Hard to find
Independent trust companies never took off in Virginia

by Jack Milligan
for Virginia Business
December 2006

Thirteen years after Virginia legalized their formation, only one independent trust company operates in the state. While more people are using trusts in estate planning, primarily as a way to trim estate taxes, Virginia doesn't make it easy for new companies to gain a foothold here.

Strict capitalization requirements - as much as $5 million for trust start-ups - discourage investors, says Douglas A. Nunn, chief executive officer at Trust Company of Virginia in Richmond. The policy has the effect of reducing competition, he adds, and hurting consumers.

Yet, the story is pretty much the same across the country. There's a scarcity of independent trust institutions largely because of capital levels required by state regulators. "By virtue of their independence, they're not affiliated with depository institutions, and that's why we're more concerned about the level of capital," says E. Joseph Face Jr., commissioner of Virginia's Bureau of Financial Institutions. "Capital provides protection. It's that cushion in the event of problems or losses."

With no federal banking regulatory oversight, state agencies are the sole regulators, explains Face, this year's chairman of the Conference of State Bank Supervisors. Therefore, a higher level of scrutiny is justified. "The independent trust companies might not like that, but the consumer would like that. Our charge is to protect the public interest," he says.

When the General Assembly amended the law in 1993, Virginia was one of a few states that still did not allow independent trust companies. The next year, two independents were quickly chartered by competing investor groups - Trust Company of Virginia and Tredegar Trust Co., also headquartered in Richmond.

A few other independents formed in the 1990s, including Old Dominion Trust in Norfolk - which later was sold to Chicago-based AMG National Trust Bank but still does business in the state - and Mentor Trust Co., which through a series of acquisitions eventually became part of Wachovia Corp. in Charlotte.

Tredegar was later acquired by Middleburg Financial Corp. and now does business as Middleburg Trust Co., although it is still headquartered in Richmond. But there hasn't been a new trust company chartered in Virginia in several years despite a healthy economy and the formation of 13 community banks since 2001. Trust Company of Virginia is the only remaining independent not affiliated with a larger organization.

In the past, only the rich set up a trust. Today, though, more people are using trusts to manage assets for a variety of reasons: to benefit children, to provide income to a charity, to transfer assets between spouses or to pass on wealth to succeeding generations. Basically, a trust is a financial mechanism in which someone transfers assets to a trustee to be managed for the benefit of a third party.

Although an individual can serve as a trustee, many people opt for an "institutional trustee" such as a bank or trust company, says Gary D. Altman, founder of Altman & Associates, a Rockville, Md.-based estate planning law firm that does business in Virginia. Choosing an institutional trustee can help minimize conflicts between family members and also provide continuity when the trust is going to last for an extended period. "Let's say you're setting up a trust for a grandchild," says Altman. "It's going to last for 80 years. Who's going to manage it?"

The founders of Trust Company of Virginia included Nunn, Richard D. Gates, an executive vice president and the firm's CFO, and the late David E. Buffington. Working with sympathetic lawmakers in Richmond and interested parties outside of government, Buffington was instrumental in getting enabling legislation passed in 1993. "The environment was changing and this had worked well in other states," says Nunn.

Today the Trust Company of Virginia has $840 million trust assets under administration and offers a range of personal trust and investment management services through a network of five offices around the state. The privately held company does not release quarterly or yearly financial data, but Nunn says its revenue grew 17 percent last year. "We've had very steady double-digit revenue growth basically from the very beginning," he says. The company's clients include individuals, endowments and foundations.

His company's competitors are primarily the trust operations of commercial banks. From Nunn's perspective, the merger-driven consolidation of Virginia's banking sector - bringing in the likes of Bank of America, Wachovia, Atlanta-based SunTrust Banks Inc. and BB&T Corp. in Winston-Salem, N.C. - brought bureaucracy to a business where personal relationships are extremely important. With size, says Nunn, often comes higher personnel turnover and an inflexible, one-size-fits-all approach to the customer. "The structures in these large organizations aren't the most advantageous for the trust business," he says. "Clients are looking for stability of purpose and personnel."

In contrast, Trust Company of Virginia is smaller and more highly specialized. The firm's employees own a significant stake of the company, through an Employee Stock Ownership Plan. Nunn says the buy-in creates a greater sense of commitment to growth. "Employees own a lot of this company," he notes. "They have a high interest in retaining the client and offering a high level of service."

Tredegar's history
In the beginning, an important part of Tredegar Trust Co.'s strategy was to develop business alliances with community banks throughout Virginia that lacked trust powers - and weren't interested in applying for them - but also didn't want to take the risk of referring their customers to the trust department of one of their large competitors. From this strategy Tredegar developed a close relationship with the former Independent Community Bancshares.

John Mason L. Antrim Jr., president and CEO at Middleburg Trust (as the company is now known) says the two organizations finally decided a more permanent relationship made sense. "The philosophy of both groups in the way they take care of the customer and the whole service component fit like a hand in a glove," says Antrim. (After the merger, Independent Community Bancshares changed its name to Middleburg Financial Corp. and Tredegar adopted the "Middleburg" name as well.)

Although Middleburg Trust is now a subsidiary of a bank holding company, Antrim says his business is still "a completely independent operation." It works collaboratively with Middleburg Bank - also a subsidiary of the holding company - in the same way that it has for years. With $650 million trust assets under administration, Middleburg provides a broad array of trust and investment management services.

When it comes to selecting an institutional trustee, Altman prefers a smaller trust organization, because the service tends to be more personal, he says. At the trust operations of many large banks, he says, "It's a numbers game."

Not surprisingly, large banks see the situation differently. John Hamner, an executive vice president in SunTrust's private wealth management, says his organization uses a decentralized management structure that tries to keep decision making authority as localized as possible. Hamner, who works in Richmond, points out that a large institution like SunTrust can provide clients with more financial products and services than smaller banks or independent trust companies. "What we are attempting to do is have people come to one department and have all their needs met," he says.

Another benefit of a large institution: consumers get a higher level of security than with a small bank or trust company. "Suppose you're someone with $25 million," says Hamner. "Do you want to risk your assets with [an organization] that has less capital than you do?" If a company the size of SunTrust were to make a mistake that resulted in a loss for the client, "We could write a check for $25 million in a minute."

Unlike commercial banks, trust companies don't use insured deposits to make potentially risky loans. Therefore, they shouldn't be required to carry as much capital on their balance sheets, says Nunn. "I would argue that this is not a capital intensive business," he says.

That argument hasn't proved to be persuasive with the BFI's Face. The bureau requires the Trust Company of Virginia to spend $35,000 a year to purchase a $3 million surety bond - payable to the Commonwealth of Virginia - to cover the cost of a bailout should the company ever fail.

Face won't comment directly on the capital requirements for new trust companies. According to Tom Blank, general counsel for the Association of Independent Trust Companies Inc. in Chicago, all states have fairly high capitalization requirements for trust companies. Regardless of whether it's a community bank or a trust company, Face says all startups are examined carefully. "They must carry capital commensurate with the risk," he says.

"Whether it's a new bank or trust company, every one is different. They have different markets, different directors and different managers. We look at their entire business plan and come to a conclusion as to [how much capital] it will take to succeed."