by BDO Seidman and the American Banker, the basis of today's special report, showed that these institutions averaged a 0.88% return on assets last year.

They did 38 basis points better than the industry as a whole, as calculated by the Federal Deposit Insurance Corp.

BDO Seidman consultant Anat Bird, a leading proponent of the super community approach who lays claim to inventing the term, contends that these banks in the middle can readily outperform others in quality and customer service.

Because they gain the benefits but ameliorate the drawbacks of both bigness and smallness, Ms. Bird sees them as a competitive threat to big and small institutions alike. (See article cowritten by Ms. Bird on page 12.)

Big Banks Respond, Too

Some very large banks, even those traditionally defined as money-centers, are taking steps in the super community direction by assigning more responsibility and control to bankers based in the communities they serve.

First Chicago Corp., a money-center that has built the biggest branch network in Illinois, has become a leader in "micromarketing."

By combining sophisticated data base technology with direct-marketing techniques, First Chicago and its subsidiaries target potential customers in a given area ever more precisely.

Micromarketing, along with most advertising, is managed centrally by James M. Grant, senior vice president, but First Chicago's community banking units make their own local use of it and sponsor their own promotions.

"There is no inherent advantage in any particular size or shape," said Kathleen Holmes, managing partner of Furash & Co., a Washington-based consultant. "Staying close to your market is hard as the devil to carry off-the bigger you are, the harder it is."

Assets Up a Bit

About half of the 125 super community banks in the BDO Seidman-American Banker survey have less than $1 billion in assets. These banks averaged a return on assets last year of 0.92%, up from 0.90% the year before.

But the prototypical super community institution, which many others may seek to emulate, is Banc One Corp., Columbus, Ohio.

It is approaching $50 billion in assets, earned a 1.53% return on assets in 1990 and 1.73% in the third quarter of 1991, and is usually categorized as a super-regional.

|People First'

Banc One has expanded rapidly through mergers, but it prefers to leave acquired banks' managements in place, with decision-making autonomy.

The holding company imposes its high performance and financial reporting standards to make "good banks with good management great banks with great management," Banc One chairman John B. McCoy said in a recent speech.

Mr. McCoy's description of Banc One as a "people first" institution epitomized the super community ideal: "Our strategy is [to have] local presidents and local boards of directors in all our banks. It works."

He added, "A lot of the industry is going in the opposite direction" - toward consolidation and centralization, particularly through megamergers - "and I think it's wrong."

As long as banks remain community-focused, according to Ms. Holmes, there will be limits to consolidation. "There will certainly be consolidation in assets," she said, but the number of banking units will remain high because of the need for local responsiveness.

Don't Forget Roots

Leonard M. Carroll, president and chief operating officer of Integra Financial Corp., Pittsburgh, which is approaching $10 billion in assets, sees size not as a defining characteristic or an objective but as something for a super community bank to keep in perspective.

"If you start thinking like a superregional, you start sliding away from the local-community orientation," Mr. Carroll said. "We always have to be on guard about that.

"As the president of the company," he said, "it would be easy for me to slip into the $10 billion mode and forget about the $50 million branch in the country. Anything that affects the customer, we try to leave in the local bank."

Localizing Service

Integra recently restructured itself into three banks that rely on the holding company only for data processing and other support.

Market responsiveness and customer service are localized, and these considerations take precedence even when it might make economic sense to centralize, Mr. Carroll said.

In that sense, Integra is typical of the group that responded to the BDO Seidman-American Banker questionnaire. (It is not known whether Integra was a respondent. The results were tabulated anonymously.)

Selective Centralization

Most cited local orientation and autonomy as the principal benefit of not consolidating. Functions that are centralized are most likely to be those, like operations, that, in Mr. Carroll's words, "are transparent to the customer."

While 93% in the super community bank survey had centralized data processing, only 44% did the same for loans.

"There are two main criteria" for deciding on centralization versus decentralization, Mr. Carroll said: "How much can you save if you centralize? And what is the impact on the products and services delivered to the customer?"

Integra goes so far as to keep loan underwriting out in its three banks, though a single loan center "would lend itself to our compact marketplace" of western Pennsylvania.

Units on a Long Leash

"It keeps us customer-sensitive," Mr. Carroll said. "That attitude has been embedded in our corporation for many years. We always saw it as a natural evolution. Only recently did we hear the term |super community,' and it fit."

Similarly, BB&T Financial Corp., Wilson, N.C., has grown into a $6.2 billion-asset, 219-office holding company while leaving about a dozen units on a relatively long leash.

"We've been involved in a number of community bank mergers, and every time, we found they could deliver better quality lcoally than we could from headquarters," BB&T chairman John Allison said in an interview last year.

Gaining Legitimacy

Ms. Holmes of Furash & Co. has not adopted the term "super community" but endorses its details. "We see it as a management strategy, or a style of doing business," she said.

One way to look at it is as "internal franchising - centralizing for economies of scale and standardizing certain products.

It requires excellent cost control and management information systems so you know how much [pricing] flexibility and profitability you have at the local level."

Any doubt that "super community" had gained legitimacy was probably dispelled this fall by "Vision: 2000," a report on the future of banking by Arthur Andersen & Co., Andersen Consulting, and the Bank Administration Institute.

The report, based on discussions with senior bank executives and other experts, predicted the emergence of super community institutions that "would maintain the look and feel of a close-to-the-customer community bank but leverage their size (up-to $25 billion) and strength to provide a full range of products."

Decline Predicted

Vision: 2000 predicted a 25% decline in the number of domestic banking entities - holding companies and independent banks - to 7,300 by the turn of the century.

But organizations with $1 billion to $25 billion in assets, including the super community class, would rise by 10%, to 265.

Staying "close to the community" responds to a deep-seated public longing.

In the American Banker's 1990 and 1991 national consumer surveys, two of three respondents said they would prefer to bank at a local or community institution.

Among small-town and rural residents, 77% expressed that preference this year, compared with only 59% in cities and suburban areas where personal attention is less expected.

No Single Formula

Ms. Bird of BDO Seidman has sponsored several discussions among what she terms a "peer group" of super community bankers. They tend to run multibank companies from small or medium-sized cities such as Evansville, Ind.; Billings, Mont.; or Harrisburg, Pa.

Their idea exchanges have revealed that, just as no two communities are alike, no two super community banks do everything the same way. Some farm out data processing; others rely on computers they own.

And there are gradations in the autonomy granted to subsidiaries' managements and boards. Some assign those boards nothing more than honorific functions; a few do not keep separate presidents in place.

But for the most part, super community bankers' scales tip toward decentralized authority, at least in product and service decisions, the BDO Seidman-American Banker survey revealed.

Questionnaire Distribution

Questionnaires were sent in August to the chief executive officers of 450 holding companies that were seen as fitting the super community type. Responses came back from 125, ranging in assets from $170 million to $33 billion.

Sixteen respondents had more than $5 billion in assets; 46 were in the $1 billion to $5 billion range; and 63 had less than $1 billion.

The average holding company owned six subsidiaries; those with more than $5 billion in assets averaged 10 units; those below $5 billion averaged five.

Additional Findings

The super community banks' return on equity in 1990 was 11.64%, down a bit from 12.32% in 1989. Again, they did better than the industry's 7.73% and 7.78%.

Among other findings:

* Subsidiaries have separate boards of directors at 85% of responding companies. Only 12 respondents, or 10%, all with less than $5 billion in assets, did not have separate presidents for each subsidiary.

* The average bank in the survey said it could eliminate 146 jobs if it were not committed to decentralized community banking. The average for the nine surveyed banks above $10 billion in assets was 925.

* When asked to cite the competitive advantages of the super community format, 44% listed personalized, quality service; 31%, experienced staff.

* Loans - consumer, commercial, and mortgage - were most often ranked among the top three profit generators. Six of 10 respondents said they did not expect this order to change within three years. Only 7% of the bankers placed credit cards among their top three sources of profit; 6% cited mortgage servicing; and 4% cited both correspondent banking and securities brokerage.

* Only 8% said money-center banks are primary competitors. Perhaps as a function of super community banks' locations, they are far more preoccupied with superregionals (66%).

* Areas that have been centralized by a majority of respondents included data processing (93%), investments (88%), purchasing (74%), and asset-liability management (74%). Asked which areas "must not" be consolidated, loan underwriting got by far the strongest response, at 54%, followed by pricing, at 17%, and customer service, 13%.

* Bankers were unified in their description of strategic niches: Fifty-three percent said community or retail banking; 30%, small business or middle market; 14%, quality service; and 10%, relationship banking.

The clarity of the super community mission can give these banks an advantage against tough local competition, said Mr. Carroll of Integra Financial.

"Local banks have a built-in advantage: They are focused on a town; their attentions are not diluted; and there is no internal debate about what they should be," he said. "But if a larger bank, a superregional, defines itself as a community bank and does it right, it will be just as tough as a locally owned bank."

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