By Kiah Lau Haslett
Mary Ann Scully is a lifelong banker, and for the last 11 years she has brought her big-bank experience and expertise to the community banking space. She cut her teeth at regional Baltimore player First National Bank of Maryland, which later became Allfirst Financial Inc., focusing on large corporate clients in the Midwest. She was then promoted to international banking, in which she worked with European and Japanese companies, eventually heading up the entire group. She eventually returned to Baltimore to work in the bank's M&A and strategic planning departments. The last position she held at AllFirst was executive vice president of regional banking before the bank's sale to M&T Bank Corp. closed in 2003.
Her next move was to start a bank. She gathered a small group of bankers, composed of former colleagues and new partners, to form a community bank headquartered in Howard County that aims to bring a sophisticated experience to small- and medium-sized businesses. Ellicott City, Md.-based Howard Bancorp Inc. was founded in 2004.
Management spent the first seven years mainly focused on the bank's organic growth. But lately, the $924.5 million community bank has focused on strategic transactions to grow assets and expand its footprint, through team lift-outs, failed-bank acquisitions, branch deals and whole-bank deals. SNL spoke with Scully this fall to learn a little bit more about the metropolitan Baltimore area, the transition from big-bank banker to CEO of a community institution and her view of the regulatory landscape. What follows is an edited transcript of the conversation.
SNL Financial: What is it like to be a community bank in Baltimore?
Mary Ann Scully:
The Baltimore market has economically performed well. It's a strong market. It doesn't necessarily get the attention that Washington does, but it's a strong market compared to most markets in the U.S. We saw an opportunity three years ago to position ourselves as a stronger community bank in the Greater Baltimore area.
How does Howard balance organic growth with strategic growth opportunities?
We talk about the three legs of a stool and how important it is to balance all three. You've got the organic growth, which is mostly commercial loan origination but includes retail lending, with demand and transactional funding growth. Then you've got the mortgage revenue piece, and that has grown initially by team lift-outs, and then third is the acquired growth. Our branch acquisitions with Rising Sun Bancorp and Cecil Bancorp Inc. have not been about branch deposits but rather about working with a financially stressed counterparty that needs to deleverage their balance sheet. It's driven by our purchase of a commercial loan portfolio that we selected, and technically that's how [the seller pays] us for the assumption of their deposits. Even the FDIC-assisted transaction of NBRS Financial Bank was obviously a very attractive gain there because of the discount purchase, but we actually consciously diluted some of that gain by preselling almost all of the nonperforming assets; when the deal was consummated, we had presold almost all of the bad loans so we were left with an annuity stream of the performing loans.
Howard announced it agreed to acquire Dundalk, Maryland-based Patapsco Bancorp Inc. in the first quarter, and the deal closed in August. What is the environment like in Baltimore that is motivating banks to sell?
Within the industry, you have people on the small-bank side who feel that they need to partner with someone who can give them some size and efficiency because of the regulatory environment. You also have a number of people who, now that they're on the recovery side of the recession, are realizing that just because their NPA problems are behind them doesn't mean they can attract the capital they need to grow. I always call the first one "the regulatory question" and the second one "the relevance question." Can I attract the capital I need to be relevant? Third, because of all the movement in the market, you have pricing moving up. Boards can feel they are not doing their shareholder base a disservice if they can get book value or a little more that book value, if they can substantially increase their pricing over what their market value might've been or if they can create some liquidity for their smaller, older shareholders. To the extent that we have what we think is an attractive currency, a track record and experiential sophistication, we're very well positioned to take advantage of that convergence in the market.
Even though Howard has just under $1 billion in assets, its strategy seems to reflect a lot of sophistication about its growth, business lines, the bank's footprint and focus — even the split of the mortgage business between traditional retail mortgage and a nationally focused refinance business. What has it been like for you and your team to go from a larger bank to forming a community bank? How that has helped or hurt you, if it has at all?
It has probably provided some moments of culture shock for us as individuals, but I think it's done nothing but help the bank. We have a sophisticated awareness from a corporate finance perspective, strategic planning perspective and an M&A perspective, as well as how to be successful in different segments of the banking industry, and can translate it into a community bank-client model. One thing I learned over the years was whether you're working with a small business down the street or you're working with a Fortune 1,000 company in Chicago or you're working with a Dutch publishing company who has just done their sixth acquisition in the U.S. — in all of those cases, it's the people you're working with that decide to award you with their business. In a tough lending environment, it's the people that frankly decide that they're going to find a way to repay you.
Some of the bank's shareholders include asset managers like Endeavour Capital Advisors Inc. and Stieven Capital Advisors LP, funds that are focused on the bank space. What's it like to have their interest, attention and investment?
Good, good and good. We have, with Griffin Financial Group's assistance, been able to tap into a number of institutional investors that are well-known for investing smartly in the community bank space. We believe that that is a mark of confidence. We also believe that that is a strategic resource we can tap into. We pay a lot of attention to investor relations and make sure they understand what we're doing. We know that any advice they provide us is experienced advice, so it really doesn't get any better than that. We also have some slightly bigger players — Manulife and T. Rowe Price — locally, which obviously gives us a lot of pride. We think that bodes well for our future as we continue to become increasingly relevant to all of our stakeholders.
You're on the FDIC advisory committee on community banking. What has your involvement in that group been like, what items you're brought to regulators attention and what is your sense of regulators' interest and support of community banking?
I'm on the FDIC community advisory council, and I'm also on the Baltimore advisory board for the Federal Reserve of Richmond. I believe that regulators candidly are focused on not wanting to see the community bank sector disappear and I believe that just about everything they do is well-intentioned and a direct result of trying to make sure what happened in 2007 and 2008 doesn't happen again. I think what bankers can bring to the table is a perspective of what the unintended consequences are of those well-intentioned actions.
For a bank like ours that's operating in higher growth markets and wants to be better than well-capitalized, we're very concerned about the regulators' understanding of what some of these regulations and higher costs signal to existing and potential investors about the attractiveness of the industry. If an industry can't continue to attract capital in the long-term, it's not a sustainable industry.
One of the great things that the FDIC has done under [Chairman Martin] Gruenberg's leadership is point out that community banks statistically play a really important role in lending to certain sectors. When you think about the allocation of capital among small- and medium-sized businesses, it can be very difficult for some of them to be underwritten by large banks. How are we going to make sure those small- and medium-sized businesses keep getting the capital they need? It's by having a strong community banking industry, and that industry in turn needs to have access to its own capital. I do think they're beginning to realize, yes, they obviously have an obligation to the depositors because the FDIC is the insurer of last resort, but they're also taking it upon themselves to say they have a responsibility to small- and medium-sized businesses, and that's the reason to be focused on the capital issue.