For the correspondent bank, UNBT was too small an account to be noticed by anyone of much importance. So Schmitt was left to fume. "Where we think in terms of individuals, these vendors have a herd mentality," he says. It doesn't help that his bank can't offer the enticement of ever-increasing volume in the years ahead.
UNBT is now on its third correspondent bank. And while it still isn't completely happy with all its vendors, it keeps looking for ways to make its relationship with them work. UNBT has a senior manager on the user board at a computer-service supplier, for example. "This gives us some control, some understanding of the company, the players, the politics," Schmitt says.
UNBT also looks for vendors that share its philosophy. The current correspondent bank for credit cards is a small regional bank not unlike UNBT, and UNBT was able to help design the whole credit-card-processing system. "You have to be choosier about whom you do business with," Schmitt says. "Not every company understands what we're trying to do."
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SHAREHOLDERS
Will anyone buy stock in a company that doesn't at least pretend the sky's the limit?
If anybody is unforgiving about the necessity of growth, it's shareholders. They are the ones, after all, who take the risk; shouldn't they be rewarded by a company that never puts the brake on growth?
Not according to UNBT's shareholders. "I think the '80s proved to us all that growth by itself is not necessarily in the interest of the owners," observes George G. Parker, professor of management for Stanford's Graduate School of Business, member of UNBT's board, and stockholder. "Senior management became more concerned with size than with profitability -- pushing right past optimal size to megasize, making the company less valuable to the owners than it had been before."
Optimal size. It's the cornerstone of UNBT's promise to its investors, and it's a promise reaping them hefty returns. Since the bank's founding, UNBT's stock price has risen fivefold, return on equity has consistently been above 14% for the past seven years, and the dividend payout has been 30% -- five percentage points higher than the average payout of other banks its size. "Remember, this stock is about consistency," says one stockholder. "Consistently good returns born of solid profitability."
But that's only the first chapter in the UNBT pledge. The second kicks in around 1995, when Schmitt thinks the bank will reach full market share of 15% and will begin pumping earnings not into growth but back to its bankrollers. Servicing his limited market ever more efficiently, Schmitt expects the bank's payout ratio to jump to 40%. Why so high? Again, it comes back to his admitted limits: "I don't pretend to know how to use their capital for expansion beyond my market."
His shareholders are believers. More than 63% of the outstanding shares have been in the hands of people who first bought stock at the bank's initial public offering, 11 years ago. And 65% of the shareholders are also bank customers.
Schmitt's IPO was typical of the way he approaches a decision. He carefully scrutinized his potential stockholders. Those looking for a quick sell he turned away. From the start he sought a large, diversified shareholder base of more than 500 (more than most banks his size go after). What better marketers for his new bank than hundreds of happy investors? he reasoned. Moreover, he needed a large enough pool so he could offer UNBT over the counter and create a secondary market. "It was a way to provide my shareholders with a means of exit in case they tired of the bank or its strategy," he says.
Investor fatigue was no small worry to Schmitt. He stipulated that no investor could purchase more than $150,000 worth of stock at the IPO, and he continues to hold the largest chunk of shares himself. "If people have too much of their net worth tied up in this investment, it's hard to be patient.
"I'm not trying to push investors away as much as herd the right ones in," Schmitt adds. Once shareholders come on board, though, he doesn't stop communicating with them, reminding them in an annual report he writes himself of the year's triumphs. His annual report has become another symbol of the bank's style: one year's report converts into a model of the bank, complete with the staff waving from atop a roof deck. "Carl is a nut," says Parker. "He's fun to work with. . . . He's colorful, buoyant, a real freethinker, which you don't see too much of in this business."
Yet, for all the good news, Schmitt walks a tightrope with his stockholders. "If there's anything that can give me a good case of insomnia, it's the fear of slipping below a 15% return on equity." Once the bank's return falls below that mark, Schmitt figures, his shareholders would willingly entertain a lucrative buyout from a bigger bank. To escape such a scenario, many banks grow their way out of trouble -- by boosting their loan base through the purchase of brokered deposits, for example. Schmitt doesn't have that choice, however, owing to his extremely conservative portfolio approach. A healthy ROE at UNBT depends largely on constant innovation to increase productivity and efficiency. "It's a real juggling act," says Schmitt. "Let's put it this way, I don't get bored."
