The Billion Dollar Debate

January 2006

Louis Moore

Is there a point when your community bank ceases to exist as your community bank—a threshold that you, as the customer, may not even be aware of until you need some manner of service beyond a checking or savings account? Some in the business speculate on the existence of a “billion dollar ceiling” for community banks. Louis Moore, president of BB&T in Knoxville, says, “Community banks—typically—define themselves below that billion dollar mark.”

“I’ve never been a community banker, but from an observer’s point of view, you typically see banks with a state base or coming into the state that are a good size, and there are very few banks that fit into that category of $50 billion down to $1 billion,” Moore says. “It’s an interesting case study—why a billion dollars? Or is that just a misperception?”

“Once you start growing above a certain size, you start running into other costs. Infrastructure, overhead and regulatory costs become higher proportionally. Most banks decide it is too much risk and better to sell out,” Moore says. Running an independent bank means higher operational costs—and that might be a reason why a bank would merge or sell once it hits that billion dollar ceiling, Moore speculates. And since there are very few real community banks left in Tennessee (owned and operated within the state), this would appear to hold true.

If a community bank represents the community it serves, as a locally owned and operated entity, where and when does the “community” aspect end? Bankers agree that it is hard to define an institution as a community bank when it grows out and beyond the immediate locale it serves, especially when a branch or city office loses its decision-making power. But does that have to happen once a specific dollar amount in assets is reached?

It’s a debate that several leaders in the banking industry were eager to join, and Moore’s speculation prompted some interesting responses.

Douglas Cruickshanks, president and CEO of FirstBank, headquartered in Lexington, believes that the billion dollar ceiling for community banking is a misperception—a banking “urban legend” of sorts. “Size as an indicator may be a false measuring tool. A community bank is not about assets. A community bank has the power to make decisions on behalf of its customers. The decision making is local.”

FirstBank, which along with First Tennessee and Greene County Bank, is one of only three community banks headquartered in Tennessee with more than a billion dollars in assets, is in twelve Tennessee communities. With assets now upwards of $1.3 billion, it could be perceived as having outgrown its small-town bank reputation. But Cruickshanks asserts that FirstBank still considers itself a community bank. “Although we’re in twelve locales, we allow our city banks to make decisions for their own customers.” For example, Cruickshanks points out that the FirstBank branch in Jackson is free to make decisions for its customers in Jackson. FirstBank, which will celebrate its 100th year in operation in 2006, is an unusual case. “We have one stockholder,” Cruickshanks says. “Mr. James Ayers bought the bank over 20 years ago with one branch in Scots Hill and only $12 million in assets. He has grown the bank from $12 million to $1.3 billion in assets, and from one branch to 12 branches.”

Can FirstBank continue to keep growing and still remain a com- munity bank? “Yes,” Cruickshanks says. “We have doubled in size in the last four years, but each city’s bank president still has the authority to make decisions and, in fact, has more responsibility now than ever.” Rapid—and local—response to the needs of customers is key. “Because there is only one stockholder, FirstBank is very nimble,” Cruickshanks says. “We can respond to a customer in a hurry.”

Will FirstBank outgrow its “community bank” reputation? Cruickshanks says that is not in the plans. “Large banks have a tendency to transfer employees more frequently. We haven’t had a change in a city president in at least four years.” While FirstBank is and plans to continue to grow, Cruickshanks says that sole stockholder Ayers is not interested in selling out and plans to grow FirstBank as a premiere community banking institution.

Sammy Stuard, president of F&M Bank, head- quartered in Clarksville, is proud of the growth of his community bank. “F&M Bank is now in four counties—Montgomery, Stewart, Rob- ertson and Wilson,” he says, “Our assets are at $494 million, and we definitely have our eyes set on being a billion dollar institution. But we still plan to maintain our community banking status and our privately held status with limited shareholders.” F&M Bank also will mark its 100th year in operation in 2006.

ven with continued growth, Stuard is confident that F&M will remain a community bank because the authority to make decisions will be left to the people in the various cities. “I think that whether or not a bank can remain a ‘community’ bank is driven from the top,” Stuard says. “We still believe in relationships and relationship banking. We want our customers to feel that they can reach me directly.”

Stuard echoes his colleague Cruick- shanks when he says that community banking has to be about authority and decision making ability at the community level. “We can grow and still be our community’s bank and offer services such that our customers still feel like they have a relationship with us—that doesn’t have to change with size.”

Communities have grown ever larger with urban flight and suburban sprawl, and Stuard acknowledges that it might sound lofty to call a bank with multiple branches a “community” bank. “But with improved communications and travel, it’s easier to know your customers within a larger area,” he says. “It all boils down to who has the authority, and the minute authority over decision making is taken out of the city or branch, relationships start diminishing.” Gordon Inman, chairman of Fifth Third Tennessee and former owner of Franklin National Bank in Franklin, is in a unique position to address the perception that community banks sell or merge before or upon reaching that billion dollar mark, having sold his community bank two years ago. “There are many reasons why a bank will consider selling or merging with a larger institution,” Inman says. “Every case is individualized, and I do not agree that there is a billion dollar ceiling.” “I don’t like to use the word ‘sell’—I merged with Fifth Third, but no dollars changed hands,” he says. As a 50% shareholder in his publicly traded bank, Inman says he needed to raise capital. “If a bank doesn’t grow really fast, it can take its earnings and put them into capital. I was running out of capital and needed to raise some. We were growing so fast at that time, and we controlled the market in Williamson County. I considered selling off my stock or merging—and if I sold my stock, I would get less than if I merged.” In 1997, Franklin National was rated the number one most profitable community bank in America out of over 10,000 community banks. From 1997 through 2002, Franklin National’s average rating stayed at number one. As a profitable, growing bank, many larger institutions were interested in Franklin National, and Inman and the bank’s board decided to merge with Fifth Third. “Fifth Third is one of the strongest banks in America,” Inman says. “They had already opened a small bank in Franklin, so a major entrance for Fifth Third into Tennessee was through Franklin National.”

So what defines a community bank? And can a big bank that is not headquartered in your home state still be a community bank? On one issue, bankers agree: It’s not about assets or costs. It’s about authority and decision making. Although BB&T is not a community bank, per se, “we do try and drive decisions that impact the client as a community bank would—but what we have behind us is the big bank support in the operations arena,” Louis Moore says. “And being a community bank may be more about a state of mind than the size of the balance sheet,” Doug Cruickshanks with FirstBank says. Sammy Stuard agrees. “Community banking is not so much about assets in dollars as it is about attitude,” he says.

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