The thrift industry has traditionally underperformed relative to the banking business. This is understandable given its typically high cost structure and historically low asset yield associated with the core product - mortgages.

As the industry has evolved, however, many players have made the leap to the community banking strategic position in search of higher margins, improved performance, and better multiples. While the transition is difficult, many have executed it effectively.

Take Binghamton Savings Bank, for example, a $1 billion-asset company that just recently converted into a commercial bank. Bill Rincker, the company's CEO, commenced this transformation 15 years ago. Before changing the charter, he changed the balance sheet.

He liked the interest rate sensitivity of prime-based lending and therefore committed the bank to investing in a team of experienced commercial lenders who could build that business.

"A well-trained, knowledgeable staff is a critical success factor," says Mr. Rincker, for those "entering the commercial market. Doing it with existing people is a mistake."

The company expanded its product line to become a full-fledged community bank serving both commercial and retail customers.

Special products were developed for commercial customers, such as a dedicated teller line for commercial accounts. Understanding the different service expectations was more an issue than product line changes.

In order to be a real player in the market, Binghamton Savings had to cover all levels of commercial clients, from complex companies to simple transactions (borrowing against real estate) and Mom and Pop operations.

Binghamton Savings benefited from the fact that its only competition was money-center banks that were ineffective at serving local customers. "We were able to take both their lenders and the customers away," said Mr. Rincker.

Binghamton Savings is not the only thrift that has successfully transformed itself. Granite Banks in New Hampshire had $63 million of assets when it converted from mutual to stock ownership in 1986. Today, it is a commercial banking company with $320 million of assets.

The transition began in 1983. Management recognized that to transform the balance sheet, it must first change systems.

"You can't run on-line systems with commercial customers," says Charles Smith, the chief financial officer. "You need batch proof systems. Commercial customers will not wait while a teller proofs deposits of a thousand checks. Also, you can't do things like assigning float with on- line systems."

Transforming the balance sheet was not just a matter of selling different products to different customers. What Mr. Smith and his management team did first was to install the proper infrastructure, then buy banks operating under different charters.

They subsequently merged all the banks, picked up a state commercial charter (which they selected because they liked the regulator), and changed the name, which Mr. Smith perceived as a necessity.

Buying commercial assets through acquisition made the transition easy. "We didn't have to hire a staff with a whole new mindset," said Mr. Smith. "That came with the acquired institutions."

Today, the company has a diversified client base that reflects its marketplace. Half the loans are secured by real estate, and the remainder are commercial realty, consumer, and commercial and industrial loans.

"The most difficult part of this transformation was the cultural integration," said Mr. Smith. "Cultural differences were worse with the acquisitions than with the low balance sheet transformation. Acquisitions involved downsizing and consolidation, which always creates a cultural issue."

Fortunately, the internal management team was young and highly adaptable to change. It executed on its commitment to transform the balance sheet by acquiring lenders with the commercial banks and then had to adapt to meet the service expectations of commercial clients.

Granite Banks has succeeded in its transformation in part because everybody in the bank owns stock, all the way down to the janitor. The employees own 27% of the company. "Everyone in the bank is a stockholder," Mr. Smith noted. "They aren't selling the bank, they are selling ourselves."

I asked why he had undertaken this transformation.

"We converted because we felt that competitively we would be in a better position," he replied. "We would trade at higher multiples. The conversion allowed us to extend ourselves through the entire state."

Bob Hatcher of Liberty Bank in Georgia shares this conviction. "We initiated the transformation because we thought we could make more money," he says. "Community banking was a better destination for profitability than being a mortgage company.

In the past 10 years, the bank has worked on balance sheet transformation. "We started at 99% mortgages," Mr. Hatcher said. "Today, we have one-third consumer, one-third mortgage, and one-third commercial."

Mr. Hatcher confirmed the others' conviction that one must have competent lenders in each type of lending. Without hiring the right people, you are doomed to fail.

In addition, management and the board must share the vision and "have the stomach for changing the business mix and the risk profile," he said. "It also helps when the regulator is on board and understands the goal. Also, as risk management becomes more complex, one must recognize that changing the business mix changes the risk profile and be able to manage that."

Mr. Hatcher's experience was that the major difference between commercial and consumer lending is a relationship orientation versus transaction orientation. This required a mindset change for Liberty and its people.

But back-office support for each activity is also quite different. "The public's perception is that commercial banks are better, more knowledgeable, and more capable of handling complex business," said Mr. Hatcher.

"Getting into the commercial business has made employees feel more competitive," he said. "They have more pride in the institution, and our customers have responded well."

Like Granite Banks, Liberty Bank has bought a series of commercial banks, which facilitated the transition and put the right staff in place up-front.

Interestingly, Liberty has not changed its charter. It has a good relationship with its regulators and is not anxious to change. Regulators have been very supportive of Liberty's effort to transform. In Georgia, having a thrift charter is advantageous because thrifts can branch state- wide, while banks cannot.

These three thrifts have successfully executed a transformation, away from the limelight, into full-service community banks, at different sizes. They had common objectives: improving margins, improving profitability, and improving multiples.

Each accomplished its objectives by setting a course and deliberately executing it through hiring the right people, making the right acquisitions, and sticking with it through the tough times. Any strategic transformation is difficult, and bridging the gap between thrifts and commercial banks is especially hard. However, with the right leadership, this transformation is quite achievable.

Ms. Bird is chief operating officer of Roosevelt Financial Financial Group, St. Louis, and chairman of Finexc Group, a New York-based consulting firm.

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