Banking on family ownership
Banks that are family-held face the same issues as other family-owned businesses do, but they also must operate under tight regulatory constraints.
Like so many other U.S. industries, banks have turned to consolidation to remain competitive. Many family-owned banks have been swallowed up amid the “merger mania” that has swept the banking industry over the past decade. But executives at family banks that have withstood various pressures—often internal as well as external—say their institutions’ personalized service and ability to relate to family business clients in their communities have helped them differentiate themselves from their larger rivals.
Richard J. Green, 56, CEO of Firstrust Bank in Philadelphia, says he has no intention of selling. He represents the third generation of his family to lead the bank, which has assets of more than $2.2 billion and offers retail and commercial services in 25 branch offices in eastern Pennsylvania and southern New Jersey.
Firstrust’s origins are representative of the hard work and strong relationships that are needed to build a family bank. Samuel A. Green, Richard’s grandfather, was a teenager when he emigrated from Hungary. Samuel was a go-getter who taught himself how to read English in the city library and sold insurance, real estate, shoes—whatever it took — to make a living. Samuel was also a member of a building and loan association, a precursor to savings and loans, and eventually rose to bank director. But he wanted to start his own bank, which required $7,500 in customer deposits at the height of the Depression. Relying on his reputation for trustworthiness, Samuel offered to match whatever friends and colleagues would invest. He raised the cash and in 1934 realized his dream when he founded Pennsylvania’s first federally chartered savings and loan.
Richard Green is philosophical about the kinds of pressures that family-owned banks have confronted in the last few years. “There’s the challenge of being a family-owned business of any kind, and then there are the challenges facing the banking industry,” he says. To be successful, he suggests, “You need the mindset that this is something you want to do, and you need to be willing to invest in people, infrastructure and assets to provide a long-term future for the business. But it has to start with the willingness to lead and to adapt to changes in the environment to keep your business model vital.”
In 1987, for example, Firstrust evolved from a savings and loan to a commercial bank in an effort to better serve customers in the region, Green says. “We strove to keep all that was good and to layer in the new businesses that would continue to keep us relevant in the marketplace.”
The change in Firstrust’s business model, Green explains, required “literally dozens” of adjustments. The bank invested in information technology and new processes, lured away commercial bankers from competitors in the region, and shifted its assets to a mix of business loans, commercial real estate, construction loans and consumer loans.
Timothy Abell, 47, the first non-family member to serve as president of Firstrust, says there are significant advantages to being privately held. “We don’t have a broad investor base that may have varying interests or time horizons; we have what we like to think of as ‘patient’ investors,” Abell says. Executives at public banks, he explains, are pressured to sell when times are good because investors believe the maximum value can be obtained. “On the other hand, if you’re not doing well, there’s some pressure to sell because people want the sale premiums. Investors may not think you can earn your way to the same returns.”
Abell notes that he and Green don’t have to spend their time fielding questions from institutional investors who have opinions about what the bank should be doing to maximize short-term earnings and drive the stock price up, nor do they have to weather proxy battles for a directorship. “We can stay focused on our customers, employees and communities and what we think is best long-term,” he says.
Abell, who was hired as COO in 2004, was promoted to president last year. His ascension points up one of the main issues family-owned banks must address—their succession plan. Richard Green’s three children are only in their teens. If Green wants to retire in the next ten years or so, there will be a gap in leadership until they mature and can take over the business, should their desire and talent permit. Abell, who has more than 20 years of banking experience, is helping to bridge that gap while at the same time bringing a fresh perspective and strategic skills to Firstrust.
Capital: A primary concern
The need for capital is a concern for any bank but has special considerations for family-owned banks. “Regulators mandate how much capital we need to have,” says Bob Vogel, 56, CEO of Market Bancorporation and New Market Bank in New Market, Minn. “Unlike other businesses, banks need to keep a certain amount in retained earnings as a percentage of assets.” Non-family-owned banks can sell stock if they need to raise capital to service debt, for example, but that’s not an option for bank owners who want to keep the stock in the family. Another issue for family bank owners, Vogel adds, is whether to pay dividends to family members or leave assets in the bank so it can grow.
When he bought New Market from his father in the 1970s, it was small, with assets of less than $4 million. (In 2006, by contrast, the bank, which has four branches, had revenue of $6 million and total assets of $80 million.) Vogel’s three siblings weren’t interested in joining him and didn’t mind that their father transferred the bank to him. But that would likely not happen in most banks today, he says, because families are usually dealing with a larger asset and the siblings pursuing other interests would likely want a share.
So many families wrestle with these concerns that Vogel and Glenn Ayres, a family business adviser with Doud Hausner & Associates, based in Glendale, Calif., joined with a third partner, executive David Watrud, to start the Family Held Bank Institute, an educational program integrating the needs of a family-held business into the community bank environment.
A disturbing percentage of family-owned banks are simply not positioned to keep their asset in the family, laments Vogel, whose two daughters work in the New Market bank. If a banking family starts distributing capital to siblings who want to cash out, Vogel explains, they could be in danger of defaulting on debt payments. Another problem, Vogel says, is that a bank can outgrow the managerial ability in the family. “It’s good to grow,” he says, “but you have to know where you’re going so that you have the resources in place when you get there.”
The pressure to sell
A succession plan is “the sword over the leader’s head,” asserts family business adviser Glenn Ayers. “Banks traditionally have been entrepreneurial-based, with one general manager passing the baton to another,” Ayres says. “As they’ve gotten bigger, however, especially in the last 50 years, there’s been a natural pressure to broaden the shareholder base to include all of their children. Usually they’ve done quite well and have a great deal of pride in what they’ve accomplished.” But the paradigm has changed, Ayres notes. “There’s no way the children are going to be able to buy their parents out in every case, as in past generations. It’s too much money.”
The temptation to sell a family-owned bank for a substantial profit may be attractive, Ayres adds, but it also means the loss of the franchise. In his experience, few bank leaders consider this alternative until an offer is on the table. He advises bank owners to be clear with members of the next generation about potential plans so children who were expecting to work in the bank are not surprised by a sudden announcement of a sale.
Paula Fasseas, who heads the Metrobankgroup holding company in Chicago with her husband, Peter, says that while she and her husband are highly involved in the banking enterprise they have built, she is realistic about the possibility that her children—or their children—may eventually want to sell. Their daughter, Alexis, 27, works in operations at the bank while studying in the J.D./MBA program at Northwestern University’s Kellogg School of Management. Their son, Drew, 26, is a Metrobankgroup loan officer.
“When we bought our first bank in 1978, Illinois regulations stipulated that banks could only have one branch. There were hundreds of small community banks in the state,” Paula Fasseas recalls. “We second-mortgaged our condo, bought a 25% stake and sold stock to anyone we could find.” Every time the state legislature would allow it, the couple would scout locations and open another branch to serve a specific community.
Today Metrobankgroup consists of 11 independent banks with 106 branches. “As we added more banks to our group, we kept them separate,” Fasseas explains. “We wanted to stay true to our mission and not become a big bank. Each bank has a separate president with separate boards of directors, and we hire employees from each community. We’ve got our market share, we’re very service-oriented and we’ve got a good reputation.” In 2007 Metrobankgroup had $3.3 billion in assets.
The cost of compliance
Metrobankgroup’s structure helps to avoid some pressure, Fasseas says. Data processing, marketing, finance, human resources, information technology and training are centralized and the charges are spread over the 11 banks, which keeps costs down.
“We have the advantage of the big banks’ resources and centralization, but we still have the separate banking units,” Fasseas adds. “Even if we have to take a bump in the road, we’re going to be here long-term.”
For small family-owned banks, regulatory compliance costs are a big issue, says Vogel. “The smaller you are, the more difficult the burden,” he notes. A $500 million bank with 100 employees might be able to afford an employee who works exclusively on compliance issues, he says, but an $80 million bank with 25 employees can’t, nor can it recover the cost. For smaller banks, report filing and other compliance activities must be chalked up to the cost of doing business.
John Johnson, a membership recruitment consultant for the Independent Community Bankers of Minnesota, an association dedicated to keeping community banks competitive, says pressure to sell often comes from the younger generation.
Johnson was the majority owner and CEO of Owatonna State Bank in Minnesota for almost 20 years and also worked for the Resolution Trust Corporation, a government-owned asset management company that liquidated the assets of insolvent banks during the savings and loan collapse in the 1980s.
He recalls one family-owned bank in which one sibling did all the work after the parents retired, while the other did little but approve bad loans. The first sibling pushed hard for the bank to be sold and succeeded. In another family-owned bank, Johnson says, two brothers who didn’t work in the business resented the third sibling, who managed the bank. Eventually, the two inactive shareholders forced a sale. Instead of selling, Johnson notes, the siblings in the latter case could have arranged a buyout agreement. By pledging the bank’s stock as collateral, the sibling managing the bank could have borrowed funds from another bank to buy the other siblings out.
It’s no surprise that if a family has held on to a bank for years, selling can be quite profitable, Johnson says. “By the time the family has gotten to the third or fourth generation, depending on state regulations, there can be an insurance agency and a real estate firm as well as the bank,” he adds. Sometimes an insurance agency can be even more profitable than the bank, he notes.
“I tell bankers that you can sell a bank almost any day you want, but you only get to do it once,” Johnson says. That message, he notes, gets their attention.
Family-owned banks can relate better than other banks to their family-owned business clients, Vogel says. “We understand their limited resources as well as the family dynamics,” he says. “It gets down to balancing the merit-based culture of a business with the emotion-based culture of a family.”
Family-owned banks can help their clients balance the two by, for example, offering advice on what they must do to be creditworthy and what return the business should be making. “But we can also understand there’s an emotional culture behind the business that doesn’t exist in a non-family business,” Vogel says.
Patricia Olsen is a New Jersey writer whose work has appeared in the New York Times, On Wall Street, USA Weekend, Hemispheres and other publications.