As the president and CEO of TCI, a small, thriving telecommunications company in Springfield, Va., Dan Testa figured he was the ideal small-business banking customer. TCI religiously ran about $8 million worth of business every year through its local bank, Riggs National. What sort of a bank would walk away from that?
Riggs would. That's what Testa rudely discovered some years ago upon fielding a call from his loan officer, who advised him that Riggs was shifting strategies to pursue bigger, more prestigious customers. "You don't fit our model anymore," Testa recalls being told. "You're too small."
Dumbfounded, Testa called Burke & Herbert Bank & Trust, a small bank in his hometown of Alexandria, Va. When he arrived at the main branch to open an account he was greeted in the lobby by none other than David Burke, then the bank's president and still its most senior officer. Burke welcomed Testa to the bank as if he were a visiting dignitary, gave him his direct phone number, and told him to call anytime. "I was overwhelmed. They treated me like royalty," Testa says. "You would have thought they didn't have any other customers."
Actually, Burke & Herbert has 50,000 of them, most drawn from within a 20-mile radius of its main branch in downtown Alexandria. Some of its customers are so loyal that they put Burke & Herbert bumper stickers on their cars. Others, spotting empty storefronts in their neighborhoods, call up and urge Burke & Herbert to fill the space with a new branch. Dan Testa expressed his enthusiasm by giving the bank plenty of business. After moving his commercial account to Burke & Herbert he moved his personal account, then refinanced his mortgage twice and took out a home equity line.
Founded in 1852, Burke & Herbert is the oldest continually operating bank in Virginia and the state's 12th largest. The bank's headquarters has been housed on the same downtown Alexandria corner since 1871, and the business has been run mainly by the same family, the Burkes, for five generations now. (The last Herbert retired in 1940.) Along the way it has become something of a public trust and local institution. "The bank has these old-fashioned standards that offer a sense of comfort in a world that changes so drastically," says Bernard Fagelson, an attorney and a Burke & Herbert board member since 1961. "It meets the everyday challenges of business but never loses sight of the fact that people want a bank to make them feel secure."
Burke & Herbert tilts heavily away from what passes for progress. The bank finally broke down and put magnetic numbers on checks only after local supermarkets would no longer accept B&H checks from customers.
In practical terms, this means that Burke & Herbert tilts heavily in favor of face-to-face banking and away from what traditionally passes for progress. Until the late 1970s, accounts at the bank were identified by name, not number, and clerks memorized customers' handwriting to clear checks. The bank was the last in Virginia to buy a computer, and when it did, it promptly ridiculed the move, draping the bank in black crepe and running cartoon ads featuring hapless Burke & Herbert employees being sucked into the newfangled machine. The bank finally broke down and put magnetic numbers on checks only after local supermarkets would no longer accept Burke & Herbert checks from customers. It still has a total of just 16 ATM machines at its 15 branches.
You'd think that kind of quaint footdragging would be a recipe for insolvency. And if that didn't do the job, then control by the same family -- the blue blood no doubt thinning over the past century and a half -- certainly would. Not exactly.
Burke & Herbert is among the best-run banks in the country, based on an important industry yardstick called the efficiency ratio. Essentially, this ratio (derived by dividing noninterest expense by net operating revenue) measures the extent to which revenue is absorbed by overhead expenses, so a lower number translates into greater profitability. In the first quarter of this year Burke & Herbert's efficiency ratio was 43.3%, versus an industry average of 56.4%. Meanwhile, in the past 45 years Burke & Herbert has steadily increased its assets under control to nearly $1.25 billion from $9 million.
But the bank's efficiency and growth have not come at the expense of customer satisfaction. In a recent survey done by Washington Consumers' Checkbook magazine, Burke & Herbert posted the highest score in customer satisfaction among banks in the Washington, D.C., area. Ninety-three percent of the bank's customers characterized its service as superior. Riggs, the bank that drove Dan Testa into Burke & Herbert's arms, was considered superior by just 18% of its customers. "Ill treatment of customers by other banks is our best marketing strategy," says Hunt Burke, David Burke's cousin and the bank's president and COO.
That ill treatment, Burke notes, drops right to the bottom line. "They [Riggs] have six times more assets than we do, and they still make less money," he says. It might also be noted that Riggs' efficiency ratio of 90.9% is more than double Burke & Herbert's.
In recent years, banking has been in thrall to change, principally in the form of feverish consolidation. Since 1985 the number of community banks -- local banks with assets of roughly $1 billion or less -- has shrunk to 7,000 from 14,000. In their stead a handful of Goliaths has risen. According to the FDIC, just a dozen complex institutions -- loosely defined as those global in scope and comprehensive in offerings -- now control some 42% of all deposits and 47.8% of all banking revenue. Of the 7,800 U.S. banks, the largest 18 now control more assets than all the rest combined.
Consolidation is meant to produce a variety of results grouped under the broad umbrella of improved efficiency. A lot of customers, however, and especially small-business customers, will say that the one sure-fire result is a decline in service. Many small-business owners are accustomed to banking locally with familiar lenders who can serve their needs expeditiously. Consolidation means that suddenly local loan officers have no lending authority; the best they can do is fax an application up the line to a regional office. The next step is for the larger banks to spend millions marketing what are known as noncore products -- mutual funds, insurance, real estate brokerage services, and so on, with customers paying for all that marketing in the form of fees. Finally, the big banks cut back on the basics, such as low-cost checking accounts and having human beings answer the phone.
All this activity and, yet, increased efficiency remains elusive -- a mirage, in the words of David Wheelock, an economist with the Federal Reserve in St. Louis and an expert on the U.S. banking system. "The efficiency argument is very tenuous," says Wheelock. "Economies of scale are hard to realize." The reason for that is largely technological. "Real economies are realized in the back office -- processing checks and that sort of thing," says Wheelock. "But banks exhaust those economies at a very small scale." In other words, a bank with $1 billion in assets can run its back office operation just as efficiently as a bank with $50 billion in assets.
None of the five largest banks in the country -- Citigroup, Bank of America, J.P. Morgan Chase, Wachovia, and Wells Fargo -- has an efficiency ratio that can touch Burke & Herbert's 43.3% figure. The best in this group of mega-consolidators is Citigroup, which has an efficiency ratio of 48.1%; the least efficient is J.P. Morgan Chase at 68.4%.
The Northern Virginia market has seen so much consolidation that Burke & Herbert is an anomaly in the region. Needless to say, the bank has been the object of repeated buyout offers, all of which it has quickly rejected. "If we ever sold we'd get run out of town by our customers," says Hunt Burke. He says one suitor admitted to him that it pursued Burke & Herbert because it could use the goodwill associated with the bank's name to grease its dinnertime telemarketing pitches. That is, customers hearing Burke & Herbert's name would not immediately hang up.
The strong impression at Burke & Herbert is that current management won't be going anywhere anytime soon. The average tenure of the bank's 300 employees is five to seven years, and branch managers have been at their current locations, on average, for 8.4 years. The bank fills 95% of its openings above the teller level from within the ranks. "We let the customer deal with one person and let them know that they'll be here next year," says Erik Dorn, a vice president at the bank.
"We're really into nepotism here," deadpans Hunt Burke. A handful of branches are co-managed by family members, including a husband and wife team, a mother and daughter team, and a pair of sisters. Most banks prohibit such arrangements, fearing embezzlement schemes, but Burke & Herbert encourages them.
The bank also bucks the norm by preserving the traditional authority of branch managers. "We try to push autonomy out to the local branches and keep it there," says David Burke. If a loan request exceeds a branch manager's lending limit (usually about $75,000), he or she can fax the application over to one of the Burkes and get a response within 24 hours. If it exceeds the lending limit, it goes to the loan committee, which meets each Wednesday and will decide that day. (Burke & Herbert also has an engaged board whose 16 members meet each Thursday night for an hour.)
Al Simon, now 80, started his Washington-based company, Sodibar Systems, in 1948, banking with Burke & Herbert. "They don't put you through all this rigamarole and red tape," he says of the bank. "You can get answers right away." Simon, who leases beverage-dispensing equipment and sells soda down the Atlantic Seaboard, says that if he's traveling and sees a piece of expensive equipment, he simply writes a check for it. He then calls Burke & Herbert and gets the bank to cover the expense, no questions asked. "Today, I couldn't get away with that with any other bank," he says.
On a typical weekday morning, the lobby at Burke & Herbert's main branch hums with as much conversation as it does commerce as customers meet and greet one another. A grandfather clock that has chimed opening and closing hours for the past 106 years stands near the front door, and the bank's six vice presidents sit, not hidden away in offices but in open alcoves. Tellers hand out not just lollipops but also dog biscuits.
The bank has been animal friendly since the 1970s, one of the legacies of Taylor Burke Jr., who ran the bank from 1963 to 1992 (he died three years ago). Taylor, father of Hunt, owned a parrot named Runyon, who perched during business hours in his office. When the parrot got too loud, Taylor would draw a water pistol from his desk and douse him. Taylor Burke may have been a comedian, but he was also a polymath who recited Shakespeare and issued salty memos. In one he advised the staff: "We want you to be always polite, but there is no law which says that you have to open accounts for obvious dingbats or paperhangers...You have my permission to make up rules on the spot. Just tell me what you've done so I can field the irate phone call." Burke also posed for bank advertisements as, among others, Whistler's mother, Batman, and Scrooge.
Bob Fitton, another board member at the bank, recalls Taylor Burke as "one of the more natural people I've ever met." He says that Burke's true legacy, beyond the memorable theatrics, was turning Burke & Herbert into "a bank that reveres the customer" in an age of increasingly depersonalized service. "If customers call in and want to talk to the president of the bank, they'll talk to him," adds Fitton. "That's just part of the culture. It's no big deal."
One customer passing through -- petless -- this day is John McCaslin, a syndicated political columnist. He recalled bouncing checks during his college years, in the 1970s. "The bank would call up my mother and ask her to put another $40 in my checking account," he says. "They would never penalize you." McCaslin says that the bank also serves as a social locus. "It's a fun place to bank," he says. "It's the sort of place where you can come in and grab $20 and run into 15 people you know."
A few years ago McCaslin needed to grab more than $20, namely a $12,000 loan for personal reasons on short notice. After a brief conversation with Hunt Burke, he got the loan. The process was so ad hoc that when McCaslin came back days later to repay the loan, officials at the bank couldn't find the accompanying paperwork and kept asking him who exactly lent him the money. To Hunt Burke that was not extraordinary. "We make loans here that on paper wouldn't fly at other banks," he says. "There's no rule we can't bend with a few days' notice."
Around the corner from the front entrance of the main bank branch, a narrow door in the side of the building leads from the street into Hunt Burke's office. Burke urges employees and customers alike to drop in anytime they have a concern. "People need more than salary to like the place they work," he says. "They need to be able to say, 'I yelled at Mr. Burke today, and he actually listened to me."
A new class of tellers comes through Hunt Burke's office. He welcomes them and urges them to call him if they have questions. Then, deadpan as ever, he urges, "Have fun -- but don't lose the money."
The day I visited with Burke a new class of tellers came through his office. Burke welcomed them and urged the tellers to call on him if they had questions. Then, deadpan as ever, he urged, "Have fun -- but don't lose the money."
Given its history and character, it's natural to think of Burke & Herbert primarily in terms of its connection to the past. But the bank has a long tradition of mixing progressiveness with tradition. Back in the 1950s, Burke & Herbert made loans to African Americans when few other banks in then-segregated Virginia would. The bank also caught heat from state regulators in that era for lending to women without having their husbands co-sign for the loans. More recently, during the recession of the early 1990s, the bank worked with customers who fell behind on their mortgages. It reaped a lot of goodwill and a surge in business when the local economy improved.
All of it -- the tradition and the risk-taking, the efficiency and the slow-paced informality, the dog biscuits and the free checking -- makes a difference. Burke & Herbert chairman Charles K. Collum Jr. says these factors, among others, explain why so many customers are content to put their money in the bank and leave it there. Of the $1.25 billion in deposits at Burke & Herbert, $240 million is in checking accounts on which the bank pays no interest. The differential between interest earned and interest paid out by a bank is called the net interest margin. Burke & Herbert has a net interest margin of 4.3%, about 35 basis points above its peer group.
That's a big competitive edge, and in 2002 the bank's return on assets of 2.03% was the highest among all large banks (those controlling more than $1 billion in assets) belonging to the Independent Community Bankers of America, a national trade association representing 5,000 community banks. Given that community banks tend to be more profitable than larger banks, Burke & Herbert was the most profitable non-Internet bank of its size in the country that year. (Internet banks can be more profitable because they have so little overhead.) Yet it was also one of the safest. Burke & Herbert's loan to asset ratio is currently a conservative 57%, just below the industry average. The combination of customer loyalty and prudent management has made Burke & Herbert one of the 10 safest banks in the country, according to Weiss Ratings, which is a national rating service for financial institutions and insurance companies.
Dan Testa's old bank has changed its approach -- "Today," a spokesman for Riggs National says, "we think we have a compelling set of small-business products and services." But Testa, whose business now does $10 million in sales a year, hasn't looked back. It's not widely known even among the bank's admirers, but Burke & Herbert is a public company, after a fashion. The stock is mainly held by the Burke family and some insiders, but a single broker in Alexandria does make a market in it, and five years ago Testa got his hands on some shares. They now trade for about $2,500 each, more than four times what Testa paid. "It's been the best-performing stock in my portfolio," he says. His bankers are glad to hear it. i
Ed Welles, formerly a senior writer at Inc., is now a freelance journalist and personal coach. His book True Spirit, True Self: Living Sensibly in the 21st Century will be published this fall by Vital Mind Press.