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The power of the personal.

Will the seismic shifts in the banking industry bring small-business back home? Bank of the Northwest is one of a growing number of startups counting on it.

Oakland, Ore.'s, main street is an efficient two blocks, long enough to qualify as a downtown, short enough that a sneeze on one end will bring a "bless you" from the other. The town's population is 850 "and 50 of 'em are grouchy," says one.

In her nearly 30 years of banking, Nelda Foster probably saw them all. The First Interstate branch on the corner was where locals stopped by for coffee in the morning or a potluck at lunch. And if the muse hit, Stormy Gordon would plunk out a few tunes at a piano that, for some reason, sat in the lobby.

So familiar were the faces, that when the bank cat, Sugar, died in 1988, the paper ran an obituary - "arrangements by Chapel of the Purrs." And Foster didn't think twice when a confused elderly customer showed up one day with a dubious vacuum salesman. "She doesn't need a vacuum," Foster told the agitated salesman. Instead of cashing the $994 check, she called the woman's son.

Today, the 50-year-old Foster sits on a bench in her backyard garden, her-legs delicately crossed at the ankles. She's dressed casually; she won't be seeing any customers. Foster lost her job during a sweep of layoffs at First Interstate. The downsizing ended Foster's career of 29 years "and nine months" and left her to ponder the sweeping changes in banking the industry.

If losing a job is like a death, then the former customer service manager shows the classic symptoms of grief. For the first few months she kept a folder filled with newspaper clippings chronicling some the feeding frenzy of the last three years: Wells Fargo swallowed First Interstate; U.S. Bancorp took West One Bancorp; First Bank System consumed U.S. Bancorp. The transfer of currency from these deals alone topped $24 billion - nearly the size of Oregon's entire two-year budget.

Foster eventually threw out the bulging folder. The anger stage is over. What's left is a grudging acceptance and a lingering doubt that none of these automation-dependent banks will be as devoted to its clients as hers was.

"Is it important to them," she asks, "that they help the customer?"

Just how important personal service is - to both depositors and business borrowers - remains to be seen, especially when weighed against the tempting ease and speed of electronic banking. If analysts' predictions are correct, automated cash handling, central phone numbers and point-system loan approval will soon be the industry standard, and less personal service an accepted tradeoff.

Until then, however, a growing number of new banks are betting their future on the power of the personal relationship.

If the 1990s was the decade of mergers, the next will be the decade of the community bank. Seven small institutions have opened in Oregon since 1994, and existing community banks saw deposits rise an average of 18% last year. The boomlet is helped by a robust economy and a flood of seasoned bankers suddenly without jobs. But it is mostly fueled by a consumer revolt. Wells Fargo is losing accounts at the rate of 1.5% a month, the New York Times reported, in part because of its error-plagued conversion from First Interstate. The merger of U.S. Bank and First Bank Systems no doubt will bring another wave of customers, many of them small and medium-sized businesses scouting for a bank with headquarters in Oregon and a chairman they can run into at the Rotary lunch.

One of those new chairmen is Stephen Polzin, co-founder of the Portland-based Bank of the Northwest, a startup specializing in middle-market business lending and private banking services for an elite clientele.

Courteous and dignified, the 58-year-old former West One Bank of Oregon CEO steadfastly refuses to campaign against his big bank competitors, one in particular: "I don't want this bank to be associated with any Wells Fargo bashing."

Instead, he and fellow partners Daniel Durkin and Kathryn Spere are trusting that experience (officers average 15 years in banking) and personal service will give the bank a competitive advantage. And at this point in the young bank's life, they're going to extraordinary lengths to deliver that service.

Tom Lee, an earnest young man in a dark blue suit, points out the amenities at Mittleman Jewish Community Center. "It's got great day care. It's got a gym, and you should see the back - it's got a track." Lee sounds more like a marketing director than a banker, but for him the roles are sometimes interchangeable.

A year earlier, the center's business manager, Melinda Mathison, was in banking hell. Wells Fargo "couldn't access our accounts, they couldn't tell us our balances." She spent the better part of her mornings listening to an automated menu on an 800 number. Several of the center's 1,500 members, in turn, questioned the competency of her accounting office. Finally, on the umpteenth complaint session in director Goldie Lansky's office, the two women had an epiphany.

"She looked at me," Mathison recalls, "and said, 'We don't have to live like this.'"

The next day the center started the involved process of finding a new bank. The candidates included some of the state's largest institutions: Bank of America, U.S. Bank, Key Bank. Tom Lee heard about the search at a party that Mathison attended. He asked if Bank of the Northwest could submit a proposal.

"Who is this Bank of the Northwest?" Lansky asked Mathison."They've been in business for four months."

Lansky reluctantly agreed to hear their presentation. Three weeks behind their competitors, Lee and automation expert Mary Jane Williams spent days tailoring the proposal to meet the center's specifications. Lee called Mathison so often,"I was afraid I was bugging you," he told her later.

Through their conversations, the team learned that the only way to equal Wells Fargo's sophisticated automated debit system was to upgrade its own technology. It included that option in its bid, an added expense that the bank considered worthwhile.

The pitches were scheduled in succession on the same day, common for non-profits seeking bids, but highly unusual for bankers who generally prefer to compete at a distance. While one group was inside the center's muted conference room, some of the highest-ranking banking executives in Oregon, including Polzin, cooled their heels in the cafeteria.

By day's end, the tiny Bank of the Northwest had moved from the bottom of the preferred list to the top. Except for its number of branches - B of NW has just one - it matched what the others were offering, and in one particular area, it surpassed them.

"In terms of straight banking services, you can get them anywhere," Lanksy says. "I was looking for the connection to real people. I wanted to reproduce that experience that I had with First Interstate."

Plus, Mathison adds,"the only person who called me [during the RFP process] was Tom."

Polzin began mulling the idea of starting a bank in late 1995, when it became apparent that the national bank mergers were leaving a lot of experienced and well-connected bankers jobless including him - while creating a tempting market opportunity: disaffected small and medium-sized businesses.

The challenges, however, were significant. Polzin, with West One colleagues Durkin and Spere, wanted to open with enough employees that the bank could grow fast, and they needed to buy a lot of technology. This required at least $8 million, twice the startup capital of other new banks. The figure had an added advantage, however: it would allow Bank of the Northwest to make larger small-business loans - a niche within a niche.

Working out of their homes and renting downtown conference rooms for business meetings, the partners started putting out feelers in the investment community. One who responded was Gerald Hulsman, CEO of Charter Investment Group in downtown Portland. The patrician executive, who weekly delivers a single rose to the attendant in his office building, had admired the West One executives since the day he found them bringing Christmas boxes to employees.

When he learned that Polzin, Durkin and Spere were thinking about starting a bank, he encouraged them by becoming a shareholder and later a customer.

"Banking is people," Hulsman explained. "It's not just money. It's relationships."

A who's who board of directors, including Wholesome and Hearty chairwoman Kay Stepp and David Harris, president of Truax Harris Energy Co., helped round up other investors, mostly wealthy professionals and business owners that the bank had targeted. The private placement handled by Pacific Crest Securities brought $15 million - nearly double what Bank of Northwest had originally sought.

That endorsement, combined with the partners' track record, helped Bank of the Northwest collect experienced bankers, many of whom held posts at Bank of America, First Interstate or Wells Fargo. To keep them loyal, the bank took the unusual step of offering stock options to all employees.

"We wanted to do a better job of sharing the fruits of success with those who helped produce it," Polzin says.

Until moving into its downtown headquarters in October 1996, the bank operated in a temporary office downtown, where Polzin used a folding table for a desk and officers learned the intricacies of fax machines. It was the bankers' equivalent of roughing it, leading to a standing joke whenever one was unfortunate enough to lose a pen: "Get one from the supply closet!"

Deposits have climbed steadily since those first two months of operation, which Spere describes as "sparse." By March of this year, they'd grown to $13 million and by early August to $24.5 million. In keeping with its strategy, the bank's loan portfolio - $18.3 million in August - is largely divided between commercial and real estate loans.

To keep its customers happy about banking with an institution that has no ATMs and one branch, the bank sends out couriers to pick up deposits and reimburses up to five ATM charges a month.

But how far will personal service take Bank of the Northwest? While it and other community banks are enjoying the fallout from the large institutions, there's a good chance there won't be enough chairs for everyone when the music stops.

Wells Fargo, already the nation's top small business lender, has launched a campaign to capture an even greater share of that market, the very core of the small banks' niche. As Wells overcomes its technology problems, the widespread defections may slow to a trickle. If the demise of the fullservice gas station is any indication, customers prefer convenience and cost savings over service. A branch on the corner where employees can cash their payroll checks, online banking and instant loan approval are powerful lures.

Moreover, the national banks will be leaner after cutting overhead and jettisoning their high-cost customers, many of whom are switching to community banks. The Wells Fargos' and First Banks' economies of scale allow them to offer the lower-interest loans and higher rates on deposits that the small banks cannot.

As the big banks' customer bases stabilize, smaller institutions - boutique banks - soon may be competing with each other and the dozens of non-bank lenders edging into the market.

Stricter state regulations will prevent a repeat of the early 1980s bank failures, when Oregon was top heavy with 95 banks. They were built during a growth spurt of the previous decade; some of them by hacks with lots of ambition but little banking experience. The recession claimed thirteen banks.

The number of banks operating in Oregon has dropped by half from the boom years to 53 today, leaving small banks and startups optimistic that there's enough bounty to go around for a while.

Bank of the Northwest's emphasis on personal service, however, is labor-intensive and time-consuming. Officers spend as much time on existing accounts as they do drumming up new business. And Polzin, Durkin and Spere insist on personally meeting every new client. At this [TABULAR DATA OMITTED] young stage, the bank's ratio of employees to deposits is the highest among its peers and well above the industry average.

Industry insiders have little doubt, however, that Bank of the Northwest will succeed, not only because of its pedigreed management team, but because it raised enough early capital to hit the ground running.

"They probably did it right," says Terry Cochran, CEO of Columbia River Banking Co. in The Dalles, whose holding company invested in Bank of the Northwest.

"If we don't give our customers three or four suggestions a year we're not doing our job," says Chuck Michael as he slides his utility vehicle into the parking lot at Skutt Ceramic Products.

It's a refrain that has been passed down through Polzin, Durkin and Spere and included in employee evaluations.

"If we can't add value," Durkin explained later, "then there probably isn't a purpose for a bank like ours to exist."

The extroverted Michael seems to relish his role as part banker, part business consultant, part golf fanatic. The latter comes in especially handy with this client, Phil Skutt, whose office contains a small shrine to the sport. After swapping Pebble Beach stories, Michael turns to business. "I wanted an update on the move," he says to Phil and son Jim, the third generation of the family kilnmaking operation. The bank is financing its expansion out of a cramped factory in Southeast Portland. The Skutts found a site (Michael participated in the search), now all they need is the money for new equipment.

Jim Skutt eyes the banker. "Now we get to the fun part..."

"...partner," Phil adds with a grin. The elder Skutt was a longtime customer of West One. After U.S. Bank bought it in 1995,"I wore a black arm band for a couple of months," he says."Big banks and small businesses are not a good mix."

Besides "dinero when I need it," Phil Skutt wants a banker who knows enough about his business that he can trust his advice. When he learned that West One's top executives were starting their own bank, he was the first to sign on.

Loyalty runs like a vein through Bank of the Northwest's culture, not just from customers, but among its own staff. The 48-year-old Michael was mulling offers from several banks when Polzin asked if he'd like to be a commercial lending officer for his startup. There was a catch, however: Michael wouldn't be getting an office for a while - or a full salary. "Say no more," Michael responded.

He had enough faith in his former boss that, "If he told me I'll be driving the messenger van, I'll be driving the messenger van."

At her hilltop home in Oakland, Nelda Foster opens an oversized scrap-book chronicling her years at First Interstate. There's a picture of Edward Settle, a retarded man who swept the streets for 5 cents a day and sample checks the tellers made out to his name; the 80th birthday party for the owner of the local grocery store; the owl that built a nest in the building's cornices.

For a while after Wells Fargo took over, Foster couldn't bring herself to go to the post office. "Even though the customers knew I wasn't at the bank anymore I felt guilty. They all had complaints."

Foster now works out of her house, operating a satellite office for a mortgage broker. She still banks at her old building on Main Street; it's the only one in town. But the branch that once housed five employees now has two. Customers wanting a cashier's check must drive south to Sutherlin. It's doubtful that even a community bank will move into a town with 850 people, but Foster remains optimistic.

"My hope is that there will always be someone to fill that void."


DANIEL J. DURKIN President Age: 55

Previous posts: Executive VP for commercial and real estate lending, West One Bank of Oregon; executive, First Interstate Bank of Oregon.

Education: B.A., economics, Carroll College; M.A., economics, University of Wyoming.

Past director: Portland Rose Festival Association, Portland Metropolitan Chamber of Commerce, Cascade Pacific Council of the Boy Scouts.

KATHRYN L.M. SPERE Executive vice president, secretary, general counsel Age: 46

Previous posts: General counsel, West One Bank of Oregon; private-practice attorney; assistant general counsel, Oregon Bank and Orbanco Financial Services.

Director: Raphael House of Portland; past member, Oregon State Bar business law executive committee.

STEPHEN E. POLZIN CEO, Chairman Age: 58

Previous posts: CEO, West One Bank of Oregon; executive, Bank of America.

Education: B.A., economics, Whittier College; MBA, University of Southern California.

Past Director: Portland Opera, Portland Metropolitan Chamber of Commerce, Portland State University Foundation.
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Title Annotation:includes related article on notable players in the niche market; personal service in banking industry and small business
Author:Holt, Shirleen
Publication:Oregon Business
Date:Sep 1, 1997
Previous Article:A road with a thousand turns.
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