Small Business

Banking More on Indie Banks


The personal touch has helped fuel the recent rise in smaller, community-based banking—and 2006 could be a record-setting year

When Allan Ducker, co-founder and chief executive officer of Easley (S.C.)-based CommunitySouth Bank & Trust, sat down with his partner to write their independent bank's business plan in 2004, he first drew a circle around the word "customer" and vowed to build a bank that put the customer first. Tired of poor service among bigger banks—he had previously spent 20 years at Bank of America (BAC)—Ducker aimed to make his bank different. Unlike most of its competitors, when a customer calls CommunitySouth, they always reach a human on the other end, and its branches have waiting areas with flat-screen TVs and fresh cookies.

Ducker's plan has worked so far. To keep up with customer feedback, the bank sends out quarterly satisfaction surveys, and he says 95% of his customers rank the bank as very good, excellent, or superior (see BusinessWeek.com, Winter, 2006, "How're We Doin'?"). A full 99% of respondents say they would recommend the bank to a friend. The reason, says Ducker, is the personal nature of its service. "You walk into CommunitySouth, and I can't guarantee you're going to get a loan, but you'll be greeted the second you step into the lobby," he says. In the two years since the bank opened its doors, it has already expanded to five locations, with more in the works.

CommunitySouth is part of a trend away from corporate banks and back to independent, community banks. De novo banks, or startup banks less than five years old, are picking up steam as customers, investors, and the bankers displaced by corporate acquisitions migrate back to local lending institutions. "When a small bank is taken over, it really fuels more smaller, de novo community banks to start up in response," says Mike Raab, an analyst at SNL Financial, a Charlottesville (Va.)-based research firm that focuses on the financial, energy, and real estate sectors.

Sound Investment

Raab says the more takeovers there are, the more it will fuel de novo growth going forward, and that he expects the mergers and acquisitions that have characterized the banking industry in recent years to remain strong into the foreseeable future.

Though the numbers aren't yet available for all of 2006, some industry experts indeed expect it to be a record-setting year for the independents. "Community banks truly are riding a tsunami. More people are starting them than ever before, and they're more popular," says Lee Bradley, managing director for bank development at SAMCO Capital Markets, a Dallas-based corporate and municipal finance company.

Another reason why independents are taking off is their recognized viability as an investment. It normally takes between 10 and 20 investors and major players to get a new one started, and they can choose to become chartered on the state or national level, with different regulations and minimum capital investments required for each. And with more institutions starting, the state and federal regulating agencies are getting more selective about who they'll grant charters to, since they don't want all the banks they approve to fail down the line.

The Main Challenges

This isn't the first time independent banks have experienced a boom (see BusinessWeek.com, 11/13/06, "Is the Small-Bank Boom Over?"). Between 1994 and 1999, the number of startup banks that opened nationwide increased from 36 to a record 200. But after the economy tanked in 2001, the number of banks also dropped to a low of 74 in 2002. Independents have been rebounding in recent years, however, and after the first two quarters, 2006 was on pace to reach 158 openings, according to SNL Financial.

Because investors are seeing community banks as a great investment, it has gotten easier to raise the $6 million to $20 million in required startup capital. Community banks rarely fail, and they often reach profitability within three years. Some independent bank owners and executives are emulating traditional entrepreneurs by specifically building the business to flip it. After all, once they've built one successful bank, it's easier to raise capital and community support to do it again.

In many ways, starting a bank is like starting any business. The three main challenges are developing the business plan and associated policies, finding a great management team, and raising capital. Once those are done, developing a great marketing plan is the key to eventual success, says Trent Sanford, president and chief executive officer of Covenant Bank & Trust, an independent bank in Rock Spring, Ga., that opened in June, 2006. Many times, a successful community bank is characterized by the quality and prominence of the local business leaders on its board of directors, says Sanford.

Getting to Know You

With rapid growth and near-immediate profitability, other independents are bound to grow without the help of selling out to a larger player. "Every year, we update our strategic plan," says CommunitySouth's Ducker. "In the next four or five years, we will be seven or eight years old with 12 branches and $1 billion under management. We're gonna keep growing—we're not building it to sell."

Of course, the bigger a bank gets, the harder it is to keep its community feel. Customers increasingly want to know their banker and are growing tired of big banks' lower return on deposits and long waiting times on loans. Since they often experience lower employee turnover, community banks offer customers personal service, along with other advantages that come with a more intimate relationship.

"With a community bank, you get to know the people that own it," says Sid Theus, chief executive officer of American Painting & Renovations, a 20-employee contracting company based in Duluth, Ga. "They know you so well that you can establish a relationship with them, where I'm somebody. Personally, I'm also able to get huge lines of credit and multiple loans."

By all accounts, the boom is here for the short-term. Of all the reasons for the banking bull market, some analysts say the biggest is the affinity that small businesses have for banking with independents. "As long as you see small businesses growing, you'll see community banks thriving," says SAMCO's Bradley. For now, supply has yet to catch up to demand.


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