Relatively Difficult: Running a Family-Owned Bank

By Kuehner-Hebert, Katie | American Banker, March 8, 2002 | Go to article overview

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. …

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