THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, April 1, 1996 TAG: 9603300196
SECTION: BUSINESS WEEKLY PAGE: 10 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY TOM SHEAN, BUSINESS WEEKLY
LENGTH: Long : 241 lines
Outside the windows of James River Bank's main office in Waverly, the logging trucks rumble down West Main Street on their way to local sawmills.
Inside the mirrored-glass building, Harold U. Blythe confers with bank president Glenn T. McCall about the details that James River's parent company will have to include in its annual 10-K filing with the Securities and Exchange Commission.
Blythe, president and chief executive officer of James River Bankshares Inc., also checks with McCall about the expected cost of consolidating payroll systems at the company's four banks.
Since its formation last June, the Suffolk-based bank holding company has become a larger, more complicated organization: its volume of loans, investments and other assets asset has more than doubled to $362 million, and its 16-branch network now stretches from Suffolk to Richmond's outskirts.
Blythe, McCall and others at James River Bankshares are preparing for something even bigger.
``We don't have any fears about being a $750 million bank, or even a $1 billion bank,'' says Blythe, who also serves as president and CEO of Bank of Suffolk, another unit of James River Bankshares.
Although the management and board have not defined a timetable for the company's expansion, James River continues to talk with prospective merger partners, Blythe says.
Merger mania
Mergers of banks with hundreds of branches and several billion dollars of assets have become routine events in recent years.
What's less visible are the consolidations among community banks, especially those in smaller towns and rural areas.
At the same time, big regional banks are shedding branches in smaller cities, opening opportunities for community bankers.
``Some of our bigger brothers and sisters are getting out of towns with 8,000 to 12,000 people,'' says Blythe. ``That's where we can shine.''
At least three Virginia banking companies - F&M National Corp. in Winchester, Premier Bankshares Corp. in Bluefield, and MainStreet Bank Group in Martinsville - already have applied this expansion strategy elsewhere in the state.
And more consolidations of this type are pending. In January, Bank of Franklin and Bank of Sussex and Surry announced plans for a multi-bank company that will concentrate on institutions in rural communities.
For bank customers, this could mean the continued availability of conventional services in communities that might otherwise lose branches.
For investors, the consolidations could mean buying or selling shares in small banks with greater ease. Depending on a bank's profitability, investors also might reap greater returns on their investments, especially if the institution is acquired.
Blythe says James River Bankshares is being built with the intention of expanding service rather than selling the company when it reaches a certain size.
RURAL RICHES:
Small-town banks often have a stable base of customers and a healthy spread between the cost of their funds and what they earn from loans and investments. But like community banks in metropolitan areas, many are under pressure from investors to earn higher returns on their capital.
``The problem is that their capital piles up, and they don't always have sophisticated capital management,'' says Jon D. Holtaway, a vice president of the bank consulting firm Danielson Associates in Rockville, Md. ``You have a good bank but a poor investment vehicle.''
Meanwhile, three waves of bank mergers since the mid-1980s have sensitized shareholders to the values of bank stocks, Holtaway says.
Bank of Suffolk and Bank of Waverly, which changed its name in March to James River Bank, responded to that pressure last spring by forming James River Bankshares.
Within months, the new company had lined up two more merger partners:
Bank of Isle of Wight, a one-office bank in Smithfield with $33.65 million of assets and $3.2 million of shareholders' equity.
First Colonial Bank F.S.B., a Hopewell-based thrift with five branches, $130.8 million of assets and $7.9 million of shareholders' equity.
The acquisitions of Bank of Isle of Wight, for $7.57 million of James River Bankshares stock, and First Colonial, for $14.39 million of stock, were completed at the end of February.
What prompted James River Bankshares to move so quickly?
``We feel the windows of opportunity will not always be there,'' says Blythe. ``We will be just as aggressive again if we can find the right match and the right personal chemistry.''
For now, the James River in its name defines the company's target market: both sides of the James River from western Hampton Roads to Richmond. Eventually, the company may consider expanding into eastern North Carolina, Blythe says.
But rapid growth, especially in a financial company, can expose it to lapses in lending standards and to fraud. To protect itself, James River Bankshares recently installed a certified public accountant and former savings bank internal auditor, to devise more sophisticated system of internal controls.
LOOKING FOR NICHES:
Part of James River Bankshares' planned expansion could come through the purchase of branches that larger banks decide to unload. Last week, it bought the real estate and other fixed assets and $34 million of deposits at two First Union National Bank branches in Franklin and Courtland.
The offices were attractive because the area they serve has a major employer, the Union Camp Corp. paper mill in Franklin, and a solid base of middle-class households, Blythe says.
Holtaway, the banking consultant, says residents in communities like these tend to be loyal to smaller banks. ``They are still attuned to branch banking and to personal service,'' he says.
But many large banks, such as First Union and NationsBank, have emphasized gaining market share with their urban branches and applied more advanced technology to delivering their services.
``Branches are expensive to maintain,'' says Vernon Plack, a banking analyst with the brokerage firm Scott & Stringfellow Inc. Larger banks in Virginia will continue selling those offices that cannot meet the banks' targets for branch profitability, he predicts.
CONTROLLING COSTS:
To justify the cost of a merger and minimize the dilution of their per-share earnings, acquiring banks usually pare expenses quickly and try to eliminate overlapping operations.
James River Bankshares has been circumspect in its effort to cut costs for fear of damaging customer service, says Blythe. The company, he says, may have to shift some of its 165 employees to new positions but expects to keep its workforce largely intact.
But the company's attention to cost control is evident only a few blocks from James River Bank's main office in Waverly. Construction crews have been working on a 5,000-square-foot operations center that is scheduled to open in late summer.
The $2 million facility will handle data-processing, purchasing and other backroom operations for all of James River Bankshares' bank subsidiaries.
FEE INCOME GROWING:
Like much bigger banking companies, James River Bankshares also is working on ways to generate income from the sale of investment products, such as mutual funds and annuities.
Although they still enjoy a healthy degree of local loyalty, small-town banks face mounting competition from brokerage firms and other non-bank providers of financial services, Blythe says.
``I don't know a single thing we can offer you from this bank that Merrill Lynch can't offer,'' he says at the Bank of Suffolk's main office. ``Maybe we can offer it with a more personal touch.''
Ten employees at the Bank of Suffolk already are licensed to sell life and health insurance, and their sales of annuities have been stronger than the bank initially expected, Blythe says.
MERGER CHALLENGES:
So far, bringing the operations of Bank of Suffolk, James River Bank, Bank of Isle of Wight and First Colonial Bank under one umbrella has gone smoothly. However, First Colonial's situation may become more challenging for the company's management, Blythe acknowledges.
First Colonial was an attractive merger candidate because it has offices in some growing communities south of Richmond and owns a small-loan company that can be expanded to other markets, Blythe says.
But like other thrifts, First Colonial continues to pay a hefty premium for federal insurance of its deposits, which puts it at a competitive disadvantage to commercial banks. Congress, which has been debating ways to replenish the thrifts' depleted insurance fund, has considered imposing a one-time charge on thrifts to raise the needed money.
James River Bankshares has no plans to act immediately, but it may eventually convert First Colonial's charter to a commercial-bank charter, Blythe says.
BLYTHE THE BANKER:
Investment bankers and strategic planners can make convincing arguments for using a community-banking strategy to expand in small towns and rural areas.
The method isn't foolproof. Whether or not it works often depends on the expertise of the acquiring company's management.
``When a bank enters a new market, the management may not understand the new market like they understand their own, and they may not have the community ties to bring in the business,'' says Holtaway of Danielson Associates.
Blythe credits James River Bankshares chairman Elmon T. Gray and vice chairman G.P. Jackson with devising the company's expansion plan. But it's clear that Blythe, a 53-year-old Franklin native, is the one orchestrating that plan.
Blythe, who moves through bank lobbies greeting customers and shaking hands, got his start in banking within days of graduating from Hampden-Sydney College, where he studied history.
Why banking? ``I felt I had some skill with numbers and seemed to get along with people,'' he says.
So he chose a management training program at Virginia National Bank in Norfolk, one of the banks that evolved into NationsBank Corp.
But after nine years at Virginia National, including a stint in its marketing department, Blythe decided to move to a smaller institution.
He worked for a Suffolk thrift for three years and then took a marketing post at Hobbs-Adams Engineering Co., a Suffolk manufacturer of harvesting and irrigation equipment. When Bank of Suffolk began looking for a new president and CEO in 1988, Blythe shifted back to banking.
THE SHAREHOLDERS:
James River Bankshares, says Blythe, is attempting to balance its attention to customer service with its efforts to earn acceptable profits for shareholders.
For now, the management has focused on earning in excess of $1.25 for every $100 in assets, although the company's return on assets for 1996 could drop below that level because of costs related to its recent mergers, Blythe says.
Return on assets is a widely used benchmark of bank profitability, and a return in excess of $1 per $100 has been considered respectable. The combination of lower provisions of troubled loans, cost-cutting measures, and stronger loan demand has enabled many Virginia banks to post substantially higher returns on assets in recent years.
Most of James River Bankshares' 2,000 stockholders live in the communities that the company's banks serve, says Blythe.
But continued growth is likely to attract the attention of other investors. And because its 2.66 million shares are publicly traded, James River Bankshares could find itself under pressure to produce higher returns more quickly than the board and management is prepared to do.
Once the company you run has its shares trading publicly, ``you become much more sensitive to the market value of that stock,'' Blythe says. ILLUSTRATION: [Cover, Color photo]
BUILDING A COUNTRY BANK
JOHN H. SHEALLY II
The Virginian-Pilot
Graphics
Research by TOM SHEAN, graphic by ROBERT D. VOROS
The Virginian-Pilot
SOURCE: James River Bankshares Inc.
[For a copy of the graphic, see microfilm for this date.]
COMPANY PROFILE
HEADQUARTERS: Suffolk
ORGANIZED: June 1, 1995
BANK SUBSCRIBERS: Bank of Suffolk, james River Bank (Waverly), Bank
of Isle of Wight (Smithfield) and First Colonial Bank (Hopewell)
BRANCH OFFICES: 16
ASSETS: $362 million
SHAREHOLDERS' EQUITY: $37 million
NUMBER OF COMMON SHARES: 2.66 million (JRBBK)
NUMBER OF SHAREHOLDERS: 2,000
EMPLOYEES: 165
CHAIRMAN: Imon T. Gray
PRESIDENT AND CHIEF EXECUTIVE OFFICER: Harold U. Blythe
[Color photos]
by CNB