Thriving In a World Of Giants

Editor’s Note: Guest contributor Scott McClymonds, founder of Fayetteville-based strategic consulting firm CEO Velocity, recently interviewed Gary Head, chairman and CEO of Fayetteville-based Signature Bank of Arkansas, and his chief lending officer, Danny Lewis, about corporate strategy and their management styles. Signature Bank opened as a legal bank in May 2005.

The following is a partial transcript of their Q&A. The complete interview and further analysis can be found at this link.

 

Scott McClymonds: “You started this bank from scratch. Tell me how you started it, but more importantly, why? What motivated you and what did you want to accomplish?”

Gary Head: “We started because we thought we could be a good competitor, and obviously people who gave $60 million in capital thought so, too. Our first meeting to raise money was in August of 2004. I was optimistic we’d raise $15 million and we had $45 million before the night was over. We later raised [the rest] through two more rounds.

“But the point was our initial offering was the largest capital raise in Arkansas at the time. It was humbling because so many people say they support you, but when they have to pull their checkbook out, that speech about loving you and not loving you changes. It was pretty amazing.”

Danny Lewis: “It was a whole different day and time. We went from never having to worry about capital [when we were at Arvest], and all of a sudden we needed capital.”

SM: “What kind of difference did you think you could make? It’s not like there was a lack of banks in Northwest Arkansas.”

GH: “We had better people. The people who started this bank were some of the best bankers I’d ever known. I think people bank with people … titles are sort of secondary. If you had a relationship with Danny Lewis for 25 years, or Knight Weis or Marilyn Hendricks, you wanted to stay with them. We had a whole bank full of those people. Relationship management is probably the best way to say it.”

DL: “Gary tells customers all the time, ‘You have a problem on the weekend, call me.’”

GH: “That’s different than the large competitors. My phone number has been in the book for 30 years in Fayetteville, Arkansas.”

SM: “Have your goals changed or evolved along the way?”

GH: “Our goals have evolved, not changed. [We are] bringing a higher level of personal service to our client base, becoming more approachable, creating easier communication. It’s what I truly believe community banks were supposed to be in the first place.”

SM: “How have you been able to grow to $500 million with only five branches? Many banks the same asset size have much more overhead in their branch network. How have you minimized your overhead while still growing?”

GH: “We grew to $700 million then sold $200 million to Jon Harrell who was president of our bank in Rogers when he opened his own bank. We’re still very close to him. They’re large shareholders of our bank. We did that because we have clients, lots of customers who bought stock in the bank and chose to bank with us instead of where they were [banking] before. 

“We don’t have lots of branches because that banking model has been done very well, particularly well by the guy I used to work for. Chasing him wouldn’t be the smartest thing I could do. I could never win that. I can’t compete on that level.

“We have four markets and try to have someone at each location who can answer your question ‘yes’ or ‘no.’ Their loan limits are fairly high, and they can grant credit inside their buildings. We don’t have any branches where we don’t have lenders.” 

SM: “Let’s talk a little about that model versus the traditional one. Your asset size versus your number of branches indicates you’re doing something very different.”

GH: “Our average assets per employee are much larger than most banks, and we don’t try to compete with consumer loans.”

DL: “Four-hundred local shareholders were our first customers. That’s how it really kicked off.”

GH: “We had the lion’s share of those guys move all relationships lock, stock, and barrel, and that’s powerful.”

DL: “We encouraged them to send us business if they wanted to see their stock grow.”

GH: “There’s a big difference in telling someone you love them and selling them stock. Owning part of it is a little different than if you’re just a customer. Your deposits and interest earn you extra money.

“We sped off so quickly because we had so many shareholders who were so incredibly helpful. Those people as stockholders are generally very good sources of referrals.

“Then you have to be good to keep them.”

SM: “That was the initial thrust. Now, how are you growing in this model?”

GH: “We’ve been at $500 million for four years, after having to work out of a regulatory order [following the Great Recession].

“We had a lot of wealthy clients when we began, and our bank was the last to get in trouble because our guys had money. Even very wealthy people lost a lot of things in the recent horrible economic times. The tsunami covered them as well.

“We were the last ones to have issues on loans. While it is very difficult to spend 70 percent of your time on bad loans and still grow, we were very fortunate to be able to hold our own. We had so many loans to eat that staying at $500 million was a pretty good feat. We had a pretty good clip of new credits, and we’ve maintained that. 

“Strategically, we try to make sure we have exceptionally good relationship managers that feel confident that they can go out and represent this bank when they meet with clients, and that’s different.

“If you are at a car dealership and they have to keep running back to get your question answered, you just want to talk to the person in the back. We try to empower our loan officers so that if you’re visiting with them about a loan you can have every confidence that person can say ‘yes’ or ‘no’ — maybe not right then and there, if it is a million dollars or so — but young entrepreneurs trying to start a business want to deal with someone who asks and understands what they’re doing and can give them options.

“It’s very impersonal if you’re trying to use technology in the lending business, because it’s pass or fail. There’s no advice on a computer. I teach an entrepreneurial class for Mark Zweig at the University of Arkansas, and it’s amazing how many of those kids will come to me and say, ‘I’ve got this idea,’ and it’s fun for me, because it keeps me thinking about what Generation Y is thinking about when it comes to how to start a business.  

“With regulations the way they are today, I wonder if Sam Walton could leverage his business to do what [Wal-Mart Stores Inc.] has done. Sam, J.B. Hunt and Don Tyson leveraged their businesses enormously to build empires. Today’s regulations make it difficult to leverage through normal lending channels enough to be the kind of people they were. None of them were afraid of leverage.

“But we live in the neatest entrepreneurial place in the world. That university sitting there spits out more and more students who want to do the same.

“So, our relationship management strategy makes us unique, because we talk to people eye-to-eye and have experienced lenders. When you fill out a loan application, you’re going to sit down with a live person. No one’s going to tell you your idea is bad. We just might have to tell you we can’t do it. No one wants to be told their baby is ugly, and if you say ‘no’ to their business idea that’s the way they feel.

“Being approachable is a very unique thing in this market.”

SM: “What do you see as your biggest opportunities, and where do you want Signature to be in three to five years?”

GH: “We were a $700 million bank without acquisition and we can be there again without acquisition in three to five years. There’s some magic in some people’s minds of being a [billion-dollar bank]. It’s not off the table that we could have a consolidation with people who think like us, as long as it stays pretty local.

“I don’t know anything about a lot of other places. I’m not interested in being in Tulsa, Oklahoma, or Springfield, Missouri.

“This is a wonderful local community with way more opportunities than we can fill on our own.”

SM: “What are some of the greatest challenges facing community banks like yours in Arkansas and the U.S.?”

GH: “We are overwrought with regulations. There are regulations we’ve seen for all banks that have absolutely nothing to do with community banks. They’ve been throttled. What bothers me the most is you’ve seen a lot of banks in rural areas go away. No one is going in there to put in a branch because if you could make money there the last guy would have stayed.”

DL: “Time and expense on compliance is huge. We’re a small bank and we have a full-time compliance officer. And we have several other people that do a lot of compliance work.”

GH: “We have three full-time analysts spreading financial statements. If you’re a little bank at $50 million, how many of those analysts can you afford? It makes it tough.”

SM: “And now there are cyber security regulations and even more cost that goes along with that. Not just lending anymore.”

GH: “That’s right. The technology that makes you so competitive opens you up to unbelievable risk.

“We’re very fortunate that we have young computer science engineers who run our IT department, and we get exceptionally great scores from our auditors and regulators because they’re up to date on new technology. These guys are far more advanced and hopefully remain so. The guy who manages our IT area is top notch.”

SM: “How can banks best serve small- and mid-market customers and really stand out?”

GH: “It’s really important for any small business to have great partnerships to thrive. You have to have a really good lawyer, a really good accounting function internally and externally, and a really good banker. For any small business to thrive, they have to have people they can get resources from.

“The three most difficult things to overcome are bad legal advice, an accounting system that has been set up poorly and you’re selling for less than it costs you to provide, and then if your banker doesn’t understand what you’re trying to accomplish and isn’t on the same page.

“If you hate to go see your banker you’re in the wrong bank. If you don’t enjoy the relationship and don’t want to seek their counsel, then you don’t have a good banking relationship.

“You should consider your banker your partner and I don’t think you can do that on a computer. You can’t resource the entrepreneurial spirit that lives in Northwest Arkansas from a computer someplace else. 

“The computer is a tool you use after your business is set up so you don’t have to go to the bank.

“But if you need to borrow a million dollars, I don’t think you want to go to a super center branch, sit down, and say, ‘I’ve got a business plan, who in here wants to go through it with me?’

“And I don’t think they really want to sit on their computer and say, ‘Dear Bank X, I’ve got a great idea and I need a million dollars, or I’ve got a half-million dollar business and I need to go to a million.’

“I hope that’s what they consider competition to me. I hope it’s me against the computer screen. I’ll take that chance.”

SM: “Even for a 25- or 30-year-old entrepreneur?”

GH: “I don’t think it matters. Do you want advice or a loan? If you just want a loan, go to the computer. What advice does it give you when you get turned down?”

SM: “What are the biggest lessons you have learned as CEO of Signature Bank?”

GH: “The biggest lessons are that things can get much worse than you can imagine. I started banking Feb. 1, 1983, at McIlroy [Bank & Trust in Faytteville] and Danny started in 1982. [Before the 2008 recession], we never saw an economic downturn that was dramatic to our client base, ever.

“We had growth and better-than-average real estate valuations. None of us anticipated the impact of the last economic downturn and its duration.

“The biggest thing we learned is there is a black hole and you have to avoid it.”

SM: “How do you avoid that?”

GH: “We’re smarter bankers now. Not every deal will work if it has real estate tied to it. In the old days, if you had dirt you eventually got out. 

“You always felt like you had a backstop for foreclosures, because someone wanted them, but it wasn’t the case during the recession. You could forget raw dirt if you had it.

“Development was a bad word two years ago. Now, if you have a good location it is getting purchased.” 

SM: “Gary and Danny, it was great to connect with you guys again. The things you’re doing here make me feel good about community banking.”

GH: “Thank you, Scott. It was fun.”