TowneBank: A Story of Community, Evolution, and Growth

Discover how TowneBank has driven growth in their community. Through real-world applications, learn how their partnership with Baker Hill has helped them streamline operations and enhance efficiency over the last 20 years. This session offers valuable lessons and actionable strategies for financial institutions seeking their own growth path to foster community impact and continuous improvement.


Transcription:

Bryan Peckinpaugh (00:10):

Looks like we're ready to jump in. Thanks everybody for carving off the end. I know quite a few people had flights to catch, so we appreciate those of you that stuck around to hear us talk for a little bit. My name's Bryan Peckinpaugh. I am the National Sales Manager for Baker Hill. With me today to share the TowneBank story is John Baiocco, and I hate starting with an I Source slide, but I think it's important to set the stage for what we're going to talk about today. It really shows how our industry has evolved since the first bank was founded and how that evolution has escalated over time. We moved from a world where it took centuries for some of these innovations to happen to one where there's constant change and challenges that we've got to adapt to. At Baker Hill, we've been part of that evolution for 40 years, and we've been fortunate to partner with TowneBank for about the last 20 of them.

(01:12):

And at Baker Hill, we no longer believe in digital transformation because it implies there's an end or a finish line that you're trying to get to. Really, there's no end in sight. As you can see from this slide, there's going to continue to be change. So instead we believe in digital evolution where there's progress that is continuous and only limited by our human capacity for creativity. We wake up every day thinking about how we build a platform and an ecosystem that is living and breathing. Digital evolution is at the heart of what we do at Baker Hill and core to our story as well as the TowneBank story we're going to share today. So now if you'd have caught very young, Bryan, he would've told you I'd have been up here on stage on a hoverboard, but I don't have that yet.

(01:59):

But in our day-to-Day banking lives, we're looking at making risk decisions based on Excel and other tools. And as a fun coincidence, I don't know if you know this, but Excel came out the same year as the original back to the Future movie, which was 1985, but we're still here using our spreadsheets because we're comfortable with them. We're used to the ui, we're very good at making changes in them even though the data says maybe we shouldn't. I don't know if you guys are aware of this, but there's industry studies out there that say 90% of the spreadsheets that have over 150 rows in them contain an error, and yet that's what we're using as part of our risk analysis. So imagine in that risk analysis spreadsheet if you had an error that was affecting your debt service coverage and you're using that to make your decisions.

(02:51):

So I think Doc Brown had it right when he said to Marty where we're going, we don't need roads in our industry. We've got to think about where are we going and what are those technologies we need to evolve as an industry. What got us here is not going to be what gets us where we want to go. As I mentioned with me today is John Baiocco from TowneBank. John leads their small business lending group and has been there with them for most of their evolution starting out as a small bank in Portsmouth, Virginia. John doesn't like us to tell the garage story, but I always liked to at least mention it, and now is a 17 billion bank headquartered in Portsmouth. The bank was founded on the idea of serving others and enriching the communities that they operate in. With the alignment of the values of our two organizations and our mutual focus on communities, they've been an ideal partner for us. As we've looked to evolve in the lending technology space, we're now on our third generation of lending technology that TowneBank is using across their platform. So John, can you tell the team a little bit about town and your story of evolution?

John Baiocco (04:00):

Sure. Like Bryan said, I'm the Director of Small Business Lending at TowneBank and really my career primarily has been on the commercial side, on the sales side, the corporate lending, and I was a regional president for a while, and about five or six years ago, I moved to the dark side. I went to credit and I actually managed the special assets groups and those of you're bankers, you know what special means? Not in a good way. And then about three years ago, I moved to small business and my move to small business was not coincidental. We realized we were going to change how we actually originated loans in the small business arena. So we have dramatic changes that I will share with you in a few minutes, but let's talk about TowneBank. We're headquartered in Suffolk, Portsmouth, Virginia, and that means nothing to all of you.

(04:53):

I appreciate that. It's in the southeastern portion of Virginia, about 60 miles from the border of North Carolina. So that may give you some context. We were founded 25 years ago, September, 1999, so we just celebrated our 25th anniversary. Can you go back? Oh, sure. One slide. Absolutely. Now we have grown to 17 billion in assets. We have 50 branch offices, which is amazing. We have over 1200 employees now. I remember when it was 25 employees. Our markets are pretty expansive. It's Hampton Roads, which is the city is of Virginia Beach, Norfolk, Portsmouth, and Suffolk. You probably know Norfolk because it has the largest Navy base in the world. We actually go up into Northeast North Carolina, which is the outer banks. Some of you may have a vacation there all the way up to Charlotte and Raleigh and Greenville, North Carolina. And then we go up to the northwest in Virginia, up to Richmond in the Charlottesville area.

(05:52):

So we've grown our footprint. We have a little over $11 in loans, and we have the number one deposit share in our primary market in Hampton Roads. And I'd like to show you a little timeline with some milestones in it. Over the last 25 years, we had our grand opening with branches in 1999, and yes, as Bryan said, we did start in the two car garage of our CEO. He loves that story. I hate it because when I worked at a competitor for the first five years at TowneBank, we used to make fun of that. Yes. Are they still operating out of the garage? So I don't like to tell that story, but he loves it. So for the next few years, we actually achieved profitability in the first 11 months of our operation, which was remarkable. So we started our phenomenal garage. No, we had three branches at that point, but yes, we had a limited overhead.

(06:47):

We were in a garage. His garage is nicer than my house. That's what I told Bryan. I'm going to take a mature of the garage. So during that next 10 years, we acquired a small bank and what you'll see, there's a theme throughout our growth over the 25 years, although most of our growth was organic, we did make strategic acquisitions throughout the years, but they were usually small community banks that enhanced our market share. So in that first 10 years, we actually started our strategic partnership with Baker Hill. We actually used their, I don't want to say old, but their legacy products. So we called B2B or B2C that they call bank to business or bank to consumer. We were also, that's the first time we were listed on nasdaq. So we made some great strides in those first 10 years. The next few years we also made some other acquisitions, actually bank of that was in the North Carolina market.

(07:43):

We actually bought an in-market community bank, which was big news for us because they're one of our competitors. And then we moved into North Carolina and bought Paragon Bank, which was a totally different philosophy. There were high touch, but they focused more on the private banking arena, which we did not. Now we've expanded even further into North Carolina. So North Carolina, we recognize as an emerging market for us, we have such tremendous market share in our traditional Virginia market that we realized if we had to grow, we had to go into North Carolina. So we did that. We were also named one of the America's best banks by Forbes, and we were very proud of that. Then we got to the point where we implemented a new core banking system, which was a difficult time for me. Change is hard. We moved further up into Richmond, expanded west into Chesterfield, Virginia, and then we actually named the ninth Best Bank in America by Forbes.

(08:44):

So we were getting a lot of recognition and we actually ranked one of the best banks to work for. But again, that was a survey done by our employees. We acquired another bank within our market. So you'll see there's a lot of change and with change when you get all those banks together to try to get them to do and to conform to the culture and the way of doing things at TowneBank was difficult and it still is difficult. So that led us into realizing that we had to adopt a new loan origination system. So what did we do? We hired a consultant to tell us what we already knew, and they confirmed that to us. Yes, you do. All your markets are originating loans in a different way and we need to all be on the same page and doing the same way.

(09:31):

So we actually sent out an RFP to many different vendors, and of course Baker Hill was one of them. But we did evaluate three different vendors and we made Baker Hill earn it, even though they were the incumbent. And we had a longstanding relationship. There were two competitors that made reasonable recommendations and provided reasonable solutions. We don't make change easily at TowneBank. So we did an enormous amount of due diligence. We actually went onsite at different banks that used these three different vendors and said, how would this be implemented at TowneBank? So fortunately, we chose Baker Hill's Next Gen system and they earned it many meetings, much vetting on our part, but we were very happy that we were able to stay with Baker Hill and NextGen. So one of the things that the change affected us when we adopted this loan origination system, which is a comprehensive system.

(10:38):

It actually starts with the application from the borrower goes, flows to underwriting, goes to the approval process, goes to the acceptance by the applicant, goes to the documentation of the loan, goes to the closing of the loan, the funding of the loan, the booking of the loan, and the imaging of the loan. That was big news for us. It was all in a streamlined process. So it enabled us and small business to actually segment small business from commercial prior to adopting NextGen, small business was merely a part of commercial, and it was unclear when they should originate their loan through small business and when they should underwrite it more thoroughly. On the commercial side, we said, okay, we're going to have clear guidelines and clear parameters for small business. We're going to use scoring to help us decision loans. In small business. We are going to right size the amount of underwriting in relation to the dollar amount of the loan.

(11:42):

Prior to adopting NextGen, we were doing the same level of underwriting and requiring the same level of financial statements for a $250,000 loan as we did for our $5 million loan. Didn't make sense. We all knew it, but that's the way we always did it. Commercial lenders chose whether or not they want you to use small business. They no longer have that option to choose, and they all will choose small business now because we've created the incentive for them to do so. What did we do in small business? We published the guidelines and every bank has different parameters for small business. Ours happens to be one based on revenues of the company. Their revenues cannot exceed $15 million. Their total exposure, their total direct exposure to cannot exceed $5 million. We also have product limits and we also have a clear understanding of what financial information you're going to have to submit to get your loan approved if it's a new loan and if it's a renewal.

(12:47):

And yes, it is less information for a small business loan than you would have to get for a larger commercial loan. So the loan officers have, we've created the incentive for them to use us. So what did we do? We were able to create or use a system that helped us quickly. Decision loans, as you know, speed to answer an applicant is the way you distinguish yourself from a competitor and how you keep your customers and how you attract new customers. So we developed a banker app where we're using the banker app that NextGen has and it's intuitive application. It's each question, the answer to the original question creates another appropriate question. So it's not one application that you have to complete for all types of loans, which is amazing, very helpful to us. We have standard rates and standard structures that are driven by the rules that are able to build into next gen. The rules are based on our lending policy.

(13:51):

That's what we want. So all loans that come through small business, the banker knows the structure it's going to be, and the rate is going to be when they submit the application. There's actually a way that the banker can securely submit financial information from the applicant. It's in the portal that's embedded in the next gen system. The degree of underwriting is very small. If the loan is small, we actually score. We use the SBSS score, very small loans. We actually score the loans and that primarily drives the decision. Of course, we have our rules that are embedded in the system, so if there's a violation of lending policy, it'll prevent a decision being made using the score. Right now, we're still developing a comfort level with that. So we're only doing unsecured loans up to $50,000, secured loans up to a hundred thousand dollars secured by liquid collateral, like marketable securities up to $250,000. We're planning on expanding that. We wanted to leverage auto decisioning, but it takes a while, those people in risk that have issues with that. But we're getting more comfortable with that.

Bryan Peckinpaugh (15:14):

So John, let's rewind back to the early two thousands when we first started partnering together. As you look at where you came from to where you are now, why was technology so important even back then in what town was looking to do?

John Baiocco (15:31):

Well back then, 25 years ago, technology for TowneBank was based more on product offerings. So could we demonstrate to the market that we had a full range of products and services and it was primarily driven on the treasury services side. Did we have all the bells and whistles? And once we quickly got over that and demonstrated that, yes, we have all those products and services, and frankly that's why I was late to the game at ec. I didn't come initially. I waited five years. I worked at, it was SunTrust, it's Truist now. And I was not real sure do they have technology to able to fulfill the needs of my client base. But now it's totally different. Now it's all based about speed to the market automation, what level of automation do you have, what level of centralization do you have? What other enhancements can you develop or use during the loan origination process to get an answer to the applicant quickly and then close quickly. So that's what technology is about now for us. I mean, it's how we can leverage information to make decisions quickly.

Bryan Peckinpaugh (16:48):

And you made a really interesting point in there, John, that I think gets overlooked a lot as we evaluate technology in the marketplace. We're always looking for that hard ROI, right? What is the time to market? Am I making the loans faster? Am I making more of them equally as important as what that can do for both talent attraction and retention that you mentioned is people look at who's got the best tech stack, who's got it easier for the loan officers to do their job because they're empowered by technology.

John Baiocco (17:18):

Absolutely. And it's easy adopting technology is the easy part is getting people to change their behaviors. That's the hard part, right? I mean, we still have lenders that won't embrace technology and are doing it the old way and it's a constant battle. But eventually we will get there and it's usually people that have hair like me that resist change. But you'd be surprised.

Bryan Peckinpaugh (17:40):

Yeah. You've been helping drive it at TowneBank for sure. Yeah, just absolutely fantastic story with TowneBank. The growth has been incredible. When we first started working with you as that 1 billion bank, even if it was a big garage that's now a 17,000,000,008 x growth in commercial portfolio, where do you think technology has enabled that? What's been the biggest drivers?

John Baiocco (18:05):

Well, It's capturing data. I mean, that's the biggest thing. I mean, what can we learn about the applicant that they have not necessarily told us? We have not asked for, we're trying to limit the amount of information that we ask from an applicant. So we want to get whatever public information we can, and that's what we're doing on those small loans that we are auto decisioning. The only thing that the applicant provides us is an application. All the other information we get is public information that is factored into the score and then we make a decision on that. So that is remarkable for us and that is a huge leap for TowneBank because we are a very conservative lender. So we've developed a comfort level there.

Bryan Peckinpaugh (18:52):

And as you talked about, segmenting small business as you were breaking that out and thinking about that different than commercial, you mentioned some of the internal factors trying to decision the $250,000 loan different than a $5 million loan. But as you thought about the businesses you serve, what was important from a technology perspective? What makes a small business owner different than a corporation and what the tech needed to deliver there?

John Baiocco (19:18):

Well, because a lot of times the small businesses don't have the degree of information to give you or the information is sometimes unreliable. It's unsophisticated. You remember I came from the corporate lending background. So when I asked for financial statements, I was getting CP prepared, reviewed or audited statements. Now I'm getting tax returns and internally prepared financial statements. You have to accept that that's what you're going to get. I shoot myself on the foot sometimes because I say to risk, well, we can ask for that all you want. You want me to get three years of financial statements. They're not worth the paper that it's written on, but I'll get that if you want, if that makes sure, no, I won't get that. If I finally said no, we're not going to get that. So again, we have to get what we can and get public information we can and score it.

(20:12):

So that's what we're doing. And as far as scalability, I mean I think it's working. I mean I think it's truly working. I think we have seven underwriters that underwrite light, and then for larger small business loans, they actually do the statement. They'll spread the statements, they'll calculate debt service coverage, all the traditional things you do, the global coverage, the collateral coverage, the guarantor strength, all those traditional things. But on the ones that you don't have to do that for, we're not doing it. And we have not seen an increased level of losses, increased level of delinquency. There has been no significant difference between the scored loans and the ones that are underwritten.

Bryan Peckinpaugh (21:00):

And you've talked a lot over the last 20 minutes or so, John, about change, how that has been a big shift in just the focus and the approach. How have you guys effectively managed through that? What were the drivers there of making sure people adopted it and use the technology?

John Baiocco (21:17):

Yeah, it's still a process. It's still a process. A lot of people get worried with change, am I going to lose my job? There's automation. Sometimes people think that means their job's at risk. We're considering automated spreading.

(21:39):

There's eight credit analysts that's spread statements. So you think they're going to embrace that change? Probably not. Of course they probably won't lose their jobs. They'll be just redeploy it in a different area of the bank. So change is hard for people in the mid-career because they been doing it. Why change? What's in it for me? What's in it for them is they can achieve a higher level of success. Success, they can grow their loan portfolio, which is tied to their compensation, but we have to show them that and we are showing them that every day. But you'd be surprised that people that are resistant and even people that are in senior roles are very, I don't want to say negative, but I'll say negative or skeptical, that's a better word. Or skeptical. They say, show me the data. So we're showing them the data. So change is difficult. The adoption of the technology is the easiest part of this. It's changing the behaviors and unfortunately there's no system they could click and make people accept the change. So it's taken a while, but I think most people are somewhere on the path of accepting next gen.

Bryan Peckinpaugh (23:02):

It's one where on the backend, looking in the rear view, it's easy to see, well, why wouldn't I want to adopt it? You see the speed, you see the ease of use for the banker, you see the better experience for the borrower. It's like, yeah, why didn't we do this years ago? But that change, as you mentioned, can be very, very difficult. We really appreciated you picking us back in 2022, doubling down with Baker Hill as a whole, going all in on a singular platform to run your lending business. How have you seen that improve your ability to serve the communities that TowneBank operates in?

John Baiocco (23:40):

Well, we're able to put money into the market more quickly. To be honest with you. That's the name of the game. And we're able to compete more effectively than we have. And I think we have pretty effectively over the last 25 years. But I think it gives us a competitive advantage when we're asking for less information than most of the big banks in our market. We say, if you want a loan of this size, this is all you have to give us. Sure. If it's going to be a multimillion dollar loan, we need more information. And that does give us a competitive advantage in my market. I'm not sure. I'm sure it would in yours too. But yes, we will approve, fund, close the loan and put those dollars to work in our community.

Bryan Peckinpaugh (24:30):

Awesome. Well, I could certainly ask you questions all day, John, but we'll turn it over and give some time to folks in the audience. If you have some questions on what TowneBank is doing. I think we've got one over here.

Audience Member 1 (24:49):

Thank you. I was curious how you might be utilizing this to manage your portfolio. I hear about it on the new money side, but tell me what are you

John Baiocco (24:57):

A plant? Because I did not mention it. Yes, there is. There is actually, I do know Mary Kay and all exactly, but I didn't plan that. There is a portfolio monitoring module in NextGen, which we are using. So it's certain data points that you select that will monitor the loan over the life of the commitment. So you can get as frequently or as you want. It will trigger warnings. So that's been very helpful to us. In fact, one of the direct benefits for me in small business, our lines of credit are on demand with annual internal expirations. So you just collect the information. I've convinced risk to allow us to have two year internal expirations because we're actually monitoring the credit on a daily basis. So the one caveat with that, you have to be careful about the data points get way too many warnings. So you have to manage through that process. And some of the things in small base will be line usage, overdrafts, what else?

Bryan Peckinpaugh (26:10):

Oh yeah, there's tons

John Baiocco (26:12):

There's tons of

Bryan Peckinpaugh (26:13):

Rules that you can compound them. So I say all the time, NSF by itself means nothing. You want to know who gets a lot of NSF fees? I don't pay attention. And the bank loves it.

John Baiocco (26:26):

Just because you get the warning doesn't mean it's a bad sign because they could be fully funding their line because they're growing. So you still have to apply some common sense to.

Bryan Peckinpaugh (26:36):

Yeah, and you've got to think through. It's one thing to try to replicate a credit policy in those rules, but you also have to think about who I give those alerts to. Highline utilization is a great example. If I have a trigger on Highline utilization and I hand it to the risk team, they might start to freak out a little bit, why isn't there a cooling off period? That's right. If I hand that to an RM, they're salivating because I've got chance to sell more product, right? I call, they're in the wrong product. Let me get you in a higher line. Let me get you in bundle a few products together. Let's make some money. But as John mentioned, that ability to run it on a night by night basis so that you have those triggers firing when you need to, you can be much more proactive in looking at the small business portfolio.

John Baiocco (27:18):

That was a good question.

Audience Member 2 (27:21):

So you mentioned the benefits of centralizing and automating some internal processes, and on the client side, there's benefits to deploying capital faster and helping them grow in the community. From an educational standpoint, there's been a lot of conversations about how to empower small business owners. Where do you see automation helping with that.

John Baiocco (27:44):

Helping the small business owner?

Bryan Peckinpaugh (27:46):

Yeah.

John Baiocco (27:48):

That's a tough view. That's a touchy situation as you well know. I think they could do the same thing and they could automate the information that they give to us to support future needs. On the commercial side, we definitely try to do that, send us financial information every year, even though you don't have a line of credit right now, so we can respond more quickly. So I think that's what they can do. I mean, they could automatically send information to their financial partner and we try to teach them that on the commercial side.

Bryan Peckinpaugh (28:25):

And at Baker Hill, we talk a lot about capacity in the process. So kind of flipping the 80 20 on its head where without systems, without automation, you're spending 80% or whatever of your time gathering that information, pulling from multiple systems, try to get to a point where you have the information in front of you, and then because you don't have the capacity, you're rushing to analyze it and figure out what does that tell you about the business. If I can flip that on its head, if I can add a lot of automation to the process, I have now time to spend and be thoughtful about what the data is telling me so that I can not just say, yes, I can say the effective. No. Right? I can look at it and say, Hey, you're asking for a million dollars that's going to cripple you as a, you're going to have to put up your house. You're going to have to put up these things. Let's not do that. What if I give you 200,000 now and let's build a plan for how we grow with you? And just be much more thoughtful in the interaction by getting the time back in the day.

John Baiocco (29:25):

And by using some of the portals, by submitting the information to the bank, that's a way that they could benefit.

Bryan Peckinpaugh (29:34):

Thank you. I think we had time for maybe one more,

Audience Member 3 (29:42):

John. Thanks and fascinated to hear how you tackled some of the challenges inherent in taking a traditional kind of middle market commercial lending platform and tackling the volume challenges and the scalability challenges that come with smaller business. And I'm navigating a similar situation and question is how you approached developing a streamlined underwriting process and the credit policies around it, how you approached establishing those dollar thresholds. It's a massive shift to take somebody away from doing a deep dive into financials and spending several days on a writeup versus here's the

John Baiocco (30:19):

It is. And I like to say that that process is finished. It's changing. It changes frequently. So there was no real science behind it. We just had to start somewhere.

Audience Member 3 (30:35):

Did you have resources, ability to kind of benchmark across other banks where others?

John Baiocco (30:39):

Absolutely. And that was one thing that Baker Hill did give us a list of banks that were using NextGen that we did consult with, but we are more conservative than all of them. So our thresholds are lower and our PE SBSS score is higher than most of those. So you just have to find your comfort level that matches the culture of your bank. I wish I could give you more precise answer, but I'd be lying.

Audience Member 3 (31:04):

That's helpful. Thank you.

Bryan Peckinpaugh (31:05):

Appreciate it. Appreciate everybody's attention with us today. That QR code there, the TowneBank team was kind enough to kind of document their success story. So if you scan that, it'll take you right to that to download. John, thanks for sharing your story with everybody. I'm sure he'll be around for a little bit if you want to catch him post this talk. Thank you guys.