Abraham Lincoln fired five chief generals (one twice) before he found Ulysses S. Grant—a general who would fight. Lincoln wouldn’t have fired Albert C. Kelly, Jr., if the banker had been one of his generals, because Kelly fights. In Kelly, who goes by the nickname of “Kell,” bankers have a leader who knows you can make a difference if you believe you can, and if you work at it.
That premise has governed his whole life, and will govern his term as the next ABA chairman. After hearing Kelly speak at a conference or in a meeting, no one will ask “Can anything be done?”
Kelly, President & CEO of SpiritBank, Bristow, Okla., was raised on hard work and the ethic that life is for doing, not complaining. If you think something isn’t right and ought to be changed, or something is worthwhile and should be done, then make it happen, even if it takes years to accomplish.
As he sees it, banks right now are at a crossroads—community banks in particular. They can either stand by and be slowly marginalized out of existence by an onslaught of unnecessary regulations and bad policy decisions, or they can push back and take charge of their own future. His view is that if banks are marginalized, the country will be, too, because banks are integral to economic growth of communities of all sizes.
Further, he believes that if the industry marshals its considerable resources in support of a worthy and worthwhile cause, it will help demonstrate by action that bankers are good citizens and help counteract some of the negative impressions people have about the industry.
Lesson of the matches
The son of an Oklahoma community banker, businessman, and rancher, Kelly sums up his father’s approach to raising him this way: “A hard-raised pup makes a good dog.” The young man spent many days stacking hay bales and building fences. His father, also named Albert, was the oldest of five Kelly brothers. He saw submarine duty in the Pacific during W.W.II, was a Harvard graduate, and was Deputy Administrator of the Small Business Administration under Eisenhower. Albert Sr. returned to Oklahoma and helped run Kelly Bros., the family business of ranching, banking, and various other interests along with his four brothers up until his death in an automobile accident when Kell was 21. (The family controls two banks. One, American National Bank of Bristow, later was renamed SpiritBank.)
Even in the 1960s there was a frontier quality to life in the oil and ranch country around Bristow, just south of Tulsa. Once, Kell’s father posted him overnight at a gate to a remote pasture on their property where a stripper oil well operated, to make sure that the oil well equipment wasn’t removed by a man who wrongly claimed rights to it. His father then left. The next morning the man showed up with a crew to remove the equipment. Twelve-year-old Kell, being more afraid of his father than the thief, stopped the man from entering. Not knowing what to do next, he was saved by his father roaring up in a car and taking charge. After a tense moment, the other man had second thoughts and left.
“My father was a tough guy,” recalls Kelly.
Kell has his own set of attributes. At 56, he has the physical strength that comes from years of ranch work, which he still does on his 900 acres almost every day when he’s not traveling. More pertinent to his role as industry leader is the mental toughness of an assistant district attorney (a job he held before joining the family bank), an abundance of energy, and a streak of what could be called prairie independence.
He draws inspiration from his remarkable family. His grandmother, who could rope and ride, came to Bristow as a nurse to set up the town’s first hospital. She later became Republican National Committee Woman for Oklahoma.
Kelly remembers as a young boy his grandmother giving him a matchstick and telling him to break it, and then giving him five matchsticks bound together to break. He could break one but not the five bound together. It was a lesson on the importance of unity, and he took it to heart, applying it not only within the family business and the bank, but within the banking industry, as well.
His family also instilled another ethic into Kelly, touched on earlier: “Make a difference.” He has dutifully lived by that creed as well by being actively engaged in his community and state. People who know him say he is the most influential non-politician in the state of Oklahoma. Not all of this involvement is banking related. He’s also very active in education and transportation issues. Reflecting on this, Kelly says, “I don’t want to just wander through life.”
He encourages others to be active in government and has set up a program within the bank to help them. (See “Ambassadors at large.”)
Roger Beverage, president and CEO of the Oklahoma Bankers Association, says Kelly—who was OBA chairman in 2003-04—is not a man accustomed to accepting the status quo. “Say to him, ‘There’s nothing we can do about it,’ says Beverage, “and Kell’s response is basically, ‘Bull!’”
That attitude drives him to find ways to get things done, whether it be raising capital to satisfy regulators, dealing with the effects of a drought at his ranch, or keeping traditional banks in place in their communities.
Growth and then a wall
Kell Kelly is an advocate for growth. Growth brings opportunity. That’s one reason he has served on the board (and currently is chairman) of the Oklahoma Turnpike Authority. Kelly believes in infrastructure and can hold forth on the subject with almost as much passion as he does with banking.
Growth has been a hallmark of his tenure as CEO of SpiritBank. Six years ago, when he was chairman of ABA’s Community Bankers Council, SpiritBank was $496 million in assets. Now it is $1.3 billion. Most of that growth has been organic, with the bank expanding from its original home in Bristow into Tulsa, Oklahoma City, and elsewhere—14 locations overall.
As befitting a man whose family has long been engaged in multiple ventures, Kelly has been keen to diversify the bank’s revenue stream to not be so heavily reliant on traditional banking, subject as it is to economic trends and regulatory fiat. Some sidelines have come and gone, but the bank’s residential mortgage business has been a major earnings driver in recent years.
This business has two components, the largest of which is American Southwest Mortgage, a wholesale/correspondent operation reaching from Texas to Minnesota. The wholly owned subsidiary provides mortgage purchasing and warehouse lines to about 900 community banks and brokers to finance traditional first mortgages.
“For a community bank, it’s an unusual and very successful business,” notes Kansas banker Earl McVicker, a long-time friend of Kelly’s.
The mortgages American Southwest buys are on SpiritBank’s books for about 35 days, says Kelly. The average cumulative balance has grown from $20 million to in excess of $200 million, although business has slowed the past couple of years.
Spirit Mortgage, a retail originator, is the other mortgage business. Kelly says it has also become a substantial profit contributor.
Despite this success, Kelly is not optimistic about the mortgage business for banks. “We could not sustain [a mortgage operation] very long if we had to retain 5% of everything that passes through our hands or that we originate,” he says referring to the Dodd-Frank Act’s still undefined “skin in the game” provision. Preserving bank-originated residential mortgages is an important policy issue for Kelly and for ABA.
SpiritBank has also had success with insurance brokerage and a modified factoring program.
But the bank’s traditional business, normally a growth engine, has stalled due to the economic downturn and the regulatory reaction to the downturn and to the financial crisis that preceded it. Kelly would call this an overreaction. Dealing with it will be one of his top priorities while he is ABA chairman.
We need flexibility
Like many community banks, SpiritBank had a large commercial real estate portfolio. The recession caused some previously solid borrowers to become delinquent and the bank had to build up reserves substantially. Last year it chose to aggressively write down many of these loans, taking a loss as a result.
Kelly concedes that some underwriting mistakes were made and that adjustments were required, but he maintains that SpiritBank, like many other banks around the country, has had to tighten far beyond what is necessary.
“We’ve had to institute such a rigid credit culture that it’s challenging to get a loan from us now,” he says. When looked at across the industry, this trend is hindering the nation’s economic recovery and development, Kelly believes.
Today, with fair lending and other regulatory standards in place, it is virtually impossible for banks not to face some criticism of loans, he says.
Kelly likes to quote his uncle, Tracy Kelly, SpiritBank’s chairman, who often says, “The West was won on bad bank loans.”
“That means that while there were a number of loans that didn’t pay,” Kelly explains, “the ones that did are what created our economy, created wealth, created capital. This required taking risk and believing in the character of the individual.
“Banks are not going to be perfect in everything they do,” he says, “but they should still be able to take a chance on the local entrepreneur without expecting that he’s going to make money in year one, and being classified because he doesn’t. People say, ‘That’s venture capital.’ It’s not,” Kelly responds. “It’s developing your local economy. It’s building America.”
The fallacy of more capital
A big problem banks now face is that “well capitalized” is not defined by statute. There are regulatory minimums, says Kelly, but “well capitalized” is defined “by what the regulator in your bank wants it to be—seven, eight, nine, ten, twelve percent, whatever.” Like most community banks, SpiritBank is a private company (majority owned by the Kelly family), which means, says Kelly, “you either get capital out of your pocket, you decide you’re going to sell out, or you shrink.” Banks can also grow capital from retained earnings, but with earnings squeezed by reduced lending, prolonged low interest rates, and the regulatory restrictions on debit interchange and overdraft fees, that it is a slow option for many. In his own case, Kelly and his board decided to shrink SpiritBank to exceed the required capital ratio. (The bank is at 9% currently.)
Mandating higher capital levels is counterproductive, says Kelly, and creates a severe hardship on non-public community banks.
Further, he points out, “it’s a fallacy to think higher capital is going to cushion a downturn. When a bank raises additional capital, the regulators won’t let you use that cushion if you run into trouble; they’ll ask you to add more.”
The reality, he says, is that most banks don’t fail because of a capital shortfall; they fail because their liquidity options get shut off by regulators, among them CDARS (the proprietary deposit aggregation service endorsed by ABA), brokered deposits, and online deposits. Banks are told to get “traditional money, “ but the only way to get it, he says, is to pay up for it, which reduces revenue and is much more negative for the banks than the other options.
“Our rules and system are completely backwards on this,” Kelly concludes.
More and more compliance requirements are another drag, he adds, adding time and cost burdens. Community banks, Kelly contends, are reaching a tipping point where they can’t function under the onslaught of new regulations.
“Bankers tell me, ‘We used to meet people’s dreams. We could make a difference. Now I’m running my bank for the regulators. If I can just get book, I’m getting out’.”
If nothing changes, says Kelly, the industry likely will shrink by half in five or six years. “That’s not healthy for our country.”
What is required
Given the urgency of the situation, Kelly says that as ABA chairman he will urge “a more offensive—respectfully offensive—approach to legislation and regulation. “We will say to those in Washington, ‘You need to understand that by taking the worst-case view on accounting, capital, and regulatory interpretation you are driving traditional banks from the business and destroying the very fabric of the American economy’.”
“We’ve got to take a strong stand on these things,” says Kelly. This could include drafting bills to try and get due process rights for banks in regulatory matters.
“There’s been an enormous effort by ABA on many fronts already,” says Kelly, and some notable successes, such as forestalling unworkable accounting rules. “But I just feel like we’re at a point where we have to save the traditional banks out there.”
Kelly is not anti-regulator. He recognizes both the need for regulations and the many experienced field examiners, but he believes that what is coming out of Washington is overly severe. His hope is that in time all the players will recognize the importance of banking to the country and work to preserve charters, preserve capital, and support small businesses and small communities.
“That’s a very reachable goal,” says the incoming ABA chairman.
A call to action
Bankers cannot simply hope that this goal will be reached, however. “We are the stewards of all things that have been banking and we are the stewards of whatever it will become,” says Kelly. “It’s critical that we be champions for the industry and have the industry be a champion of itself. We have to engage not just CEOs but all employees, not just small banks but all banks. Each banker must believe they can make a difference.”
ABA’s grassroots lobbying capabilities will be a key part of this effort. Those capabilities have increased substantially in recent years and Kelly will continue to emphasize them, because, he says, they are so critical.
“We need to stand up together,” Kelly sums up. “Individually we’re only as good as the last decision we made. Together we’re strong.”
Just like the unbreakable bundle of matches.
Ambassadors at large
Not everyone thinks they are cut out for political involvement. But once they have tried it, gained a little confidence, and seen how they can make a difference, it can be hard to let it go. Witness the former SpiritBank employee who had been active in the bank’s lobbying efforts and went to work for another bank that didn’t have such a program. He emailed his former employer to say how much he missed it.
Kell Kelly, SpiritBank’s CEO, does everything he can to encourage employees to be active in government affairs. For the past eight years the $1.3 billion-assets community bank has engaged a lobbyist, but Kelly wanted to broaden the involvement. So about five years ago, he created a program to train employees as lobbyists.
Kelly always keeps employees informed about industry issues, encouraging them to respond to requests to support OBA and ABA initiatives. But he felt that to have them actually call on a political leader and present a view for or against some measure, they needed training. The result was the bank’s Ambassador Program.
The program is voluntary and is open to any employee. This year 20 people signed up, the most ever. The bank now has a cadre of more than 65 trained employees, according to Katie Segner, marketing director, who runs the Ambassador program.
New volunteers attend a one-day training session where they hear about the program’s mission from Kelly and learn how to write letters and speak with government officials. Each spring, the bank holds a two-day Leadership Conference in the state capital at which, typically, the Governor, state Treasurer, and other officials meet with the Ambassadors. They also call on all their state senators and representatives.
When employees first join the program, Kelly tells them: “If you believe that you cannot make a difference, you will be right. Because you’ll never try. But if you try, you’ll see that you can make a difference.” He says it’s typical that after a little while in the program, people say, “Darn, this works!” The bank weighs in on a variety of issues, many not banking related. It has supported transportation bills, and opposed an immigration bill it thought was unfair.
“We always want to stand for the dignity of the individual, first,” says Kelly, “and then look at measures that are pro-business and that will help make Oklahoma a place where people want to be and where it’s easy to live.”
Kelly’s hope is that the Ambassadors will pass the word to family, friends, and customers that everyone has the power to help shape good government, if they get involved.