Citizens National Bank: Breaking a Billion

Financial

Written by John Zorabedian

Tuesday, 01 April 2008

Citizens National Bank: Breaking a Billion - American Executive - RedCoat Publishing

Archie McDonnell, Jr. explains how this Mississippi bank doubled in size without abandoning its core principles.

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Metavante

The mortgage crisis that has riled the markets and squeezed the banking sector has largely bypassed Citizens National Bank (CNB) of Meridian, Miss., a privately held community bank with $1.1 billion in assets. But the broader trend toward consolidation in banking has meant CNB has had to expend considerable energy to keep from losing out to the megabanks that have devoured so much of the competition.

Archie McDonnell, Jr., CEO

Despite taking billions of dollars in losses in the sub-prime mortgage meltdown, the five largest US banks have accumulated more than 50% of the financial services market in the country. And although only a small number of banks are expected to fail this year, there are now just 7,500 banks nationwide, versus more than 15,000 in 1991.

The sub-prime mortgage mess, whether as a cause or effect of a broader economic downturn, has been driving profitability down at the nation’s banks. “Profitability of the whole industry was not as good in 2007 due to generally increasing credit problems in a lot of the larger banks, the flat yield curve, and the effect of the economy in that way,” said Archie McDonnell, Jr., CNB’s CEO.

Yet even as half of all banks reported lower quarterly earnings in the fourth quarter of 2007, with negative earnings growth on average of 5.95% for all insured banks in 2007, CNB’s net operating earnings rose about $1.6 million last year. Since 2000, the bank has grown from about $500 million in assets to more than $1 billion.

McDonnell, who took over the bank from his father, Archie McDonnell, Sr., in 1999, said many community banks struggle with efficiencies and their operations once they reach the half-billion mark. But in September 2005, McDonnell hired the consulting firm Metavante Corporation to help the bank develop a growth plan and implement a reorganization plan. The six-month reorganization project, which McDonnell called “Good to Great” (from the Jim Collins book of that name), generated $1.3 million in annual expense savings, and set the bank on its current path.

Good to great
McDonnell told the consultants that his goal was to aggressively grow the bank to eventually reach $2 billion in assets but not at the expense of CNB’s culture and deep connections to its local communities.

As McDonnell explained, he believes CNB’s destiny is to become the community bank for the entire state of Mississippi, one that can service the particular needs of the state’s economy without pulling money out to invest in other, wealthier states. “Mississippi is not the wealthiest state in the country, but that doesn’t change the fact that people want there to be jobs and opportunities for their children and their grandchildren,” McDonnell said. “A lot of these megabanks come in and suck the money out of the state and redeploy it in Florida and Texas and California and more profitable places.”

Keeping to that mission would not come without some pain, and in reorganizing the bank, CNB cut 10% of its staff. “We took every employee in the bank and put them in a pool,” McDonnell said. “We assigned the best and brightest people to the position they needed to be in and reorganized the bank.”

The reorganization made the bank scalable, so it would be able to grow more efficiently. The primary difference was the creation of a centralized loan operations center with improved technology and processes that allowed loan officers to quickly make recommendations for consumer loans within minutes, rather than hours or days. The bank also reorganized its commercial loan operations into four regions.

CNB sought to improve its non-interest income by improving processes for accruing overdraft income, hired a chief marketing officer, opened three new branches, and established a series of metrics and benchmarks for improving the bank’s efficiency.

McDonnell assumed leadership for directing the organization through all of this change. To establish his willingness to embrace change with employees and directors, he turned up to an annual meeting wearing a black wig and white leisure suit reminiscent of John Travolta and “Saturday Night Fever.”

McDonnell began working at the bank when he was barely old enough to drive and worked in “just about every job you can do in the bank,” he said. Now 55, McDonnell credits his father’s leadership for making him the executive he is today. In honoring his father’s legacy, and the legacy of the bank’s original founders, he said he wants to keep the bank strong and growing for the sake of posterity.

“I always tell some of our best customers to think about banking with us like a rewards- card,” McDonnell said. “I tell them, if you bank with one of these megabanks, you’re not doing anything for your children or grandchildren. If you bank with us, it’s like earning reward points.”

The bank’s owners have pledged to each other, and to the communities of Mississippi, that they will not sell the bank. On CNB’s Web site appears a Declaration of Independence announcing this intention to keep the ownership local. “We wake up every day asking ourselves how we can stay small as a community bank but still get larger,” McDonnell said.

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