BANKING
     

Artwork by Andre Lucero

Some in the industry, though, think the conservative suits at First Virginia are marching into no man's land. According to conventional wisdom, the industry is morphing into a barbell shape, with megabanks at one end and community banks at the other. Banks in the middle are considered too large to have the intimacy of community banks and too small to make the investments that big banks can in technology, people and products, says Benjamin P. Jenkins III, president of the mid-Atlantic region for First Union.

Some think banks like First Virginia or Winchester-based F&M National -- another midsize bank holding company, with assets of close to $3 billion -- will eventually be forced to sell out to banking giants looking to expand their turf. Bowman doesn't believe that will happen, but there's no denying the competitive advantages that the big banks wield.

They can afford vast networks of automated teller machines and the technology for Internet banking, along with a wider range of expertise in areas such as stocks, bonds and insurance.

Meanwhile, the rise of the very large banks has boosted the prospects of many community banks, which are picking up customers who don't like dealing with an ATM.

At the same time, a mini-trend of sorts is evolving as community banks join forces with their neighbors to cut costs for back-office operations. Nat Jones, president of Community Bank in Petersburg, predicts that from those alliances, a new midsize bank could be born. "You're going to maybe see a two- or three-bank holding company join with another holding company," he says. "Some of these mergers of equals are going to move into that middle part of the barbell."

* * *

First Virginia's response to the changing marketplace, says Bowman, is to hunker down in the markets where it already has a stake. Last year, it bought five branches on Maryland's Eastern Shore from the Bank of Maryland. That deal plus some earlier acquisitions increased the number of First Virginia branches on the Eastern Shore from 12 to 23 and moved it to second in market share.

In recent years, the company has shrunk slightly from 15 to 12 banking companies scattered across Virginia, Maryland and eastern Tennessee. The idea is to merge banks in contiguous markets to create banks with bigger market share and better management. But Bowman says the bank will keep the super-community structure that puts decision-making in the hands of local managers.

Virginia's other midsize bank, $2.9 billion F&M National, has nine banking affiliates in Virginia, Maryland and West Virginia. It recently acquired Manassas-based Security Bank, increasing its Northern Virginia presence to 30 branches and adding another $60 million in assets.

Alfred B. Whitt, F&M National's president and CFO, says his bank will have to grow to fight off competition from the big boys. It's going to pass the $3 billion mark in the next month or so, he says. "We talk about $5 billion internally from time to time, but that's not intended to be a stopping point. I think, as a matter of fact, you're probably going to have to continue to grow and expand to maintain the efficiencies and operations that you really need."

Whitt predicts the next decade will cut the number of banks nationwide by half. "There'll be room for banks of all sizes, but I don't think there'll be room for 9,600 banks, which is what we currently have." For now, F&M officials insist that the bank will remain independent. That's what the bank board has said it wants, "so we continue to operate as if we're going to remain an independent bank," Whitt says. He won't say, however, if the bank had received offers from bigger banks. "It might turn out [that] nobody wants us, anyway."

* * *

David West, a bank stock analyst with Richmond-based Davenport & Co., says F&M and First Virginia "are both kind of wild cards out there. They both to date have maintained an independent course, but if they were to change their minds I think there would be several interested parties." BB&T, in particular, would be interested in F&M, West says. He adds that the multibank holding company structure that F&M uses probably includes some operating inefficiencies that a bigger bank could eliminate.

Bowman of First Virginia says his bank isn't looking to be bought. "Our desire is to remain independent, and as long as we provide a superior shareholder value, we can do that."

That's the trick. "I think it's going to get tougher and tougher," West says. He thinks banks like First Virginia, near the $10 billion range, are "over that line where your competition is the larger banks."

While the big banks tout their ability to be all things to all people, Bowman says there's no proof people want it that way. They want specialists, he says. "I think that's where the super-community banks have an advantage over the large banks. In effect, we are specializing in the needs of the community in which we are located."

The consolidation wave not only pressured midsize banks from above, it helped spur the creation of new community banks. Eight opened in Virginia last year, and they're aggressively going after customers. The midsize banks "are sort of in limbo," says Ben Watson, president of Benchmark Community Bank in Kenbridge. "What is their market really going to be?"

Mike Howell, an analyst with SNL Securities in Charlottesville, thinks midsize banks face two choices: Grow bigger or sell out. That's the unwritten strategy of many midsize banks, he says. But that option could dry up once the giant banks get so large that they don't need another midsize bank, he says. "Some of these might stay independent by default."

* * *

Jenkins of First Union has heard the common complaint about the megabanks -- that they treat customers like they're just another account number. What First Union plans to offer in exchange for that first-name familiarity is the chance to get a slew of financial services from one company wherever and whenever the mood strikes -- by telephone, computer or ATM. "We believe the future is all about choice, so we want to offer choices for customers about how they want to bank," he says.

Big banks are rushing to expand their assets and services, and First Union has been as aggressive as any. Jenkins, however, understands that being big doesn't guarantee success. "It is a very competitive environment today, and it's going to be more competitive in the future. We've never had change as fast as it is occurring today," he says. "You've got very big banks, brokerage firms, investment firms, credit-card companies. Everybody has really moved to the same points. ... I think you've got to be good at what you do."

The $37 billion BB&T Corp. of Winston-Salem pushes its community-bank approach but still enjoys the advantages of size. In March it acquired the Richmond-based brokerage firm of Scott & Stringfellow Financial Inc., and its recent acquisition of Martinsville-based MainStreet Financial Corp. nearly doubled its Virginia branches to 109. But the company wants to maintain that familiar community-bank feel, says Rip Howard, president of BB&T of Virginia. "Because that's what you hear from the public, 'As you become bigger, I become a number.' We do not want our clients to become numbers."

West, the bank stock analyst at Davenport & Co., says BB&T's formula is working well. "They've produced really excellent results and have very strong returns," he says. And they're growing, particularly in the metropolitan Washington, D.C., market. "Clearly BB&T is not finished in this state. They continue to look for small and medium-sized institutions. I think they're trying to position themselves as the acquirer of choice because of the way they run themselves."

* * *

William Young and Ed Barham may have eyed each other as competitors before, but today they think they've got more to share than to fight over.

Young's Fredericksburg-based Virginia Heartland Bank and Barham's Second Bank & Trust of Culpeper last year formed a new holding company with combined assets of $330 million. The banks keep separate boards of directors, and decisions are still made at the local bank level. But they save by sharing functions like data processing, marketing and employee benefits, Barham says. They also get to share the cost of technology -- such as banking by PC or telephone. "By coming together we were able to gain a little more clout without giving up independence," Barham says.

That safety-in-numbers approach is the latest wave among community banks. It's how they plan to compete with some of the offerings of the Wachovias and First Unions of the industry. Across the state, banks are forming holding companies, says Jones of the Community Bank in Petersburg. His bank recently joined two others to share back-office functions. "We want the part of the bank that the customer sees not to change at all. But in the part that the customer never sees, we need to get some efficiencies of scale."

The fallout from big bank takeovers kicked free so many new customers it made it easier for small banks to view each others as colleagues rather than competitors. Young and Barham say both banks had double-digit growth in deposits and loans last year.

West says some of the smaller bank mergers were well-done and increased efficiency, but some didn't. "They just said, 'Give us a holding company,' and then go on and operate like they always did."

Jones says consolidation may help small banks now, but it also means the safety net is gone. "If they ever got into problems, the little bank could always say, 'I've had enough,' and call the big bank and they would come in with a sweet offer," he says. "That's not there anymore. NationsBank, Wachovia, First Union, they don't care anything about a $300 [million] to $500 million bank."

What's more, there are new community banks joining the pool. Last year eight new banks opened in Virginia and 15 others sought charters. West of Davenport & Co. thinks it was too much activity. "Some of that was just this frenzy that we had. It was just a great time to start a bank."

* * *

There's another reason that consolidation could begin to slow down. In late April the Norwalk, Conn.-based Financial Accounting Standards Board -- the independent rule-maker for accountants -- proposed eliminating the "pooling of interests" strategy that companies have used to lessen a merger's impact on earnings. The change would bring the United States in line with international accounting practices, says Howell of SNL Securities.

"With a pooling of interest transaction, it's basically as if they've always been one company. They don't have to value who is really the dying company." Companies instead would have to identify which company is being bought and put a value on its assets. If approved, the change will affect mergers begun after the board issues its final guidelines in late 2000.

Edmund L. Jenkins, chairman of the Financial Accounting Standards Board, said in a statement that the board made the move because the pooling method hurt investors' ability to make sound decisions about combined companies. The change will give them a better picture of the initial cost of a transaction and its long-term performance, he said.

SNL banking analyst James Record says in the short term the change could spark a race by banks that are thinking about mergers and want to get in under the wire. In the long-term, however, he doesn't expect much change. He cites several reasons, including the possibility that investors may be worried that the prices are too high. After the March merger announcement by Fleet Financial Group and BankBoston, which made sense to many analysts, Fleet stock dropped as investors expressed their displeasure, he says. And bank stocks aren't doing well, which limits funds available for acquisitions. Plus, bank managers don't have time to worry about mergers -- they're focused on getting through the Y2K transition with minimum headaches.

At least for now, that takes some pressure off the midsize banks, says Record, who never bought into the barbell theory, anyway. "There's been a lot of talk about them disappearing for a long time, and they haven't," he says. "I think they can succeed."

© JUNE 1999, Media General Business Publications Inc.,
publisher of Virginia Business Magazine