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JULY 11, 2012
CLAYTON ROSE
ALDO SESIA
Friend Bank: The Time for Hope (Abridged)
On February 12, 2010 Hope Harris Johnson, CEO of Friend Bank (Friend), paused to watch the
snow falling in Dothan, Alabama, for the first time in 15 years. Her dachshund Buddy, the bank’s
mascot, was fast asleep at her feet. Friend was entering the fifth year of Hope’s ambitious 20-year
growth plan which, if successful, would transform her family’s 105 year old community bank into an
institution with a substantial presence in southeastern Alabama. Hope was pleased, so far, with the
results. Strategically they had exceeded expectations in opening a second office and execution of the
plan was going well. And while the financial and economic crisis that began in 2008 had affected the
financial results, it also presented Friend with competitive opportunities. Turning away from the
window, Hope looked at the framed sticky note that sat on her desk: “Take Care of the Bank, Dad.”
(See Exhibit 1.)
Community Banking
Community banks were generally considered to have assets of less than $1 billion. There were
about 8,000 community banks in 2009 (using a broader definition of assets up to $10 billion), which
comprised more than 90% of the total banks in the U.S.1 However, community banks had only 23%
of the assets in the U.S. banking system. 2 Notwithstanding some powerful economic and regulatory
forces arrayed against them, these banks played a unique role in the communities they served.
Almost 90% of these institutions were privately held, and 50% were owned and capitalized by an
individual or family group, with many of the others owned by groups of local business people. Their
small size created both competitive advantages and disadvantages. Camden D. Fine, CEO of the
Independent Community Bankers of America, a group that represented community banks, said:
At the heart of banking is the relationship between the customer and the bank. Customers
can be eyeball to eyeball with the bank’s president, the ultimate decision maker. This cannot be
replicated by the big center banks and large super regional banks. If the financial crisis has
taught us anything it has taught us that banking is a relationship business. The leaders of
1American banks were generally grouped into three categories, defined by their size as measured by the dollar value of their
assets. In addition to community banks there were money center and regional banks. Money center banks were the small
number of very large banks headquartered in one of the U.S. financial centers, and included JP Morgan Chase, Bank of
America and Citibank. Regional banks were those with more than $1 billion in assets. (Laurence M. Ball, Money, Banking and
Financial Markets, St. Martin’s Press, 2008, p. 211.)
2 “Community Banking Facts,” Independent Community Bankers of America, http://www.icba.org/, accessed 05/25/ 2010.
________________________________________________________________________________________________________________
Professor Clayton S. Rose and Senior Researcher Aldo Sesia of the Global Research Group prepared the original version of this case, “Friend
Bank – The Time for Hope,” HBS No. 310-070. Professor Rose and Senior Researcher Sesia, also prepared this abridged version. HBS cases are
developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.”
Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
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community banks are at heart entrepreneurial and have the unique ability to make decisions
fast and turn their ship on a dime.
Community banks survived because they touched a deep cultural cord in America—one of
entrepreneurship and self-reliance—as well as the desire for local control over the institutions that
mattered most to people. Intimacy with clients also gave these banks, in theory, the ability to make
better lending decisions. Their bankers had a better knowledge of the borrower, especially those
without long credit histories suitable for credit-scoring or other model-based lending practiced by large
banks—and an ability to engage in relation- or reputation-based lending or lending in low-volume
markets.3 So called soft data (e.g., a borrower’s character, family reputation) could play a role in risk
assessment; whereas large banks depended primarily on hard data (e.g., cash flow, collateral).
The lack of size and scale also had a downside: It cost more for community banks to fund
themselves than larger banks—both in attracting deposits and in the cost of term funding. Community
banks, particularly the vast majority that were privately held, also lacked the access to capital that their
larger brethren enjoyed. Traditionally they were limited to seeking additional capital from their original
investors or other local individuals of means. The 2008 financial crisis had limited even further any
access these banks might have had to the broader capital markets.
Perhaps most problematic for community banks was the disproportionate burden they had in
complying with new federal banking regulation brought on by the financial crisis. Some studies
suggested that the incremental cost of complying with bank regulations could be as much as 45 to 60
basis points of a community bank’s expenses versus 8 to 16 basis points for the largest banks. “For
community banks, complying with these new regulations is a huge problem,” Hope explained. “We
have to comply just like the Bank of Americas even though we operate a different model. Whereas a
big bank can spread the cost of these new regulations, we simply do not have the transaction
volumes. Regulatory burden presents us with economies of scale problems.”
Fine described the atmosphere as one of “regulatory overreach.” There is no forgiveness, no
forbearance, no working with the bankers. It is off with their heads. This includes banks rated as
CAMELS 1 being rated CAMELS 3 or 4 in the very next examination. Classifying seasoned
performing loans solely on the basis of the underlying collateral value without any thought to other
sources of repayment.4
However, he also saw a golden opportunity for the best run strongly capitalized community
banks with low levels of non-performing assets to expand market share, to fill in gaps opened up in
the markets they serve where their competitors have become either nonexistent or weakened because
of the financial crisis, including the major banks. “But they are going to need a very strong profile
because of the headwinds they will continue to face,” he added. “Regulators are being very reticent to
approve expansion plans. A community bank has to be squeaky clean.”
Hope Harris Johnson
Born and raised in Slocomb, a rural farming town of about 2,000 residents tucked in the
southeastern part of Alabama, Hope was a third generation banker. She graduated from the
3 Tim Critchfield, Tyler Davis, Lee Davison, Heather Gratton, George Hanc, and Katherine Samolyk, FDIC Banking Review, last updated
November 2005, as http://www.fdic.gov/bank/analytical/banking/2005jan/article1. html, accessed February 19, 2010.
4 CAMELS rating referred to the overall score regulators gave to banks, with 1 being the highest and 5 being the lowest.
CAMELS stood for Capital, Assets, Management, Earnings, Liquidity and Sensitivity to interest rates—the key areas examined
by the regulators in determining a bank’s soundness. Source: Federal Reserve Bank of San Francisco “FRBSF Economic Letter
99-19,” June 11, 1999, at http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-19.html, accessed March 14, 2009.
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University of Alabama and the Graduate School of Banking at Louisiana State University (LSU). In
2009, she completed the Owner/President Management (OPM) program at Harvard Business School.
She first worked for SouthTrust Bank before moving to Tennessee in 1986 to work at a regional
investment company. A year later, Hope and her husband returned to Slocomb to begin an
apprenticeship at Friend (then called Slocomb National Bank). Under her father’s tutelage, she
worked in each area of the bank and began developing an understanding of the intricacies of bank
operations. In 1996, much earlier than she had ever imagined, she became president.
The First 100 Years
Slocomb National began in 1905. Harry Harris, Hope’s grandfather, joined the bank as a clerk in
1926, took correspondence classes in banking, and became an essential member of the bank’s
leadership. During the Depression, as he watched other banks suffer “runs,” Harris ordered enough
currency to satisfy the potential demands of any depositors who might wish to withdraw money. 5 He
had the bills stacked behind the counter clearly visible to all customers. Reassured, not a single
customer withdrew their money. At the behest of bank regulators, Harris became president in 1942,
and began accumulating shares in the bank. When he stepped down in 1974, the Harris family
controlled less than 50% of the bank. His son Lawrence succeeded Harris as president. Between 1974
and 1991, Slocomb National’s assets grew from $8 million to $36 million. In July 1991, Lawrence was
leaving the bank for some time off at the beach. He took a sticky note and wrote to Hope, “Take care
of the bank, Dad.” Lawrence unexpectedly passed away that weekend. Hope was 27 years old and
six months pregnant with her first child.
Her mother, Marjorie, who had worked at the bank for over 30 years, became president. Hope
said, “We were concerned about our customers accepting me as president because I was so young.
Our customers knew my mother for many years so naming her president was important to
maintaining trust and continuity, which is so important for a small bank.” After five years honing her
banker skills and building relationships and creditability with customers, employees, and regulators,
Hope took over. “We’ve always tried to be proactive when it comes to regulators,” she said. “It has
paid off. We have had such a solid bank for so long, and I believe they view us in a great light.”
Ownership
In 1999, the bank elected S Corporation status, which allowed its shareholders to pay tax on their
share of earnings at the individual level, rather than have the bank pay taxes on the aggregate
earnings.6 In 2000, SNB Holdings, Inc. was formed; it owned 100% of Slocomb National’s shares. The
bank holding company structure allowed greater flexibility for acquisitions and growth, and in
managing the income needs of the family. In 2001, the Harris family owned 70% of SNB Holdings
and entered into an agreement to buy out all minority shareholders consolidating into 100%
ownership by the Harris family—Hope (her husband Joseph Johnson and three sons), her mother,
and her sister Harri Anne, an Alabama State Senator. The three women comprised the board of
directors of SNB Holdings and were also on the Friend board along with Joseph, and Joe Dalton, the
owner of the oldest business in Slocomb, the Dalton Pharmacy.
5 Banks tended to keep on hand a limited amount of cash to meet the normal needs of its depositors. In times of stress or panic
which heightened concerns about a bank’s solvency, as occurred during the Great Depression, depositors have tried to
withdraw their deposits simultaneously creating a “run on the bank” and forcing it to shut down because of an inability to
meet all the customers’ cash demands. As part of post-Depression reforms, the U.S. government through the FDIC began to
guarantee bank deposits up to a maximum to eliminate the risk associated with a particular bank.
6 The bank paid an annual dividend to the holding company, $575,000 in 2009, to cover the principal and interest on a loan
taken out in 2008 to support growth, and to provide the shareholders with cash for taxes on their share of annual earnings.
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The Value Proposition
“Everything we do here at Friend is predicated on our value proposition: to help our customers
save wisely, spend prudently, and borrow cautiously,” Hope explained. “This is good for our
customers and for us too.” Hope saw Friend as providing “private banking” to all its customers, not
just the wealthiest, as was typical in the industry. Joseph, the bank’s senior loan officer and Dothan
office president, explained, “At a community bank the customer is not just a number.” For example,
Slocomb National was known for giving out loans as small as $150. Customers could depend on
getting such loans during Christmas or to cover seasonal expenses related to farming. Carl Smith, the
bank’s senior vice president and chief credit officer, attributed the bank’s uniqueness from its focus
on “taking care of the community.”
For its core customer base the bank focused on attracting and serving small businesses (including
medical, legal and accounting professionals), retirees and pre-retirees, non-profit organizations, and
conservative families. Hope believed that these groups would most appreciate the bank’s value
proposition, and provide it with the best opportunity to create a “win-win” with customers who
saved and invested, thereby supporting the liability side of the bank’s balance sheet, while
creditworthy borrowers helped to grow the assets. Friend consciously offered higher rates on
deposits and lower fees than competitors to attract deposits, especially from retirees.
Friend offered checking and savings products and loans. The bank’s delivery channels included:
in-person at bank offices, online, call center (during office hours), ATM/debit card, and 24-hour
automated telephone banking provided by a third-party, and mail. The bank’s ATM cards served as
debit cards wherever VISA credit cards were accepted. The bank cross-sold products to existing
customers based on where they were in the life cycle. In that vein, the management team was looking
into adding investment, brokerage products (facilitated through a third party). Small business
customers benefited from several programs geared to the business and their employees.
The bank’s success in delivering its value proposition to clients was directly dependent upon the
enthusiasm and skills of its employees. Over the years the bank had developed a distinctive culture
that supported employees in this effort. Hope knew each employee by name (there were 30 at the
beginning of 2010), and made a point of also knowing their families. The bank provided employees
with training, the opportunity for advancement, and recognition through annual employee awards.
Bank family celebrations included birthdays, work anniversaries (dinner out on the bank), and
Christmas (end of year party for employees and guests). Friend also supported its employees in a
number of ways including contributing toward their children’s’ college tuition.
Hope summed up the culture: “We try to operate like a family.” The “family” extended to the
larger community itself. For example, through the bank’s True Blue program employees were given
40 hours of paid time off to perform community service. Each year employees helped with end of
year community needs using the Friend Christmas Special Needs Fund and Friend Giving Trees.
Employees also volunteered in the schools and at senior centers, providing financial education.
A 20-Year Growth Plans
At the end of 2000, Friend’s assets stood at $40.7 million. The bank was strongly profitable, with,
net income of $443,000 and an ROA of 1.09%. It held 100% of the Slocomb deposit market share.
Nevertheless Hope felt uneasy. The bank’s prospects for growth in the early 2000s were clearly
limited; Slocomb was unlikely to experience much economic or population growth in the years
ahead. The status quo, she felt, was likely to make the bank less and less competitive. The
responsibility to preserve and grow the family’s wealth, to allow for liquidity if the need were to
arise, and to create a substantial legacy for her three sons, all weighed heavily on her.
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In 2001, Hope began to seriously evaluate the bank’s future and its competitive positioning. She
began to develop an understanding of various growth opportunities available to the bank, and the
attendant risks and costs. In 2006, Hope launched a 20-year growth plan for Friend with two ambitious
goals: grow net income by 10% per annum and increase the bank’s assets to $150 million by 2015 and
to $500 million by 2025. She said: “It was obvious that if we were to grow, we would need to be more
than a one-town bank. I was thinking so small for so long; I realized I had to think bigger. The
numbers led me to realize that I would have to change our strategy to meet our growth potential.”
With the blessing of the Board, and a nod from bank regulators, Hope put her 20-year growth
plan in motion, and would manage the execution of the plan in five-year increments. She focused on
the constraints that she would face, the resources required, and the new markets Friend would need
to enter to realize her ambitions for the bank. Her sister Harri Anne wanted the bank to survive so
her three nephews could carry forward the tradition their great grandfather and grandfather started.
“How we would fund the growth was a concern of mine,” she noted.
While Hope’s long term plan assumed the growth would be funded from earnings, the family was
aware that obtaining outside capital might be necessary in the future. Harri Anne said, “I am open to
changes because I want the bank to grow. I am named after the founder, so I am a bit prideful, but
there is a point when time moves on, you don’t know what my grandfather or father would have
done. My father was not so sentimental himself that he wouldn’t sell. He wanted to do what was best
for the bank. So remembering that helps us.” Hope said: “When my dad got 51% of ownership he
was very happy. It was later that we acquired full ownership. So from an emotional or sentimental
point of view, knowing that my father was satisfied with a controlling interest makes it easier on us
to consider bringing in outside capital if we need to.”
Financial Constraints
Notwithstanding her aggressive long-term targets for asset and net income growth, Hope
concluded that the bank needed a healthy capital cushion, and would therefore maintain an 8½%
leverage ratio (equity/assets), and would not grow assets faster than the capital base could support.
This decision had several implications including if and where the family should seek outside capital,
diluting their economic stake and possibly their ownership. Hope also felt that the bank should
maintain at least a 1% ROA, and an 85% deposit/loan ratio. “A deposit-to-loan ratio greater than 85%
makes regulators nervous,” she said. She wanted to continue using wholesale funding to some extent
to better match the maturity of her liabilities with those of her loan assets.
From Slocomb National to Friend
In what she described as “a huge decision,” Hope concluded that the bank needed a new name
and new image that would be consistent with the growth plan. She commissioned a respected design
group in Alabama, which had done innovative work for other larger Alabama banks, to help in the
rebranding effort. “I was not completely comfortable changing the name of the bank,” Marjorie
Harris said, “but we couldn’t branch out with the Slocomb name. It was a necessity to come up with a
brand name.” Hope sought a name that would have rapid recognition and would separate the bank
from competitors. Ultimately, the board decided to go with Friend Bank. “I like the name Friend
because it is the perfect image of what we’ve always tried to portray the bank to be,” explained
Marjorie. Still it was not easy to relinquish the Slocomb name. Harri Anne Smith remarked: “We had
so much heritage to be proud of with the Slocomb name. I thought we would lose something giving it
up. I realized, however, that to be progressive we needed to create a new brand. Even so it was a
little hard to let go of the past.” After much debate, the board also decided on a new logo, new creed,
and new covenant. It was also important to Hope that the architecture and the amenities in the bank’s
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offices reinforced the brand she was trying to build. She said, “We believe what is of value to our
customers is our commitment to helping them save wisely, spend prudently, and borrow cautiously.
That has resonated with people. Everything we do is aligned to that value proposition—how we
design our offices, the products we offer, and the people we hire. That commitment is our purpose; a
purpose which is unique in banking.” In August 2008 the bank began doing business as Friend Bank.
(See Exhibit 2 for the bank’s vision statement.)
Dothan
Hope decided to build out Friend’s presence in the higher-growth markets of lower southeast
Alabama after dismissing Florida because of its different regulations and market practices. The plan
called for one office per new market; although additional branches would be considered later for some
mid-size cities. Each office would have a bank president, someone who knew the local market well.
There would be one physical ATM at each location, but Friend would not operate a large ATM
network, opting instead to tie into national networks. Friend would limit online banking to
information and transaction capability and bill payment through a third-party. It would not, however,
allow customers to open new accounts or apply for loans online. Hope believed Friend’s target
customers would not be best served by such “do-it-yourself” features.
In October 2009, Friend opened its first full service Dothan office.7 Of the decision to make Dothan
the first location outside Slocomb, Hope remarked: “Joseph and I live in Dothan so we know the
community. The city has a very large and growing population unlike Slocomb, and it was close to
Slocomb, which I felt was important for our first stage of growth. In addition at the time of the
decision, Joseph had already made tremendous progress in developing that market. In fact, 40% of our
loans and 10% of the bank’s deposits were from the Dothan market. And the average Dothan loan size
was 4x that in Slocomb.” Nevertheless Harri Anne Smith was nervous, “Branching into a new location
at the time the economy was in a major recession was worrisome.” Unlike the Slocomb market, the
competition in Dothan came from a mixture of money center banks (Wells Fargo/Wachovia), large
regional banks (Regions and Compass) and other community banks.
The bank was able to locate the branch at the busiest traffic intersection in the state south of
Montgomery. “Prevailing wisdom in the industry is that consumers no longer need the personal
touch,” said Judson Brooks, chief operations officer and the Slocomb office president. “That they
want to conduct their banking transactions quickly—drive thru, online, etc. We want our customers
to have those options as well, but we built the Dothan office because we believe there are people out
there that do want that personal connection.” In fact, the management team believed that the Dothan
office was unlike any other bank. The lobby was warm and inviting, with a fireplace and a gallery of
local children’s art. There was a refreshment center, amenities for kids, a large central courtyard with
seating, the Friend Community Room, and the Friend Helping Friends Pavilion (with park space and
grill area). These spaces were available free of charge to local groups and small business customers.
Mindful of the value of the bank’s long standing culture in developing the right relationships with
customers, the Slocomb office remained essential. Carl Smith said, “We wanted to be able to
effectively export the culture and values we had at Slocomb to our new market. In fact, the employees
we hired for Dothan we trained in Slocomb so they would know what we were all about.”
7 In 2007 Slocomb National had opened a small office in Dothan.
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Management Talent
“The ultimate constraints on growth are capital and our ability to attract good talent, especially
the ‘yodas’8 of banking—those with an intimate knowledge of the local markets and with keen
judgment,” Hope explained. She had three such individuals: Brooks, hired in February 2008, Carl
Smith, hired in early 2009, and Joseph, who began working at the bank in 1989. Those three and Hope
were the management team and the bank’s Loan Committee and Asset/Liability Committee. Having
worked for a number of years at Wachovia and SouthTrust, which was acquired by Wachovia in
2004, Brooks had big bank experience. Hope felt that “Hiring Judson was one of the best things I’ve
done since being named CEO. He knows all the bankers in the area.” On why he joined Friend,
Brooks explained, “The job I held at Wachovia was eliminated. I had the option of moving elsewhere
if I wanted to continue my career with the company, but I did not want to move. I did not really
know Hope that well at the time, but certainly knew of the bank. We met and I liked what she had to
say about the bank and its future.” Brooks explained one appeal a community bank held for him: “We
make the decisions, not some corporate headquarters group.” In 2007 Hope created an Advisory
Board to provide her guidance as she executed Friend’s growth plan. Members were Joe Dalton, Reid
Dove (owner of a large transportation company), Paul Hufham (owner of a local dental practice), and
Joseph.
2007–2009
Economic Engine
Friend generated the substantial majority of its revenues and earnings from lending. On average
over the three years 2007-2009, interest income from lending accounted for 45% of the revenues, fees
made up 40%, and income from the securities portfolio accounted for the balance. At the end of 2009
the bank had grown its loan book from $36 million in 2006 to a little over $48 million, of which about
40% was in the form of residential real estate mortgages, 20% in construction loans, and the balance
in loans to consumers, small businesses and farms. (See Exhibits 3a, 3b, 3c for key income statement,
balance sheet, and loan loss allowance data 2005 to 2009.) It also held about $19 million in securities,
a combination of U.S. Treasuries, mortgaged-backed securities and municipal bonds. These securities
served three purposes: they provided a steady source of revenue, they were collateral for funding
from the Federal Home Loan Bank, and they were required collateral to cover the value of deposits
from the State of Alabama. “The portfolio is pretty conservative,” Hope said, “nothing exotic.” Once
it began operating in Dothan and putting more loans on the books, Friend began to reduce the
proportion of the bank’s asset it held as securities.
Friend was unable to avoid the economic effects of the financial crisis begun in 2008. Several of the
bank’s borrowers—dubbed the “sick six”—had run into trouble. Hope, the management team and
the board decided to increase loan loss reserves to account for the decline in the value of these loans,
and this reduced the year’s earnings by over $500,000. Hope said, “Since implementing the growth
plan our performance in 2009 is the most disappointing to me. If you factor in a normal loan loss
reserve due to growth and a normal credit loss factor, we would have been well above our earnings
growth target; 50% or so earnings growth.”
On the positive side, in its first year Dothan’s deposit growth had exceeded expectations. Even
before the full service Dothan office opened Friend’s Slocomb location had attracted 0.4% of the
overall Dothan deposit market as of the end of June 2009 (see Exhibit 4). At year end 2009 Friend had
$15.6 million in deposits from the new office, although the bank’s share was still quite small. “In
8 Yoda was a character from George Lucas’ Star Wars movies that had “master” abilities.
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fact,” Hope said, “if the growth continued at its early pace, which it did not, we could not have
maintained it.” Management purposefully kept loan growth slow as the creditworthiness of
borrowers had deteriorated with the advent of the U.S. recession.
In spite of the cost of building out the Dothan office, the bank had maintained strong expense
discipline; the model required that it be the low-cost provider given that price was used to attract
funding. While the bank’s non-interest expense increased in 2009, a result of the build-out, the ratio of
its operating expense to average assets and its efficiency ratio (the cost of generating a dollar of
revenue) were well below its peer group. In the decision of when to add to new staff, management
paid close attention to the bank’s ratio of average assets to number of employees and how it
compared to that of its peers. Friend exceeded its peer group in the proportion of earnings that
remained in the bank as capital. (See Exhibit 5 for comparison of key ratios against peers.)
In 2009 the management team had eliminated the bank’s credit card product. Brooks explained,
“The credit card was never a featured product for us, and quite frankly there are more lucrative cards
in the marketplace (for customers), when it comes to awards and benefits. But more importantly the
credit card did not fit with who we are and what our mission is all about.” Hope said, “Ending the
credit card will reinforce our value proposition.” She added:
When we depart from strategy we run into trouble. For example, we got involved with a
$30 million development loan in which we purchased $500,000 in a participation loan from a
correspondent bank. I made the decision. We are a relationship bank, that is our foundation,
but we had no relationship with the borrowers. Why did we do it then? Well, everyone was
doing it, I wanted to add some leverage, earn some extra money. It was a poor decision.
In 2009, Friend wrote off about half of the loan.
Friend outsourced back office operations to the extent it would always remain the face of the bank
to the customer. Third party vendors had large scale providing operating efficiencies which could not
be matched internally. Furthermore, vendors were at the cusp of new technologies. “Just because we
are a community bank does not mean our customers expect less in the way of technology. They want
to know that their checks have cleared and so forth. Vendor or partner is another relationship that
needs to be managed. Our vendors are big companies, and we don’t want to just become another
number to them, any more than we want our customers to be numbers to us,” remarked Brooks.
Lending
Like for most community banks, the board set Friend’s loan ”Policy Limits” on lending authority
for each loan officer. (The board also set policy limits for key risk areas, like liquidity and interest rate
risk.) In early 2010, Friend had three loan officers—one in Slocomb and two in Dothan, where it was
looking to hire a third officer. The loan officer in Slocomb was processing 40 to 45 loans each month.
“We do a bit more consumer and small business loans in Slocomb right now because we are the only
bank in town,” explained Joseph Johnson. If loan officers wanted to make a loan beyond their lending
authority they went to the weekly Loan Committee meetings seeking approval. Entering new
markets with new regulations meant credit decisions were more dependent on quantitative factors.
“The numbers are becoming more important as we look to provide credit to new customers,” Carl
Smith admitted. Each quarter the Loan Committee reviewed the loan portfolio to determine if there
should be changes to the loan loss reserves or whether loans should be written down in value. Their
reports were reviewed by the board. An independent consultant reviewed the portfolio annually.
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Funding & Risk
The bank funded itself from two primary sources: the local market (deposits and certificates of
deposit) and the wholesale market (term funding from non-local sources). Deposits were the most
stable and least expensive form of funding (by virtue of the U.S. government’s FDIC guarantee). At
year-end 2009, demand deposit accounts that paid no interest and interest bearing deposit accounts
(and certificates of deposit) comprised 12% and 79%, respectively, of Friend’s funding base. The
downside of such funding was that as interest rates rose, the cost of attracting funding would rise as
well (and customers would be less willing to hold assets in a non-interest bearing accounts). Like all
other banks, Friend consciously sought to supplement its core funding with liabilities that had longer
maturities to better match the maturities of the loan book. To do this it used financing available from
the Federal Home Loan Bank and from the broker market for certificates of deposit (CDs). Because
CDs issued by banks could be FDIC insured, investors did not have to undertake extensive credit
analysis to gain comfort in the safety of the investments, and across the U.S. individual and
institutional investors bought CDs from banks of all sizes through a robust broker market.
In addition to credit risk, like all other banks, Friend had to pay particular attention to its funding
and liquidity risks. To manage its funding (or “mismatch”) risk, the potential cost of the bank to reborrow or “roll-over” shorter term liabilities at the same interest cost, the bank relied on two primary
measures: the change in net income over the next 12 and 24 months for a given move in interest rates
and the change in the net present value of its assets under various interest rate scenarios. 9 Friend
validated its model on an annual basis with an outside consultant and back-tested the model as well.
Management also focused on the liquidity of the bank’s balance sheet. Each quarter the
Asset/Liability Committee would review funding and liquidity risk, and its report would then be
reviewed by the board. As of December 31, 2009 Friend carried very little interest rate risk on the
books and its balance sheet was quite liquid—in both cases the bank was well under its Policy Limits.
Prior to the opening of the Dothan office in 2007, Hope had made the conscious decision to take
on higher interest rate risk, leveraging the asset base, in order to generate greater earnings. But with
the new office, and the new plan to grow loans, the firm would be taking on additional credit risk, so
she scaled back the bank’s interest rate risk.
Regulators
The Office of the Comptroller of the Currency (OCC), part of the U.S. Department of the Treasury,
was Slocomb National’s primary regulator. Hope continued the tradition of working with regulators
and placed a premium on maintaining excellent relationships with them. “We’ve always tried to be
proactive when it comes to regulators. It has paid off. We have had such a solid bank for so long, and
I believe they view us in a great light,” Hope said.
Looking Ahead
In 2010, Friend was entering the fifth year of Hope’s 20-year growth plan. As she did annually,
Hope updated her plan to account for what she and her team had learned. She had also introduced a
strategy scorecard with targets (see Exhibit 6), behind which were specific action plans for
employees. The current plan was to enter new markets in 2011 or 2012, and by 2015 have a presence
in four markets, all geographically close to Dothan. Each office would eventually have assets roughly
equal to those of the Slocomb office, at $39 million. Hope and her team were mindful that a new
branch typically broke even when it accumulated around $9 million in deposits, and that it could take
four years for a new office to become profitable on a cumulative basis. The decision on where to open
9 During moments of extreme market stress, it may not be possible for banks to renew these borrowings at any price.
9
313-010
Friend Bank: The Time for Hope (Abridged)
the next office would include consideration of: the number of competing banks, unemployment rates,
income levels, and other demographics.
Hope was also considering starting an employee stock ownership plan (ESOP) to retain and
attract talent. Another thing she and her team needed to think about was how to use social media
(i.e., Facebook, blogs, Twitter) to reinforce the Friend brand and “may help us to stay personally
connected to our customers in a way that traditional media could not,” she said.
The management team had ongoing debates about what to do with loans under $2,000. The bank
lost as much as $50 on each loan of this size, but, as a community bank, and in fact “a friend,” how
could the bank not provide these small loans to its customers? “In Slocomb we are the only show in
town,” Brooks added. “As a community bank the right thing to do is to lend the money, no matter
what. It’s not about the earnings, yet . . . . “
Meeting weekly in the Dothan office, the management team reflected on what was ahead. “One of
the challenges facing us is maintaining the “family” atmosphere in each new market we enter, and
across the bank as a whole,” Joseph Johnson remarked. “In addition we need to develop a business
development culture that complements our core culture of wanting to help our customers. Dothan is
a far different market than Slocomb. Dothan is a very competitive market. It will take more than
seeing us at the ballpark or at church to attract new customers. We have to have a targeted approach
to reach people we don’t necessarily know.”
Brooks said:
As we grow it will be more and more challenging to find and hire employees that share our
values. The growth itself is not a concern. I worry about the ability for us and other community
banks to maintain the types of relationships we do have with our customers in a regulatory
environment that has become so restrictive. There is this perception that banks in general are
taking advantage of consumers, hence more regulations. I would argue that the community
banks have done a much better job of meeting the needs of the consumer than large banks, yet
regulations are affecting us all. The industry perception has been painted with too wide of a
brush.
Carl Smith added that there were regulatory changes in how the bank must communicate with its
customers regarding a variety of services and fees, electronic statements and overdrafts charges, for
example. The bank would “need to do a good job explaining to customers that these changes are not
our fault,” and he worried that this could “take away what makes us special.” “If anything what is
happening is not that the Wachovia’s of the world are becoming like us, but that we are being forced
to become more like them,” Brooks added. Hope noted:
What we are seeing and hearing is that regulators have been successful in halting loan
growth at most banks; including many banks in our market, which is a strange environment
given that the government on the one hand is pressing banks to increase lending, but their
regulators are doing just the opposite. Many banks have stopped lending or are shrinking loan
portfolios, which creates a difficult environment for even good customers/strong borrowers.
The lending environment in our market combined with the bias against bigger banks has
created opportunity for us. We are able to selectively grow at this point.
The management team believed Friend was at a certain moment in its history given where the
bank was in its growth plan and the disenchantment customers had toward larger banks. While
excited about the opportunities, Hope was mindful of the challenges. “We cannot hide behind ‘we’re
your friend;’ that is not a strategy. Our products need to be competitive. But what differentiates us is
not our products, but our commitment to our purpose and to the communities we serve.”
10
Friend Bank: The Time for Hope (Abridged)
Exhibit 1
313-010
Father’s Note to Hope
Source: Company.
Exhibit 2
Friend Bank’s Vision, Purpose, Values, Creed, and Covenant
VISION
We will be a $500 million respected and trusted community bank. Our shareholders, employees, customers, and
communities will be better off with us than without us. We will be the bank that sets the bar for other community banks.
PURPOSE
To help friends save wisely, spend prudently, and borrow cautiously.
VALUES
As one of Alabama’s oldest family-owned community banks, our focus has always been on building relationships and
serving our neighbors in the Wiregrass. We believe success lies in being a true friend to our employees, our customers, and
our community, and this belief is reflected in our core values:
Honesty and Integrity: In our personal and professional lives, we seek to maintain the highest ethical standards.
Excellent Service: Because our customers are our friends, we want them to know that they come first. Exceptional
customer service is just one part of that.
Family Environment: Our employees, our customers, and our community are part of our extended family. In banking and
in our community involvement, we seek to help our friends and their families find happiness and prosperity.
Community Commitment: We invest our time, our talents, and our resources in the communities we serve. We strive to
make them better places to live and work.
Long-Term Business Discipline: As one of only a few 100-year-old banks in the country, we know that our carefully
planned investments in business, in our employees, and in our relationships will carry us through the next 100 years.
CREED
Our philosophy on banking is really quite simple. Banking is a business of friendships. And while our philosophy is simple,
our mission is profound. Be a true friend. Be a true friend to our employees. Be a true friend to our customers. Be a true friend
to our community. This is our roadmap to success, true, but more importantly, this is our roadmap to significance. Be a true
friend. Always be loyal. Always be dependable. Always be faithful. Always be genuine. Always be compassionate. Always be
understanding. Always be kind. Always be true. Our business is not a square box of accounts. Ours is a circle of friends. And to
these friends, we will always, always be true.
COVENANT
Banking True To You
Source:
Company.
11
313-010
Friend Bank: The Time for Hope (Abridged)
Exhibit 3a
Friend Bank Income Statement & Related Items (2005 to 2009), thousands
Income on Loans and Leases
US Treasury & Agency (excls MBS)
2009
$3,153
2008
$2,665
2007
$2,379
2006
$2,262
2005
$1,716
41
49
66
112
150
Mortgage Backed Securities
317
379
333
411
522
Est. tax benefit
133
140
123
132
127
All other securities
460
499
298
317
326
Investment Interest Income (TE)
951
1,067
820
972
1,125
5
9
170
26
6
Interest on due from banks & on Fed Funds sold &
resales
Other interest income
3
25
17
28
21
4,112
3,766
3,387
3,288
2,868
Interest on time deposits over $100mil
293
387
511
513
275
Interest on all other deposits
486
664
927
678
425
4
25
1
19
36
Total interest income
Interest on Fed Funds purch & repos
Interest trade liabilities & other borrowings
327
349
121
268
303
Total interest expense
1,110
1,425
1,560
1,478
1,039
Net interest income
3,002
2,341
1,827
1,810
1,829
499
380
336
368
264
Adjusted operating income
3,501
2,721
2,163
2,178
2,093
Non-interest expense
2,207
1,725
1,368
1,343
1,296
511
150
60
60
107
Non-interest income
Provision: loan & lease losses
Pretax operating income
Net income
Cash dividends declared
Source:
12
783
846
735
775
690
$780
$844
$733
$775
$705
575
327
296
303
838
Adapted from UBPR Report at www.2.fdic.gov/ubpr, accessed February 12, 2010.
Friend Bank: The Time for Hope (Abridged)
Exhibit 3b
313-010
Friend Bank Balance Sheet (2005 to 2009), thousands
2009
Assets:
Real estate loans
Commercial loans
Individual loans
Agricultural loans
Other loans and leases
Loans not held for sale
Loan & lease allowances
Net loans and leases
2008
2007
2006
2005
$41,364
3,991
2,577
1,533
51
49,516
666
48,850
$37,732
3,280
2,006
1,166
21
44,205
513
43,692
$25,166
4,565
1,809
1,051
47
32,638
361
32,277
$20,968
2,963
1,991
1,238
86
27,246
285
26,961
$19,154
3,964
1,624
1,145
66
25,953
272
25,681
5,839
6,448
3,258
750
2,805
19,100
67,950
7,979
7,055
4,403
246
0
19,683
63,375
9,189
6,806
1,426
678
613
18,712
50,989
11,457
6,791
1,009
290
1,619
21,166
48,127
14,049
6,571
1,025
138
0
21,783
47,464
Non-interest cash & due from banks
Premises, fix assets, cap leases
Other real estate owned
Acceptances & other assets
Total assets
1,288
4,193
224
1,718
$75,373
848
2,269
0
1,170
$67,662
170
2,032
0
700
$53,891
840
1,914
160
780
$51,821
609
1,933
0
1,015
$51,021
Liabilities:
Demand deposits
All NOW & ATS accounts
Money market deposit accounts
Other savings deposits
Time deposits under $100mil
Core deposits
Time deposits $100mil +
Total deposits
Fed funds purchase & resale
Fed home loan maturity <1yr
Fed home loan maturity >1yr
Acceptances & other liabilities
Total liabilities (including mortgages)
All common & preferred capital
Total liabilities & capital
7,165
6,367
10,841
3,329
17,174
44,876
16,487
61,363
0
2,250
4,500
188
68,301
7,072
$75,373
6,257
5,545
6,635
3,240
15,768
37,445
11,429
48,874
1,361
0
11,993
220
62,448
5,214
$67,662
5,839
9,354
2,437
4,123
13,359
35,112
10,696
45,808
0
0
2,517
207
48,532
5,359
$53,891
5,270
7,517
1,181
2,691
13,429
30,088
13,094
43,182
0
1011
2,517
222
46,932
4,889
$51,821
5,703
6,100
1,231
2,105
12,886
28,025
9,883
37,908
257
4,666
3,528
184
46,543
4,478
$51,021
2.35
7.64
2.35
8.84
4.36
10.93
2.65
11.14
3.12
11.76
U.S. Treasury & Agency securities
Municipal securities
All other securities
Interest bearing bank balances
Federal funds sold & resales
Total investment
Total earning assets
Off balance sheet items (as percent of
total liabilities & capital):
Friend Bank
Peer Group
Source:
Adapted from UBPR Report at www.2.fdic.gov/ubpr, accessed February 12, 2010.
13
313-010
Friend Bank: The Time for Hope (Abridged)
Exhibit 3c
Friend Bank Analysis of Credit Allowance and Loan Mix (2005 to 2009)
2009
2008
2007
2006
2005
Change: Credit Allowance ($000)
Beginning balance
Gross credit losses
Recoveries
Net credit losses
Provisions for credit loss
Ending balance
Average total loans & leases
$513
364
6
358
511
666
$48,267
$361
4
6
-2
150
513
$38,172
$285
24
40
-16
60
361
$28,490
$272
254
207
47
60
285
$27,333
$196
45
14
31
107
272
$23,455
Loss provision to average assets
Friend Bank
Peer Group
0.72
0.63
0.24
0.49
0.12
0.18
0.12
0.14
0.21
0.15
Non-current loan & lease to loan
& lease allowance
Friend Bank
Peer Group
60.81
131.71
130.80
130.57
73.41
85.57
0.00
56.15
2.21
50.83
5.73
15.45
12.87
14.29
4.94
6.78
0.00
4.40
0.13
4.31
Non-current loan & lease to
equity capital
Friend Bank
Peer Group
Source:
Adapted from UBPR Report at www.2.fdic.gov/ubpr, accessed February 12, 2010.
Exhibit 4
Dothan Deposit Market Share as of June 30, 2009
State
HQ
Bank
Regions Bank
Wachovia Bank NA
Compass Bank
SunSouth Bank
Ameris Bank
MidSouth Bank NA
BankSouth
ServisFirst Bank
Community B&T of SE AL
Trinity Bank
Colonial Bank
PeoplesSouth Bank
AB&T National Bank
Friend Bank
Total
Source:
14
AL
NC
AL
AL
GA
AL
AL
AL
AL
AL
AL
GA
GA
AL
State/FED
Chartered
State
FED
State
State
State
FED
State
State
State
State
State
State
FED
FED
No of Offices in
Dothan Market
Deposits
($000)
Percent of
Market Share
7
8
3
1
2
4
1
1
2
1
1
2
1
1
$503,164
323,966
169,850
159,055
135,436
125,479
120,090
111,302
91,810
56,797
49,110
34,789
31,420
7,285
26.2%
16.9
8.9
8.3
7.1
6.5
6.3
5.8
4.8
3.0
2.6
1.8
1.6
0.4
35
$1,919,553
100.0%
Adapted from http://www2.fdic.gov/sod/index.asp, accessed March 29, 2010.
Friend Bank: The Time for Hope (Abridged)
Exhibit 5
313-010
Friend Bank Selected Ratios (2005 to 2009)
2009
2008
2007
2006
2005
3.10
3.25
2.79
3.24
2.66
3.27
2.58
3.19
2.49
3.20
Efficiency ratio
Friend Bank
Peer Group
63.05
78.77
63.40
75.76
63.25
70.26
61.67
66.45
61.92
65.99
Avg. personnel exp per employee ($000)
Friend Bank
Peer Group
46.58
60.53
44.40
60.08
40.00
57.72
40.79
55.60
39.37
53.96
3.14
3.91
3.38
3.71
2.84
3.46
2.73
3.38
2.69
3.34
9.78
10.15
8.68
10.43
10.42
10.82
9.93
10.56
9.21
10.23
Dividends
Friend Bank
Peer Group
8.74
2.76
6.18
4.08
5.86
4.90
6.59
5.20
17.54
4.60
Return on Assets (%)
Friend Bank
Peer Group
0.89
0.20
1.06
0.40
1.11
0.92
1.14
1.14
1.02
1.14
Net Interest Margin (%)
Friend Bank
Peer Group
4.21
3.56
3.79
3.69
3.55
3.97
3.48
4.09
3.52
4.11
0.87
-2.27
6.24
-1.59
5.40
2.82
6.29
4.85
-6.38
5.65
Total overhead expense as percent of
average assets
Friend Bank
Peer Group
Assets per employee ($mil)
Friend Bank
Peer Group
Tier one leverage capital
Friend Bank
Peer Group
Retained earnings
Friend Bank
Peer Group
Source:
Adapted from UBPR Report at www.2.fdic.gov/ubpr, accessed February 12, 2010. Return on assets and net interest
margin are casewriter estimates based on data from UBPR report.
15
313-010
Exhibit 6
-16-
Friend Bank Strategy Scorecard
Strategy Statement: To grow net income 10% and assets to $150 million by 2015 by building on our 100-year old reputation as a trusted community bank; helping customers
save wisely, spend prudently, and borrow cautiously through a family of knowledgeable, trustworthy, and committed bankers; a culture that develops and values enduring
employee, customer and community relationships; additional prime main street locations throughout Southeast Alabama; high efficiency management; sound credit and interest
rate risk processes; and top quality product, services, and technology partnerships.
Perspective
Financial (If we succeed how we will look to our
shareholders)
Strategic Objectives




Grow net income
Add and retain relationship customers
Increase revenue per customer
Improve efficiency
Customer – Value Proposition (To achieve our

Become a trusted financial partner, consistently delivering
vision how must we look to our customers)
proven financial solutions and excellent service
Internal (To satisfy our customer, which processes must we excel at)
Customer management

Understand customer segments

Communicate value proposition and acquire new
customers

Create highly loyal customers

Cross-sell the right products at the right time
Strategic Measures







Net income
ROA-S
EPS growth
Asset growth targets
NIM
Loans/Deposits
Dividends

Customer satisfaction
survey

Number of
opened/closed accounts
Targets







≥ to the model
> 1%
> 10%
≥ to the model
> 4.00%
85%
Annual
Increase

Monthly
improvement
> Previous
year

Product Innovation

Develop new products for customer segments
Operations management





Manage supplier partnerships
Lower cost of delivering value proposition
Continuously improve processes
Deliver responsibly to customers
Manage credit and IR risk







Efficiency ratio
Assets/employees
IRR/PVE
Net charge offs
NPA ratio
Classifieds ratio
CAMEL







< peers
> peers
<15%/<20%
<.5%
<1.50%
<40% capital
1 or 2
Responsible citizen

Generate business/build culture thru community investment



Volunteer hours
No. events held at bank
$ invested in community

> year before

> year before




Turnover
New hire training
Annual perf. review
Personal incentives
aligned to scorecard
Culture training




> year before
<5%
100%
100%


100%
100%
Learning & growth perspectives (to achieve our
vision how must our organization learn and improve)



Source: Company.
Human capital (hire, develop, retain the right people
Information capital (employees have info and tools to do
job)
Organizational capital (create customer-focused culture,
communicate vision, develop leadership and
accountability, link pay to performance, work as a team)
