ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, April 14, 1996 TAG: 9604130001
SECTION: BUSINESS PAGE: 1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
MEMO: ***CORRECTION***
Published correction ran on April 16, 1996.
The annual meeting of shareholders of MainStreet BankGroup of
Martinsville will be held at 10 a.m. April 23 at the Rives Theater in
Martinsville. An erroneous date was given in the graphic material
accompanying an article on the Business page Sunday. Also, the graphic
gave an incorrect ticker symbol for the stock. The correct symbol is
MSBC.
Even Wall Street insiders had their doubts when a new team from Bank One of Ohio and Roanoke's former Dominion Bank said they intended to engineer a turnaround at what's now MainStreet BankGroup.
That was in January 1995, when what was then called Piedmont BankGroup in Martinsville had one of the largest "short" positions of any stock traded on the Nasdaq Stock Market.
To "short" refers to a technique for making money on a stock when investors believe its value is about to plummet. They sell borrowed shares at the current price, planning to replace the stock later at a lower price and pocket the difference.
"They were betting we were going to fail," said the company's chief financial officer, James E. Adams.
In the case of MainStreet, however, the stock climbed from $18.75 a share when Adams walked in the door in the fall of 1994 to as high as $34 recently.
"They lost a lot of money," Adams said of those doubting investors. To think that the bank overcame such odds, he said, "makes me feel warm inside."
Last month, the bank declared a 100 percent stock dividend. This split had the normal effect of halving the stock price. MainStreet stock traded last week at around $16, a pre-split equivalent of $32.
The stock price is but one measure of the bank's financial bolstering:
In just one year, MainStreet's return on assets, a measure of financial strength and profitability, leaped from 0.52 percent to 1.28 percent. In last year's fourth quarter, the percentage jumped to 1.58.
Return on equity, another sign of fiscal soundness, jumped from 7.33 percent to 17.24 percent.
By way of comparison, banking industry goals for those two benchmarks are 1 percent and 15 percent, respectively.
These improvements followed the arrival of Michael R. Brenan as chairman and president in June 1994. Brenan succeeded Irving Groves Jr., who retired.
Brenan came from Youngstown, Ohio, where he was president of the local Bank One, an affiliate of Banc One Corp. of Columbus, Ohio. Banc One is one of the nation's top 10 banking companies with $88 billion in assets and markets throughout the Midwest and Southwest. It was once rumored to have been interested in acquiring Signet Banking Corp. because of its statewide presence in Virginia.
"Michael Brenan has done an outstanding job," said Vernon Plack, banking analyst for Scott & Stringfellow Inc. in Richmond.
"Along with the team he assembled," Plack said, "they have turned - and are turning - the bank from a mediocre-performing institution into a high-performance community bank."
"I suspect we will continue to see improvement out of that organization," Plack said.
Brenan assembled a new management team, recruiting - among others - Adams, who was working in the region as a banking consultant. Adams, former chief financial officer for Dominion Bank, joined MainStreet in late 1994.
Michael J. Coiro of Johnston, Lemon Research in Washington, D.C., said the new team "accomplished a whole bunch of things."
Coiro, who follows MainStreet's stock for his securities firm, said the team drastically cut expenses of the member banks by consolidating the back-office operation.
"The old bank had some extremely inefficient processes" with duplication in the processing by member banks, Coiro said. He said the complex changes were accomplished without a hitch so that they were invisible to customers.
His firm has recommended the MainStreet stock, Coiro said, and "we have some very happy shareholders." MainStreet has shareholders in every state except Alaska and Hawaii.
The MainStreet board, he said, acted boldly in calling in entirely new management.
The board didn't think of itself as bold, said director Richard Simmons. But when the prior administration retired, the board "set out to get the best person we could." To do that, Simmons said, the directors hired an executive search firm to find a good candidate.
They were looking for a person with training and experience in a larger bank-holding company.
Brenan said his first reply to the head-hunter in early 1994 was "absolutely not." He was perfectly happy in with Banc One Corp.
Two weeks later, the head-hunter called again from New York and suggested a face-to-face meeting. They both flew to Pittsburgh, where they met in the airport for several hours.
The search firm urged Brenan to meet with the bank's directors, so he went to Martinsville on three occasions in April and May of 1994.
Brenan said the directors told him they wanted someone to lead MainStreet in a different direction, a more progressive one than in the past. The board, Brenan said, was seeking "somebody to turn this thing around."
He accepted their offer, Brenan said, because he saw MainStreet as "a chance to be captain of my own ship," one he could move in a new direction. He was also young enough - Brenan is 43 - to move his career along another path.
And having seen Martinsville, Brenan said, he seized the opportunity "to live in a smaller community in the Southeast." Brenan, who graduated from college in Ohio in 1975 and had held banking jobs in that state ever since, has four children.
He was attracted to the lifestyle of Southwest Virginia, he explained, for the same reasons that kept Adams in Roanoke after the acquisition of Dominion by First Union Corp. cost Adams his job after two years with that company.
Now, Brenan said, "I've had more fun in the last 18 months than in my entire career."
Adams said he stayed in Roanoke rather than seek another banking job elsewhere because he liked living in the area and believes it is a good place to raise children.
He set up a bank consulting firm, advising community banks about finances and administration.. But because few banks have their headquarters in the region, Adams said he spent about 80 percent of his time on the road.
When Brenan offered him a job like the one he had at Dominion, Adams accepted. He was given freedom to commute from Roanoke, but Adams said he wanted to live in the community where he worked. He, too, likes life in Martinsville. |n n| Brenan said his first move was "to breath life into the holding company." MainStreet is the holding company for six banks.
The lead franchise is Piedmont Trust Bank, which has six offices serving Martinsville and Henry County. It was founded in 1921.
MainStreet's six banks have a total of 29 branches. Their markets extend from Lynchburg to Smyth County, and they had started joining together in 1978.
Typical of their customers is Glass Dynamics Inc. of Stoneville, N.C., a family-owned business with $16 million in annual sales.
One of the owners, Conrad Lankford, who lives near Martinsville, said MainStreet's banks give his business good rates and "responds well to our needs." He said said Piedmont Trust Bank gives the family a quick answer on loans while some larger banks "go around and around" loan committees. Outsiders on loan committees wind up knowing too many details about the business, he said.
Besides, Lankford said, he and his brother grew up in the Martinsville area with people who work for the bank.
Although it is a small bank, Piedmont Trust also has a share of the loan business of a national industry, Martinsville-based Tultex Corp. Piedmont is one of a consortium of 10 banks, led by NationsBank, that extends a credit line to the textile giant.
Even though the MainStreet banks were affiliated with each other previously, Brenan said, the holding company had no sense of structure.
The new team centralized data processing, legal compliance, internal auditing, finance, accounting, human resources and marketing.
The member banks' customers could see none of this back-room consolidation. The move, Brenan said, freed the individual banks to "be there for their customers," develop relationships and expand business.
Each bank still has its own chief executive officer and board of directors. Each is active in its own community, operating under its own name. Brenan said the individual banks make "the lion's share" of pricing and loan decisions within the holding company's parameters.
Larry Heaton, president of one of MainStreet's affiliates, the Bank of Ferrum, said 1995 was a year of change that "was not without some pain." But he said those changes, such as layoffs and processing consolidations, were fully debated before a consensus was reached.
Heaton, who has spent 16 years with MainStreet, said Brenan's job was to be accountable to the shareholders, while his own job is to care for customers and employees.
Bank of Ferrum got through the year in good shape, Heaton said, and the bank's results improved. The changes, he said, "bode well for us" because customers will benefit from the bank's closer focus and the more efficient back-office operation.
John L. Wynne, president of another MainStreet unit, First Community Bank, has spent 10 years with the organization. He said Brenan and his team have "streamlined our total organization." That means more support for the Forest-based Community Bank, he said.
The holding company consolidation, Brenan said, reduced the work force by 10 percent, from 485 at the end of 1994 to 440 today. Yet there was no adverse publicity in the community over the layoffs. "It was something that clearly needed to be done," Brenan said.
MainStreet also "moved a lot of people around," Brenan said, because many people were in the wrong places and, therefore, were not properly motivated.
People are now held accountable for their performance, Brenan said, but they are given freedom to do their work. The company, he said, merely got out of their way. As a result, he said, many people "blossomed."
When he started work on Halloween Day in 1994, Adams said, he found the financial organization lacked a disciplined structure. Nobody was accountable for performance objectives.
And the overall portfolio of bank investments "was a mess," Adams said. The portfolio consisted primarily of very volatile bonds with too much interest rate risk. It also included fixed-rate instruments such as collateralized mortgages which also carried risk.
Adams laid out his proposal to the board in December of that year. He recommended that MainStreet eliminate the risk by selling investments which "didn't make any sense," accepting sharply reduced income for 1994.
The board, Adams said, "acted very responsibly and very decisively" in deciding to clean out the portfolio, thus setting the stage for a dramatic financial comeback and increased profits.
Strengthening the performance ratios, like the returns on assets and equity, shows that the bank is doing better than in past years when "performance was dismal," Adams said. The ratio has improved from 64.70 in the first quarter to 1995 to 54.03 in the last quarter. That means that the bank spends $54.03 to raise every dollar of revenue compared to an industry average of 50 to 55.
Yet, Adams believes, "I think we can do better."
Finally, the bank has long since overcome a lot of bad publicity that resulted from the embezzlement trial of Susan Stone, a former employee of Piedmont Trust Bank. She is serving a four-year sentence for alleged stealing $4.9 million from the trust account of an elderly textile heiress between 1985 and January 1993. |n n| MainStreet's director appears happy with the results, at least so far.
Simmons said the system set up by Brenan and his team give the member banks support, allowing individual banks to focus to a greater extent on serving customers. "We're very much sold on Mike," Simmons said.
Director William Cooper II said Brenan took the bank "in new directions, and it's paid off."
Plack, of Scott & Stringfellow, wrote in an analysis last spring that the bank would "likely be sold" unless the new team was successful in turning the situation around.
Now, however, MainStreet is more likely to become the acquirer. One reason Piedmont BankGroup changed its name Jan. 1, Brenan said, was that "MainStreet said more about who we are" and has wider appeal.
MainStreet, Brenan explained, suggests banks oriented toward smaller communities as contrasted with large urban banks. To him, the name also expresses the values of America's small communities.
Brenan said officials are talking to other small banks about joining MainStreet. They are looking in Southwest Virginia, southern West Virginia, northern North Carolina, eastern Kentucky and Tennessee.
In Virginia, Brenan said, MainStreet is looking to sell its story of local independence with centralized services to banks in smaller communities throughout the southwest, including areas around Christiansburg, Blacksburg and Montgomery County. But Brenan has no plans to enter the "difficult and over-banked" Roanoke Valley market.
The goal, he said, is to create the dominant banking franchise in the region by the turn of the century, much as Dominion Bank once did.
Brenan said MainStreet offers its local banks more autonomy and independence than the large regionals can manage. Yet it has more centralized services than a single bank can muster.
Beverly L. Mitchell, senior vice president and chief marketing manager, is developing a plan to help new and existing member banks develop their clientele. She is conducting customer surveys and focus groups so the banks will know their customers and communities.
Each bank will have its own plan, she said, because all are different. Forest, Mitchell said, differs from Saltville, so she and the branch managers will develop marketing strategies for each branch.
Another proposal for the coming year is creating a separate MainStreet Trust Co., a service only Piedmont Trust Bank now offers. Brenan said a centralized trust company allows better control of the service. Besides, he said, it is hard to market the trust services of Piedmont Trust Bank in, for instance, Lynchburg.
Brenan said many people have speculated that he and his team would leave Martinsville when they achieve their original objectives for Main Street. These observers expected the team to "fix it up, sell it and get out of town."
But, he said, "we're not going anywhere. We're here for the long haul."
The management team still has a lot of work to do, such as expanding MainStreet's franchise, he said.
Besides, Brenan said, the team is having fun now.
LENGTH: Long : 255 lines ILLUSTRATION: PHOTO: 1. Michael R. Brenan is MainStreet Bank Group's chairmanby CNBand president. "I've had more fun in the last 18 months than in my
entire career," he said. Beverly Mitchell is senior vice president
and chief marketing manager and is developing a market strategy for
the company. 2. (headshot) James E. Adams. color. Graphic: Chart.
color.