Leap of Faith

The year was 1999, and Wheatland Bank was at a crossroads. The $85 million institution’s rural markets in western Washington State were struggling with issues common to agriculture, including slow growth, the boom-or-bust farming cycle, and bad loans, just to name a few. The management team was thin on talent and short on ideas, and its technology, product set, and financial reporting systems were antiquated. To make matters worse, board members sometimes bickered with each other and management, reinforcing the sense of a company that, in the words of one director, was “going nowhere fast.”

With Chief Executive Officer Dick Ludeman set to retire and no successor in sight, Wheatland’s boardu00e2u20ac”and that of its privately held holding company, Spokane-based Community Financial Groupu00e2u20ac”was “leaning a little bit toward selling,” says Howard “Mike” Leffel, a retired CPA and 15-year director. Indeed, it had almost happened at least twice a few years earlier, but directors never reached a full consensus, and both deals were scuttled amid contentious negotiations. “I like to procure, not sell,” says Vice Chairman Charles Miller, a blunt 70-year-old rancher who in 1978 helped start the bank. “I had to get out my two-by-four and hit [two other cofounders] right between the eyes to get them off the sale track,” he adds with a chuckle.

The stakes were high. If Wheatland could find a new CEO with the smarts and vision to chart a new path, it would remain independent; if not, then it would likely be part of some other banking company before too long. The bad news was, few of the candidatesu00e2u20ac”a director-compiled list of career credit and loan officers from larger nearby institutionsu00e2u20ac”offered much inspiration. “We all realized we had a lot of changes to make, and that it was going to take a different kind of leader for us to continue on,” Leffel, 66, says.

Board members ultimately found just the person they were looking for right under their noses: Susan Pittman Horton, then a 37-year-old certified public accountantu00e2u20ac”and the company’s outside auditor and board adviser. Hiring a young woman who had never even worked in a bank before was unconventionalu00e2u20ac”and in some quarters, downright controversial. Almost immediately, shareholders, employees, and customers began to second-guess the move. “A lot of my [accounting] clients loved my work and saw me as a trusted adviser,” Horton says. “But not many of them would have put in a 37-year-old woman as president and CEO.”

Wheatland’s board had few such qualms. After spending a decade with a Big Eight accounting firm in Seattle, Hortonu00e2u20ac”who grew up in nearby Reardan, Washingtonu00e2u20ac”had taken a position at McFarland & Alton, a respected local firm in Spokane, where she built a financial institutions practice into a powerhouse from scratch and made partner.

For five years, directors had watched Horton perform her auditing and consulting duties for the bank and always came away impressed with her industry knowledge and ability to cut to the heart of the matter. And for good reason. With 50 community bank clients, she’d sat in on countless board meetings and strategy sessions and had a firm grasp on best practices and what separated winners from losers in the industry.

Once Horton’s name came up, Miller says, the group never seriously considered anyone else, and gladly paid up to lure her away from her old firm. “Sue was kind of a shoe-in from my perspective,” says Donna Herak, 47, a retired CPA and a director since 1997. “It was really obvious that she had what it took. … At the time, she was really the only one who made much sense when we’d talk about the bank.”

Hiring a CEO without a traditional banking background is not without precedent. For instance, Ray Davis, the chairman and CEO of fast-growing Umpqua Holdings in Portland, Oregon, was a banking consultant before he began running what was then a small, rural bank. Nevertheless, it was a leap of faith for Wheatland’s board to go with such an unproven commodity.

Seven years later, that faith has been amply justified. Since Horton’s hiring, assets have almost doubled, to $165 million, while deposits have risen to $130 million, from $74 million. In 2005, net income was $973,123u00e2u20ac”up 22% from year-earlier levelsu00e2u20ac”while earnings per-share rose 20%, to $1.42 in the same period. The market value for the company’s shares has risen 40% during the past five years, according to Wheatland officers, while shareholder value has increased at an annual average of 10%.

To be sure, not everything at Wheatland has gone exactly as planned. Horton’s decision (fully supported by the board) to move the sleepy ag lender into more prosperous urban markets led to predictable anxiety among some of its small-town customers. Horton will miss an earlier goal of reaching the $250 million level in 2007, thanks largely to stiff competition. Net income actually fell in 2004. Last year assets increased 12%, and core deposits were up 14%u00e2u20ac”not a bad performance but still short of investor expectations. And returns on equity (around 8%) and on assets (just above 1%) aren’t as high as some of the 355 shareholders, most from local communities, would like.

“There’s a lot of pressure from shareholders,” says Herak. “We get criticized for not performing at a higher rate. We get criticized for not growing as fast as we ought to. We get criticized for abandoning our roots. Those things are the hardest to deal with.”

Even so, Horton’s fresh insights and go-get-’em attitude have clearly energized the placeu00e2u20ac”and the board, which has overseen an aggressive expansion since she arrived. Today’s Wheatland has a crack management team, competitive products, and a distinctive marketing program. It employs efficient budgeting techniques, provides employees with an incentive to increase sales, and measures profitability down to the branch level.

Wheatland also has expanded its branch network from five to nine, with three new offices and a new headquarters in Spokane, the closest city of any size, and another in the fast-growing Moses Lake area to the west. Those new locations allow it to tap into a relatively robust commercial lending and deposit market, providing some much-needed diversification to a balance sheet that once was tied almost solely to ranching and farming. Today, just 38% of the loan portfolio is in agriculture, with 12% in commercial loans and 35% in commercial real estate.

In short, Wheatland is a well-run commercial bank nowu00e2u20ac”something that couldn’t be said in the late 1990s. “Sue is smarter than hell,” says Roger Underwood, a cofounder and the bank’s chairman emeritus. “She came in here, gradually reorganized the entire operation, and brought a real professionalism that didn’t exist before.”

A dynamic leader who combines sharp financial and analytical capabilities with a passion for selling, Hortonu00e2u20ac”who became chairman in 2001u00e2u20ac”has instilled an accountant’s discipline to the board’s decision making. She and her management team back up proposed initiatives, such as where to place a branch or what products to offer, with hard numbers and rigorous analysis. More than once, directors have been headed down one path, only to be convinced by Horton’s numbers-based approach to pursue a different tack.

An avid horseback rider and the single mother of a four-year-old daughter, Horton also has proven a creative innovator and negotiator. In 2003, she sold a poor-performing branch to a credit unionu00e2u20ac”the first time in history that a branch of an FDIC-insured institution was sold to a company without that insurance. In just the past year, the board has decided against adopting a Subchapter S ownership structureu00e2u20ac”despite advice to the contrary from some advisersu00e2u20ac”because it would hinder Wheatland’s long-term growth.

Such moves mesh with Horton’s crowning achievement: the creation of a well-crafted strategic planu00e2u20ac”built largely on her experiences as an auditor and strategic adviseru00e2u20ac”that acts as a playbook for board members as they consider various courses of action. “Sue had a vision of what she wanted the bank to look and feel like. She’s not only created a new image for us, she’s defined it and personified it and implemented it,” Herak says. “That’s what you want out of a leader.”

Wheatland got its start in tiny Davenport, Washington in 1978, when Underwood (a local attorney), Miller, and CPA Roger Lyle pooled their funds and formed an organizing committee. The trio had to overcome some initial skepticism as they went about recruiting other investors. “‘What the hell is wrong with you?’” Underwood recalls his attorney father asking him. “‘That’s the stupidest thing I’ve ever heard. We already have two banks in this town.’”

It wasn’t long before Underwood’s dad was bragging about his son at the local country club. Wheatland slowly branched out into neighboring ag communities like Wilbur, Ritzville, and Odessa in the heart of western Washington’s grain country (hence the name, Wheatland). In each town, it would recruit a director to help drum up business. “People in Odessa can be different,” Leffel explains, who signed on in 1991. “If you don’t live there, you’re looked upon as an outsider. So we needed people who were active in that town.”

Wheatland met with its share of troubles, and went through several leaders over the years. When Herak signed on in 1997, she found a board that was directionless and “biding its time.” Ludeman had done an admirable job of cleaning up some problem credits but wasn’t really capable of taking the bank to the next level. “Dick recognized that we needed to make changes, but he had reached his limit in terms of what he could do,” Leffel explains.

In May 1997, the board went so far as to strike a definitive agreement to be acquired by Americanwest Bancorp in Spokane for $12.5 million. The deal was terminated months later, however, largely because of board disagreements. Another proposed transaction with Washington Trust Bank fell apart for similar reasons, Underwood says.

In late 1998, the board began its search for a new CEO. Underwood and Miller thought early on that Horton could be the right person for the jobu00e2u20ac”if she’d take it. As Wheatland’s auditor, Horton met the duo for lunch a couple times a month. At one of those meetings, Underwood proposed that she become the bank’s interim CEO. “I said, ‘Roger, I’m honored you’d think of me. But it would impair my independence. … We shouldn’t even be having this discussion!’” Horton recalls. “I look back now, and it’s clear he was testing the waters.”

At the next meeting of the board’s executive committee, it was Herak who floated Horton’s name, and got an enthusiastic reception. A few days later, Underwood made a formal proposal to Horton, writing his offer on a napkin. It read: “Whatever it takes.” Horton eventually decided she’d see just how serious the directors were. She had done an executive compensation survey for her firm, and knew what CEO pay packages looked like. So she made a “wish list” of salary, deferred comp, stock options, equity grants, and the like.

Meanwhile, Underwood and other executive committee members went to the full board, telling fellow directors that they’d already discussed the job with Horton. Directors liked Horton, but were upset that it appeared to already be a done deal. “We hadn’t made a hard-and-fast decision, but we made a very strong recommendation,” Herak says. “I don’t think we kept the rest of the board as informed as maybe we should have, and there was some hemming and hawing over us reaching a decision without input from the rest of the board.”

To their credit, the other board members quickly got over those misgivings. In short order, they agreed to all of Horton’s conditions, making her an offeru00e2u20ac”complete with a significant equity stakeu00e2u20ac”she couldn’t refuse. Today Horton, Miller, and the Herak family are the three biggest shareholders, according to Underwood. “She’s well taken care of,” says Herak. “But she’s also a major stockholder. That removes a lot of the risk for me, and provides reassurance for other investors.”

Her first day on the job, in February 1999, Horton got a taste for how much work lay ahead. Regulators were performing an onsite inspection, and the company had yet to even begin plotting its Y2K upgrades. They gave her two weeks to come up with a plan. “I pulled the whole team together that afternoon, like I would have on an audit, and said, ‘Here’s the issue. Let’s come up with an action plan,’” Horton says.

That was only the beginning. Wheatland didn’t have email, voice mail, or PCs. It didn’t offer free checking, for fear of lost account fees, or Internet banking, which was viewed as too costly for a small rural bank. And it didn’t have enough ATMs or enough ways to generate fee income. All that might have been fine for a local community bank, but Horton had bigger things in mind, and set about leading the board and entire company through a formal strategic planning exercise to address those shortcomings.

During her first two months, Horton met individually with each employee, down to the newest teller. The talks were meant, in part, to reassure jittery workers. “They were already insecure about the future of the bank and their positions. And now here was more change,” she recalls. The main purpose, however, was to gather intelligence. “I wanted to know how we could be a better bank, and they knew exactly what we needed to do. They said, ‘We need free checking, because everybody else in town has it. We need more ATMs. We need tiered money-market accounts,’” she recalls. “They’re the ones who hear from people in the community. … I took notes, and praised them for their ideas.”

Armed with those insights and plenty of other data, Wheatland’s board and top management huddled in a planning session. The baseline agreementu00e2u20ac”something Horton had insisted on before taking the jobu00e2u20ac”was a formal commitment to independence. “I wasn’t going to leave my lucrative position as a CPA partner to spend two years pumping up the bank for a sale,” she explains.

Horton also had no desire to launch a public offering. As an auditor, she’d helped banks with IPOs, “and what I found was that at first, people thought it was a really neat thing to be a publicly traded company,” she says. “But they didn’t really see more liquidity or higher valuations. All they saw was a whole lot of extra administrative and compliance work that raised their costs. … For a community bank, remaining independent is a better strategy for enhancing shareholder value over the long term.”

The planning session included a frank assessment of the company’s strengths and weaknesses. Wheatland had good people, a strong local reputation, and a knowledgeable, well-connected board. As Leffel explains, “When it comes to lending money around here, I’ve got a pretty good idea of who’s a good bet and who isn’t.”

But there were also some endemic problems that needed attention. “We were in communities that were shrinking, and serving an industry sector [agriculture] that was struggling,” Horton recalls. “Asset quality was weaku00e2u20ac”we had some real problem loans that we needed to work out. And we didn’t have the products and services we needed to be competitive.”

Horton addressed some of those short-term issues as part of her long-term plan. In her first two months, she hired a new chief financial officeru00e2u20ac”Allison Yarnell, an associate from her CPA firmu00e2u20ac”and a chief credit officer, Joe Druffel, a U.S. Bancorp alumnus with experience in agriculture loans. Leadership, she had concluded, was a key shortcoming. “We had people with the titles, but not the abilities,” she says.

The group quickly began laying the groundwork for Wheatland’s future. As Horton saw it, the company’s core financial objective should be to generate a balance of growth and profitability over time. Doing so, she reckoned, would require something that was dramatically out of character with Wheatland’s heritage: an expansion into more-populated cities.

The idea was initially intimidating to some directors. “My roots are in agriculture,” Miller says. “The biggest challenge has been changing my views on moving to town and expanding in an urban area.” Nor did it go over very well with some of Wheatland’s small-town customers, who feared the bank would abandon agricultural lending. In response, Horton held community seminars to explain the strategy. “I’d tell them it’s just like farming, where the survivors are those who are diversifying and growing,” she recalls. “I told them we were making a commitment to remain independent, but that in order for the bank to survive, we had to grow profits so shareholders wouldn’t want to sell, and that required an expansion.”

To this day, Horton’s not sure how well that message was received. But folks had time to digest the idea, because before Wheatland could compete outside of its cozy small-town markets, it needed a significant upgrade of its internal operations and product offerings.

Among Horton’s first moves was to analyze revenue. NSF fees and other basic service charges were far lower than most other banks, so Horton bumped them up, putting them on par with rival institutions. She also introduced some basic new offerings, such as mortgage originations. Today, Wheatland sells the loans in the secondary market, but captures the noninterest incomeu00e2u20ac”overdraft protection, and, through partnerships, credit card, brokerage, and insurance products.

Technology was another key issue. Within months of Horton’s arrival, Wheatland went to work on offering Internet banking, bill pay, and automated clearinghouse capabilitiesu00e2u20ac”front-end technologies that customers wanted. Later came an online cash anagement system for small-business clients. The bank’s core farming customers “use computers more than the general public” to monitor market conditions, she explains. “But the real reason was to get ready for expansion into new markets. … If we wanted to go against the competition in Spokane, we’d need to have a full set of products.”

A short while later, Horton’s team asked for nearly $400,000 to improve data processing and other back-office capabilities and build a foundation for more product and service offerings. Directors winced, but a cost/benefit analysis by management was persuasive. Board members also drew on their own experiences. Herak, who once had been CFO of an ad agency whose clients included Microsoft Corp. and Apple Computer Corp., recalled the value of having cutting-edge technology at that firm. “It was expensive, but we bucked up, and it kept us ahead of the competition,” she says. Leffel had had similar experiences at his CPA firm. “If we were really going to build the bank, we needed to invest,” he recalls thinking.

Horton’s ability to borrow best practices and think creatively showed in her approach to solving nagging problems. Customers wanted greater access to ATMs, for instance, and the initial thought was to install new machines. After looking at the price tagu00e2u20ac”each machine would cost about $45,000u00e2u20ac”she concluded it made more sense to rebate up to $10 a month in foreign ATM fees to customers.

Directors had faith in Horton’s insights. But they didn’t go along blindly with everything she suggested. “When you have someone as colorful and strong-minded as Sue, it’s easy to get lulled,” Herak explains. “I’m a fiduciary for shareholders. I have to be more than a rubber stamp.”

Among the most contentious issues was Horton’s idea to offer free checking. Many directors feared the loss of fees would dent the income statement. Horton and Yarnell argued that it was a must-have product and performed an analysis showing that the additional low-cost deposits generated by free checking could be used for loans and would produce more than enough profit to offset the loss in fees. “Once we saw the numbers, it was a no-brainer,” Herak says.

Hand in hand with all of this came a revamping of the internal controls and reporting systems. The effort included a more professional budgeting approach, which provided board members with expectations for growth and profitability of new branches or other initiatives. “I had seen banks that expanded quickly but didn’t have the right controls or infrastructure in place to manage their growth,” Horton explains. “In the end, they had significant problems because of it.”

Directors say the changes have made them more secure about making decisions. A better budgeting process, for instance, allows them to see one-, three-, and five-year projections on such weighty matters as a proposed branch opening. “Most bank branches will lose money for a couple of years. But if you can predict it out, you can show them what results to expect,” Horton explains. Over time, a level of trust emerged between the board and management that hadn’t been there before.

By 2000, the board was ready to begin plotting its move on Spokane, and again Horton’s numbers-savvy came into play. Many directors advocated tiptoeing into the market, via a small area on the fringe of town. Horton wanted a more aggressive approach, right into downtown. To make the case, her team dissected both locations in terms of income, education, housing, deposits per branch, number of businesses within one and two miles, and more. Backed by that data, she argued persuasively that the chances of success were better in the heart of the city.

In 2001, that first office was opened in downtown Spokane. A short while later, another was opened near a major Spokane shopping mall. The same year, the bank moved into Moses Lake, a community in the fast-growing Columbia Basin, about 100 miles west of Spokane. In each of those markets, local business leaders were brought on as board members. Today, Horton says, those new offices account for about 30% of loans and deposits.

With the growth, Horton has brought big changes to the company’s culture. She’s opened up communication, giving “state of the bank” presentations at quarterly dinners that are attended by all 65 employees. “Sue has a really open communications style,” says marketing director Nicole Grier. “She gets input from every level and lets people know how the bank is doing. … People feel valued and empowered to make decisions.”

Employees also participate in an employee stock ownership program, which makes them feel more like owners. And each December, they join with board members for an annual Christmas dinner at a Spokane hotelu00e2u20ac”an event that typically features dancing and gambling (with play money for prizes). “When I got here, there was a lot of dysfunction and backbiting,” Horton says. “I wanted to make it more of a family atmosphere.”

In return, staffers are expected to produce. Incentive programs, such as a recent deposit contest between branches, are part of the scheme. “Our top goal is always deposit growth, and everyone in the bank knows it,” Horton says. With the larger product menu, cross selling is emphasized. She also began measuring branch profitabilityu00e2u20ac”something her predecessor, Ludeman had advised against, warning that it made people feel too competitive. Her response: “How can we not measure this?”

The tracking confirmed what many directors already knew: Wheatland’s branch in Cheney, a small college town with relatively few commercial loans, was an exceedingly poor performer. Horton struck a deal to sell the branch to a local credit union. The Federal Deposit Insurance Corp. had to sign off on it, as did the National Credit Union Association, and customers had to be offered the option to “opt out” and move their deposits. Nevertheless, Horton crafted a transaction that provided a guaranteed premium for the deposits, regardless of how many customers left (few did). “We got out of a bad situation with the original cost of the building and a hefty premium on the deposits,” she says. The $1 million in capital Wheatland received was deployed into the Spokane market.

If the bank has been reenergized, so, too, has the board. As a group, directors had grown accustomed to being left out of the loop by management. Indeed, Horton recalls Ludeman saying she should “tell the board as little as possible.”

“We didn’t have timely financial data, and the analysis level was dismal,” Herak says. “When I think back on it, I don’t even know how we made decisions.”

There also were divisions within the board to be overcome. Previously, there was a blowup between cofounders Underwood and Lyle, which led to Lyle’s resignation. The squabbles over whether or not to sell were ongoing. And when the holding company was created in 1998, primarily to make it easier to raise additional capital, some directors who were left off its board felt jilted. “There was some jealousy,” Underwood says.

Against that backdrop, winning the trust of directors became an immediate priority. As an auditor, Horton had witnessed situations where a CEO’s conflicts with one or two directors poisoned the whole board. “I didn’t want that,” she says, and began reaching out to individual board members. “I told them I’m going to go overboard on disclosure, and that no question is a bad question. We can discuss anything,” she explains. “If there’s ever a situation where I think a director is upset with me, I’ll follow up and make sure they’re feeling OK about things.”

Herak says the “dysfunction” of the old board has been replaced with a healthy give-and-take attitude. “There’s a culture of, ‘Don’t keep your opinions to yourself. Pipe up when the discussion is occurring,’” she explains. “There’s much more trust.”

The most recent example of that openness came early this year, when the board considered changing its ownership structure to Subchapter-S. According to the FDIC, about 27% of all financial institutions are organized as Sub-S corporations, because it eliminates most corporate taxes on earnings. It’s an advantageous structure for many smaller institutions, and on the surface, it looked like a good fit for Wheatland. In fact, the company’s outside advisers had recommended it. The board was split on the idea, however, and Horton had some misgivings. So her team did what it always does: analyzed the situation, laying out the pros and cons for board members to consider.

“We investigated it thoroughly, and once we had all the information, it was pretty apparent it wasn’t the right move for us,” Leffel says. The tax advantages of the election, he says, aren’t as great as they once were, and it’s much more difficult to raise capital as a Sub-S corporation. It also would have cost about $3 million to buy out minority shareholders and bring the total number of investors down to the required ceiling of 100 or less. “We wouldn’t have had as much money available for future expansion,” Leffel explains.

Such decisions illustrate just how much Wheatland has changed under Horton’s leadership. Seven years ago, both the company and board were adrift, with little ambition or direction. Today, everything is rooted in the strategic plan, with an eye toward the long-term future. When bumps emerge in the roadu00e2u20ac”as they do for most every companyu00e2u20ac””we have something to fall back on to help make those choices,” Herak says. The plan “isn’t just stuck in a drawer. It’s a living document.” Maintaining that professional discipline in pursuit of continued growth and profits promises to keep Wheatland strong for years to come.