- The Washington Times - Monday, May 8, 2000

Capitalism abhors a vacuum.

Nine new community banks emerged in Northern Virginia, Montgomery County and the District after a wave of consolidation swept through the banking industry in the latter part of the 1990s.

They were founded by the castaways officers who elected to become entrepreneurs after their banks were purchased.

As the number of banks in the area decreased, the officers pinpointed a niche they felt was underserved by the consolidators small business. Their entrepreneurial efforts resulted in more choice for consumers and small businesses alike, and the new banks all formed within the past two years are seeing steadily growing assets.

"The market is rich enough for other small banks and the defining issue for the small banks is sticking to their niche and doing it well," said Kevin Reynolds, president of Cardinal Bank in Fairfax, which opened in June 1998.

He came to Cardinal from George Mason Bank of Fairfax, which was purchased by United Bankshares of Parkersburg, W.Va., in April 1998.

"We've had a steady increase in number of new banks," said banking consultant Bert Ely of Ely & Co. in Alexandria. In 1999, there were 231 new banks nationally, up from 50 in 1994, Mr. Ely said.

"I think that trend will continue. It's one of the fallouts of the consolidation trend in banking. As we have seen more in the way of bigger banks, that has thrown a lot of banking executives out of work… . And also there are a lot of people out there that would rather deal with a community bank," he said.

In 1994, Congress passed a law that authorized full interstate banking, setting off the merger spree.

"It basically put a lot more people out there in the marketplace," Mr. Ely said.

Arnie Danielson, another local banking consultant, said many banks were created in 1998 because stock prices and therefore selling prices for the industry were high. Though those prices have since fallen, banks founded two years ago continue to flourish.

Big bank exodus

The new banks have won many of their customers from larger competitors who they say don't offer the same level of service or flexibility.

"They're really shooting at a target that these other banks, no matter what they say, are not very interested in" small business, said Mr. Danielson of Danielson and Associates in Bethesda.

Thomas Russello is one such target he is the vice president and co-owner of BEI Structural Engineers in Bailey's Crossroads, and does both his personal and business banking at Alliance Bank in Fairfax.

"I deal with personalities. We are with a small bank because we can talk directly with people who are running the bank," he said.

He followed Donna Smith, a vice president at Alliance, from Tysons National Bank, which was bought by MainStreet Financial in 1996. BB&T; Bancorp purchased that bank last year.

Mr. Russello stayed with MainStreet for a while after Miss Smith left until an incident convinced him to switch banks.

He and his wife had put $500,000 in their checking account to buy a house. His wife wrote a note saying he could take the money out in the form of a cashier's check. He had no problem getting the check which he saw as a bad sign.

"They never asked who I was, they never asked for ID, and I walked out of there with a half-million-dollar cashier's check," Mr. Russello said.

D. Trent Gourley is another Alliance customer. He owns Gourley and Gourley in McLean, a 27-year-old private investment firm that focuses on senior citizens.

Mr. Gourley said he's always looking for a good small bank, since he's had trouble with the big guys.

"Whoever you were talking to two weeks ago, well, they're gone and you start over," he said of big banks.

He has so much faith in small banks that he's invested in four of them AccessNationalBank.com, Cardinal, Potomac Bank of Virginia, and Millennium Bank.

Starting fresh

Bank executives who were ousted or chose to leave because of the flurry of mid-1990s mergers wanted more autonomy and a chance to have more contact with customers. They found their communities responsive each founder or group of founders had to raise $6 million to $10 million in capitalization to start their banks.

"Most of the new banks that have started recently have started because there's a core group of bankers who want to return to a small institution where they could visibly make a difference," said Burwell Gunn, president and chief executive officer of Cardinal Financial Corp., the holding company for the Cardinal office in Fairfax, as well as separate Cardinal banks in Manassas and Dulles.

Mr. Gunn said he and his colleagues had heard stories of customers at big banks calling 800 numbers and not getting to talk to a person, or dealing with frequently changing employees.

"It's created an environment in the market where there's a large base of customers who really want personal service," he said.

Mr. Gunn, Mr. Reynolds and other core members of the group that started Cardinal raised $10.5 million initially, asking $100,000 or more from each of their 88 investors. They opened the doors to the first Cardinal Bank in June 1998.

Last July, the bank had an initial public offering on the Berlin stock exchange, raising $27 million, which it used to open two more banks. The Fairfax bank's assets have reached $55 million, and it is profitable.

Two weeks ago, Cardinal announced the acquisition of Heritage Bank in McLean, adding two more branches and $64 million in assets to the growing institution.

Cardinal and the other banks' rapid expansion seems proof that there is indeed a niche for the small business bank.

Linwood Cotman, former president of Citizens Bank of Laurel which was bought by Crestar Bank in 1996 hopes to take advantage of new bank potential. He's working on opening his own bank, with CEO Jack Goldstein, in Loudoun County within a year.

"This area could still handle another couple community banks," he said.

More narrow niches

Two of the new area banks are focusing on more tight niches than just small business they're also pushing Internet banking.

Both of the bankers who started the Internet operations were involved in the creation of First Patriot Bankshares in Reston in 1990, which was sold to United Bankshares in 1997.

Carroll C. Markley went on to found Millennium Bank in Reston in April 1999.

"I've been in banking [for years], and the future in my opinion is technology and, obviously, Internet banking," he said.

Though the other new banks have on-line services, Millennium markets them more aggressively. On its Web site, the bank has bill payment services, loan applications and checking and savings account access.

Mr. Markley's counterpart, Michael Clarke, started AccessNationalBank.com in Chantilly, Va. in December. The bank has grown to $27 million in assets.

"We believe it's a validation of our business plan that the market is receiving us well and it's reflective of the strong economy that we have locally," Mr. Clarke said, adding that it's hard to imagine a bank that wouldn't do well in this economy.

Alliance Bank in Fairfax is also targeting a specific subset of small business the Chinese-American community. One of the bank's directors is a Chinese national, another is Chinese-American, and the bank always has someone who speaks Mandarin on staff.

David Cordingley, president of the bank, is another banker who started an institution in the wake of a United takeover. He started Bank First in 1987, which was later sold to United, and ended up at Tysons National Bank prior to starting Alliance in November 1998.

Mr. Cordingley has tried to strengthen his position by hiring employees away from big banks.

"The same way the big banks are losing customers, they're also losing their best employees," he said.

He added that working with small businesses is rewarding.

"When a business outgrows you because you helped, that's a lot of fun," he said.

Banking in the city

City First Bank of D.C., located in Columbia Heights, takes a different tack than the other new banks in the area.

The bank aims to improve banking services for underserved, low-to-moderate-income areas such as Anacostia. The idea for the bank was born in a church basement, and Debbi Hurd Baptist, its president and CEO, came not from a traditional bank but from the Federal Home Loan Mortgage Corp. Freddie Mac.

City First opened in November 1998, and Ms. Baptist said the direction in which the city has moved since that time has been good for the bank.

"There's a lot of movement into the District as opposed to an outward migration. That's served to introduce a range of incomes into some of the traditional underserved areas of the city," she said.

That's allowed the bank to further its mission. The revenues from lower-income customers' accounts, which take longer to become profitable, are bolstered by higher-income individuals' accounts.

City First is the only D.C. bank to be certified by the Community Development Financial Institutions Fund, which gives grants to banks in underserved areas.

Onward and upward

Most of the new banks plan simply to expand their businesses in the coming years, and don't have any specific sell-off goals even though there's always the chance of being gobbled by the giants.

In fact, some of them hope to be the gobblers on a smaller scale.

"We're aggressively looking at expansion, and we're always looking at merger and acquisition opportunities as well," said John Maxwell, president and chief executive officer of James Monroe Bank. His institution has grown from one branch in Arlington to an additional office in Annandale, with $65 million in assets.

Kevin Reynolds of Cardinal also said his bank is focused on expansion, especially with the Heritage acquisition.

"We do not want to sell. We have a very young management team" that has worked hard to start the bank and is eager to see it grow, he said.

Larry Warren, president and CEO of Potomac Bank of Virginia in Vienna, said selling is always a possibility when a business is owned by multiple shareholders.

"Our board of directors is duty-bound to look out for the best interests of the shareholders," Mr. Warren said. "But that's not why we're in business… . We are long-term players."

EagleBank of Bethesda is one of the new banks, like Cardinal, that has gone public. Bank Chairman Ronald D. Paul said Eagle is also looking at acquisition possibilities.

With four branches and $126 million in assets, Eagle is the largest of the new area banks. Mr. Paul said that's partly due to the 16-member board of directors, who have recruited friends and acquaintances to become customers.

Mr. Ely said the crop of new banks is poised to do well, and is challenging the misconception that there aren't any banking choices for consumers and businesses.

"A lot of people are surprised about this. They think we're moving inexorably to a world of big banks," he said.

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