When it comes to buying banks, Arnold C. Hahn takes no chances.
The Western Bancorp chief financial officer requires directors of any acquired bank to sign a contract promising they will not organize a competing bank.
"We can't stop them forever," said Mr. Hahn, noting that the bank's "noncompete agreements" run for one to two years. "But we like to solidify our position in the marketplace for a while."
The rapid pace of bank consolidation is stimulating more start-ups than at any time since the 1980s. And because many of these new banks are being formed by displaced directors and bank executives, some industry observers say noncompete agreements are essential in merger deals. Otherwise, said Memphis banking attorney Jeffrey C. Gerrish, a key executive or director with strong ties in the community could set up shop across the street.
"It's a foolish acquirer who does not obtain a noncompete agreement from departing personnel," Mr. Gerrish said.
According to the Federal Deposit Insurance Corp., 214 banks were chartered in the first 11 months of 1997, more than two times the total approved during 1996.
And while no one keeps track of exactly who is forming the new banks, "the driving force ... is usually a displaced executive," said Carl S. Meyer, managing director at William H. Meyer & Associates Inc., Manhasset, N.Y.
Still, not all banks demand that executives or directors sign a noncompete agreement. United Bancshares of Charleston, W.Va., for example, has never used them and does not plan to-though a group of former directors at a recently acquired bank, Patriot National in Reston, Va., are organizing a competing bank in the town.
Indeed, there is some debate as to whether such agreements even work. Mr. Meyer said many banks do not bother with noncompete agreements because they are not enforceable in many states. "They often aren't worth the paper they're printed on," he said.
Robert Powers, principal at Compass Consulting Group in Providence, R.I., said noncompete agreements have little effect unless displaced bankers can successfully steal business from their former banks, which is never guaranteed.
"It takes an awful lot for a business to move its relationship" to another bank, said Mr. Powers.
Some banks have no policy when it comes to cutting off the competition.
Texas State Bank takes it on a case-by-case basis. When it spies a potential troublemaker, it asks the banker to sign a noncompete agreement that could last up to five years.
The merits of noncompete agreements are at the heart of a legal battle in Auburn, Calif. In that case, Westamerica Bancorp claims that an officer of a bank it acquired breached a contract by trying to start a competing bank after being let go by Westamerica. But the officer, John G. Briner, contends he never signed an agreement when asked and therefore is under no obligation to Westamerica.
It is unusual that a bank in California would even ask a displaced executive to sign a noncompete agreement. While banks can ask directors to agree not to compete, California law often does not uphold similar agreements with bank presidents or other key executives, said David J. Block, a San Francisco banking lawyer.
That's not to say bank officers in California will not agree to them-for a price. Robert J. Gallivan, principal at Bank Compensation Strategies in San Diego, said he knows of one Southern California bank that paid a bank president $400,000 to stay on the sidelines.
Banks have other options for those who refuse to sign.
"Either keep them on the payroll or give them a consulting agreement," Mr. Block said.
But even those who sign may eventually return to the neighborhood.
Dorian Corliss, formerly chief executive officer at Family Bank of Commerce, Grants Pass, Ore., agreed not to challenge Valley of the Rogue Bank for one year after a 1993 acquisition. He was given one year's salary for his pledge. But in 1996, Mr. Corliss reappeared as CEO of the new Community Bank of Grants Pass. u