Small Banks Revisit a Precrisis Strategy: Long-Distance Expansion

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It's sooo tempting.

Enterprise Financial Services (EFSC) and Reliance Bancshares (RLBS) in St. Louis, like a lot of other community banks around the country, are frustrated by slow growth at home and can't find any good acquisitions nearby. At the same time they see ripe — but potentially risky — expansion opportunities in far-flung markets like Arizona and Florida.

Sound familiar? That siren song, circa the early 2000s, got a lot of banks in trouble later when the housing markets in markets like those tanked. But the music is playing again, and even Stephen Marsh, the chairman and chief executive of Enterprise's bank unit, acknowledges that the industry has a short memory.

"We're surprised at how quickly bankers have forgotten the last credit crisis," he says.

Still, Enterprise is actively hiring lenders in Arizona, where it bought three failed banks in recent years. And Reliance, which had held on to a pair of branches around Fort Myers, Fla., is looking to introduce new products in that market.

The important thing, executives at these companies and outside experts say, is to incrementally boost revenue and avoid high-risk practices that contributed to the meltdown five years ago.

For instance, the $3.1 billion-asset Enterprise is trying to avoid the temptation to water down underwriting and lower prices to win deals, Marsh says.

Yet regulators and academics have raised concerns. A research paper presented last week at the Federal Reserve Board's inaugural community banking conference found that the performance of bank acquisitions deteriorates as the geographical distance between buyer and seller widens.

While the paper was limited to traditional bank deals, co-author Tim Yeager says many of its findings are applicable to any distant expansion. Yeager, a professor at the University of Arkansas, says those challenges include sufficient managerial oversight, higher operating costs and shaky knowledge of the out-of-town market.

"It is so much harder to monitor the quality of the work and the decisions that are being made" from a distance," Yeager says. "You can address some of that with local help, but those employees may lack the ability to see the managerial big picture."

Still, it is possible to manage the risk, says Joseph Stieven, chief executive of Stieven Capital Advisors.

"It has been problematic whenever banks go out of their market to aggressively pursue loans," he says. Enterprise avoided a major misstep in Phoenix because it "did not go out there on a strategy just to grow rapidly," says Stieven, who is familiar with its operations.

Another key to making an out-of-market expansion work involves personnel, Stieven says. "The key to banking is still the people," he says. "The banking business is still based on relationships."

Enterprise believes it has the right person in place to help it make a bigger splash in Arizona. The company recruited longtime local banker Jack Barry several years ago to oversee its operations in the state, and it escaped significant damage when the market soured in 2008.

The company, bolstered by its more recent acquisitions, is now looking to develop a platform in Arizona to arrange senior debt financing for mergers and offer asset-based lending and tax-credit lending.

Arizona "has been extremely profitable and has been a great boost to our capital base," says Scott Goodman, Enterprise Bank's president, adding that about 25 lenders have expressed an interest in learning more about the bank. "The plan now involves growing it into a core market. For us it is about ramping up the talent pool there."

Enterprise is especially keen on luring lenders from Wells Fargo (WFC), JPMorgan Chase (JPM) and Bank of America (BAC), which held nearly 72% of Arizona's deposits at June 30. That concentration contrasts with the highly fragmented St. Louis market. Wells alone "has more than 100 well-trained commercial lenders who are tripping over each other for prospects," Goodman says.

The $1 billion-asset Reliance is no longer one of the banks fighting for business in Arizona. It pulled out of Phoenix more than four years ago as it looked to cut costs, preserve capital and address mounting credit issues. The company also closed an office in Houston.

Tom Brouster, who led a major recapitalization at Reliance, ultimately decided to retain the federal thrift the company started in southwestern Florida roughly a decade earlier. Reliance eventually merged the thrift into its Missouri bank. At June 30, Reliance had two branches and $44 million in deposits in Florida.

Reliance is in the process of "finding the right people to manage" the branches, says Brouster, the company's chairman and biggest shareholder.

"Things have changed around quite a bit in Florida," he adds. "If you look at our marketing plan, we're looking at stabilizing those branches and adding some new products."

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