Relatively Difficult: Running a Family-Owned Bank
Kuehner-Hebert, Katie, American Banker
Family-owned banks can be heartbreakers. Consider this tale, reported by a consultant.
The chairwoman lay on her deathbed. Her family had run the bank for generations. But she had fired its latest family-member president - her son - twice. She thought he was not up to the job.
As she lay dying, he begged her to reinstate him. She refused.
The nonfamily president kept the job.
Family ties were also strained recently at the Humphrey family's Financial Institutions Inc. in Warsaw, N.Y.
A family member was in line for a promotion at the $2 billion-asset company, which evolved from a bank the Humphreys have owned since 1861. But the board, mostly relatives, decided that this candidate was not working out, said Peter Humphrey, the chairman, president, and chief executive officer of the multibank company.
A nonrelative got the job.
"In some family companies you rise through the ranks based on your last name versus how well you perform," Mr. Humphrey said. "But those companies can have problems when senior management is not capable."
Despite personal complications, though, most of the hundreds of family-run U.S. banks thrive for generations, said Mark Schmidt, the associate director of the Federal Deposit Insurance Corp.'s division of supervision.
"These banks do just as well if not better than other banks," Mr. Schmidt said. "It's the family's own money at stake - sometimes their entire fortune - and these families constantly keep that in mind."
It also helps, said California investment banker Edward Carpenter, that these banks tend to be in small or midsize towns where the family is prominent.
"Because of those long-standing relationships between families who control most of the wealth in those areas, it's often very difficult for competitor banks to take away significant market share from these family banks," said Mr. Carpenter, a principal at Carpenter & Co. in Irvine.
Other reasons family banks tend to make money: Many have owned their buildings outright for generations, so their operating costs are just a fraction of other banks', Mr. Carpenter said.
Also, they operate very conservatively, partly because as privately held companies they cannot raise capital on Wall Street, said Robert Gallivan, a principal at Clark/Bardes Consulting in San Diego.
Nevertheless, families that run banks must deal with issues that other bankers are simply spared.
Firstly, as a variant of "Junior can't hack it," there is the problem of Junior not really wanting to. Sometimes "a bank ends up being managed by family members who may not be that interested in running a bank," Mr. Carpenter said. "They took the job because it was expected of them, or it was one of the only prestigious jobs that they could find, or they took the job to protect their equity."
The Williams family, which owns HomeStreet Bank in Seattle, has a program to help young Williamses learn what running a bank or just working for one entails. HomeStreet holds orientations every other year for those of high school and college age. Young people scattered along the West Coast gather in Seattle to learn about operations from each department head. They are also invited to periodic "family council" bank meetings.
Mixing family and nonfamily bankers can also be tricky. Just getting the latter to deal honestly with family members is a challenge, said Richard A. Soukup, a partner in the Chicago office of the Grant Thornton accounting and consulting firm, which concentrates on middle- market companies.
Mr. Humphrey said it is important to have the same standards for both. If a family member is allowed to slide in to work around 11:30 in the morning after a nonbusiness round of golf with his buddies, people putting in longer hours and producing more may take exception.
There should also be a single standard for compensation, said Robert Rogowski, a principal at Columbia Financial Advisors Inc. in Seattle. "Maybe some banks don't want to make it fair market value, or maybe they don't care," he said, but the failure to do so "creates a very touchy issue for a lot of the other folks in the bank."
One way to finesse the issue is an employee stock ownership plan. The Williamses established one soon after founding Centennial Bank, now HomeStreet, in 1921. Now the family owns about 65% of the $1.5 billion- asset thrift's stock, current employees about 18%, and former employees most of the rest.
"It is a balancing act that a public company doesn't have to think about," said Kathryn Williams, the bank's senior vice president for community relations. Luckily, everyone seems to agree about the thrift's goals, particularly its remaining independent, said CEO Bruce Williams, her brother. "The combination of family and employee ownership helps us attract great employees, because we offer a sense of stability. Our employees who have been laid off at other banks that have been acquired by bigger banks really appreciate this."
Of course, family banks are also subject to the ordinary ills of American society - divorce (the former son-in-law who still works at his ex-wife's family's bank), drugs, and alcohol.
And death can take a corporate as well as a family toll. Peter Humphrey said it had been doubly tough to deal with the personal and professional losses in two deaths last year. His brother, Wolcott "Jay" Humphrey 3d, died in September while serving as president and CEO of a company unit, Pavilion State Bank. His uncle Donald G. Humphrey, a Financial Institutions board member, died of a heart attack last March.
With all those problems possible, some banking families think it best for their members not to work at the bank at all.
E.M. Downer 3d, the chairman of $1.8 billion-asset Mechanics Bank in Richmond, Calif., said he has discouraged his three sons from working there.
In the 1970s, his father, then the chairman, would shoot down practically every suggestion he made, Mr. Downer said. "That's why I told them that they'd be better off developing their career paths outside of the organization - just from the standpoint of developing their self-esteem," he said.
Mr. Gallivan, the California consultant, agreed that it can be tough for parents and children to work together. "The kids end up having to prove themselves by doing twice as much work to earn the respect."
One solution, adopted by the Williamses and many other banking families, is to encourage young relatives to work elsewhere first. This brings perspective and gives them "a chance to prove to themselves that they can be a contributing employee wherever they get a job," Kathryn Williams said.
Raymond E. Glasnapp, the late chairman of his family's Union Bank in Kansas City, Mo., said no Glasnapp is allowed to work for the $460 million-asset bank - or even have an office there. That's also the rule at the family's $440 million-asset First National Bank of Olathe, Kan.
"I leave it up to the professionals, who I believe can handle things better," said Mr. Glasnapp, who died last month.
But HomeStreet's Mr. Williams said his relatives think it better that some of them become professional bankers.
"We like to have at least a couple of family members who are closely involved," he said. "We serve as a liaison for other family members on the board who aren't bankers, as well as a liaison between other senior officers who may have misconceptions about the family."
Nevertheless, HomeStreet recently made an outsider its president. She is Joan Enticknap, a former Bank of America commercial banking executive, who was also named chief operating officer. The idea was to bring additional commercial expertise to the thrift, Mr. Williams said. Moreover, most of HomeStreet's directors are not family members.
That's a smart strategy, said Mr. Carpenter, the California investment banker. "If you don't have outsiders with fresh views, the bank can become stagnant," he said. "It gets the reputation of being an old-fashioned bank run the same way grandpa ran it."
Over all, the most important challenge for family banks may be balancing tradition with new ideas, Mr. Carpenter said.
"Family banks need to constantly reinvent themselves and bring to the marketplace the same spirit and innovation that caused them to be successful when bank was formed by their ancestors," he said.
Illinois banker Eugene T. Carter says the key to making it all work is keeping the lines of communication - among family members and between them and other bank employees - open.
Mr. Carter was the president and his son Thomas E. a senior lending officer at First State Bank and Trust of Park Ridge in 1994, when First of America Bank Corp. of Kalamazoo, Mich., bought it. (National City Corp. of Cleveland bought First of America three years later.)
Wasting no time, the Carters founded Park Ridge Community Bank in 1995. The older Carter is the chairman and CEO of the $151 million- asset bank; his son is its president.
"There is only one chief, though - me," Eugene Carter said. "But quite frankly, if he's in strong disagreement about something, I prefer to go in his direction - unless I know there's something really wrong about it."
After all, Mr. Carter said, "he's going to end up with the bank."
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Publication information: Article title: Relatively Difficult: Running a Family-Owned Bank. Contributors: Kuehner-Hebert, Katie - Author. Magazine title: American Banker. Publication date: March 8, 2002. Page number: Not available. © 2009 SourceMedia, Inc. COPYRIGHT 2002 Gale Group.
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