Growth, in the time of recession

By Dick Hughes  

SEPTEMBER 5, 2010 6:32 p.m. (0)

When the economy was cooking and banks were growing, freshly minted Pinnacle Bank stayed in the slow lane.

Good move.  When the crash came, Pinnacle pulled away from the pile-up unharmed.

“We were not smart enough back in 2005, 2006 to know you were to grow it really fast,” says David Barnett, president and chief executive officer, who led the effort to establish a new community bank in Greenville’s competitive market.

“There were times when I wondered if we were growing fast enough, but we took a cautious approach, which obviously served us well when we got to the fall of 2007 and into 2008. It kept us from having trouble, and we don’t have troubles today.”

Unlike many banks, large and small, Pinnacle came out of the recession with profits, strong capital, excess liquidity, a low-loan loss ratio and, encouraging for a start-up, a high percentage of local deposits over outside or brokered deposits.

And, as Barnett likes to point out, Pinnacle pulled it off without government TARP money.

Chartered in 2005, Pinnacle opened on North Pleasantburg Drive in January 2006, two years ahead of the mortgage meltdown that carried down the economy and many banks with it.

After 15 years with C&S Bank/Bank of America and nearly 10 with Citizens First, Barnett was ready “to try something on my own” in a small and independent bank , far away from corporate “cookie cutter” decision-making and pressure to sell “the product of the day whether you needed it or not.”

“In the big bank model, if you are a small business owner, you present what you want, they put it in a computer and it goes up the line, and somebody who doesn’t know you, can’t look you in the eye comes up with an answer.”

Barnett gathered like-minded bankers and investors and set about planning an independent community bank that works with customers eyeball-to-eyeball and is in it “for the long haul.”

“The model back then was sort of to grow it in five years and sell it.  That was not our model. We wanted to have something lasting not only for us but for customers.  It takes a little bit off a community bank if it is going to be sold in five years. Then you will be BB&T.”

A holding company, PBSC Financial Corp., was formed as an IRS Subchapter S corporation, which means gains or losses for tax purposes flow to individual investor-owners instead to the corporation. It is common nationally but rare in South Carolina.

Explains Barnett: “There are six of us all together in South Carolina. Across the country about 32 percent of all banks are Subchapter S.”  (Another in the Upstate is long-established Travelers Rest Bank.)

Because the IRS limits Subchapter S shareholders to 100, Barnett needed investors willing to make sizeable commitments.

“We were shooting for about $12 million, and we ended up raising $18 ½ million,” he says. “If someone said 18 ½, I would have just had to say, no way. But we did it, and we did it on our own.”

Pinnacle broke even in 2007, lost $33,000 in 2008 and had profits of $449,000 in 2009 and $144,000 through the first six months of this year.  It has $90 million in deposits, and it has a well-capitalized ratio twice what regulators require.

By mid-2008, Barnett says, it was clear the economy was in trouble and Pinnacle was falling short of growth projections, “so we consciously scaled back.”

“Have we delayed doing some things? Not really from a strategic standpoint or adding branches, because that really is not our model.  So, yeah, we grew slower than we thought we might.”

The bank has taken its hits, and set aside $201,000 in the first six months of 2010, as Barnett explains, “to increase our loan-loss reserve to be on the safe side for potential losses.”

Barnett sees pockets of economic recovery, such as “some steam” in housing, but no overall sustained improvement.

“You hear a lot about banks not lending.  That’s not the case, at least with us. We are ready to lend. We are looking for opportunities but there is just very little demand.”

The cycle is not going to turn, he says, “until people start getting jobs … (and) consumers are back spending money.”

Barnett believes Pinnacle is positioned to grow, albeit cautiously, in post-recession and is willing to consider acquiring a bank “if it fits out model” or add branches, as it did in Powdersville, if the right banker in the right market comes along.

In the meantime, Barnett is content at a bank that’s “great in return to shareholders,” gives comfort to customers that it is here for the duration and “personally, I’m 50 years old and don’t want to be looking for a job in a couple of years.”