Can Family Banks Help Spur a Recovery?

The funny thing is, Chuck Welter never wanted to be a banker in the first place. He had been there, done that, and boy, was it dull. When Welter started as a trainee at the Indiana National Bank, banking was so heavily regulated it became known as the 3-6-3 club, he recalls: "You paid 3 percent on savings, you charged 6 percent for loans and you were on the tee at 3 o'clock." This was the early '70s. After a year drowsing over his work, Chuck found an "honorable" escape, heading to Notre Dame for an M.B.A. He soon landed himself a prized job in sales at the giant Eli Lilly pharmaceutical plant—which in Indiana back then was the equivalent of going to work for Microsoft two decades later if you grew up in Silicon Valley. Chuck was quite happy—until his father, Bill, called up one day in 1973 and told him he wanted to buy up the old community bank, First National, in the little town of Valparaiso. Would Chuck come in with him?

His heart sank, Chuck says. He would be condemned to a life of drudgery at the First National Bank. You knowthe type: one of those old granite relics on Main Street that in many small towns now lies vacant or is subdivided into shops. Valparaiso is virtually Middle America itself, less than an hour's drive southeast of Chicago and not far from the Rust Belt town of Elkhart, which Barack Obama turned into a symbol of economic distress on his first trip as president in early February. Chuck resisted his father's entreaties, warning Bill, a successful car dealer, that neither of them knew much about banking. But Bill wouldn't take no for an answer. He wanted to create a family business that would span the generations.

Chuck eventually agreed, of course. He became a banker—and after a long period of painful learning and personal trauma (his marriage ended, among other things), a pretty damn good one. The three-decade-long saga of the Welter family is a microcosm of much of what has happened inside the American banking industry. It is a tale of near bankruptcy and harrowing gambles, of the subversive temptation of higher-risk returns and a searing family breakup over banking philosophy. It is, ultimately, a story of vindication for Chuck Welter, who was fired in 2006 by his own younger brother in part for hewing to traditional banking values during the subprime-mortgage mania— a stance that Chuck took in large part because he was old enough to remember the fallout from the last mania, the S&L crisis. Now Chuck and his loyal daughter Katy, a 26-year-old who's in her last year at University of Chicago Law School, are looking to become bankers again. They are among fewer than a dozen applicants who have qualified in the last six months for national banking charters.

Back in Washington, there is a rising tide of opinion that, in general, banking values should resemble Chuck Welter's more than they do Wall Street's. While America's global banking industry is not going to start acting like community banks—even Federal Reserve chairman Ben Bernanke said last week that good finance is about innovation as much as restraint—the government seems intent on promoting traditional practices. On April 1, the Federal Deposit Insurance Corp. instituted new rules that will reward conservative banking values by charging less for FDIC insurance to institutions that practice them. Columnist Paul Krugman recently joined other commentators in calling for a return to "boring banking"—code for when the industry was tightly regulated, U.S. household debt was low and Ivy League geniuses really did go into rocket science, engineering or tech, rather than inventing arcane financial instruments like collateralized debt obligations. Bernanke himself said recently that sound small banks could be a major engine of lending during the recovery. Still, it's brave to go into such a beleaguered business: according to the FDIC, the insurance approvals granted to new banks has dropped by half.

The sub-prime-mortgage disaster occurred in large part because many of the old banking verities were forgotten. The relationship of trust between lenders and borrowers—crucial to sound banking—grew so distant that the two sides no longer knew each other at all. And regulators didn't care much if they did, such was the furor to bundle loans into securities and sell them around the world. People forgot that the old divides between retail banking and investment banking were there for a reason; traditional banking is cautious, while investment banking and trading is buccaneering and bold. During the height of the bubble, the bankers were almost totally overwhelmed by the buccaneers. "I used to joke, being a traditional banker at a Wall Street firm was like being the last guy in the Alamo," says Doug Hollowell, whose company—sponsored by Jeff Greenberg, the son of former AIG Chairman Hank Greenberg—was also just approved for a new commercial-banking charter. "No more." Katy Welter says: "We used to struggle to explain to people the value of a community bank. I don't think we'll have to now."

"Struggle" is the appropriate word to describe what Chuck Welter went through to learn banking the "right" way. On the day his father signed that deal back in late '73 to buy the First National Bank, the guy who sold it to them—who was to mentor Bill in the trade—dropped dead of a heart attack. Things got worse from there. Partly because they didn't know what they were doing as the era of deregulation took off—allowing real competition—Bill and Chuck got caught up in the stagflation recession of 1980–81, then the bad-lending furor of the S&L era. In essence, First National was paying high inflationary interest rates to its depositors while its many uncreditworthy borrowers were defaulting. "My father looked at lending like selling cars: just loan as much as you can," Chuck recalls. "We made some really bad mistakes." Losing money in the early '80s, they ended up under a cease-and-desist order from the Office of the Comptroller of the Currency in Washington, weeks away from going under. Bill was ousted as chairman under OCC pressure, and Chuck was left to double down, staking the family's remaining funds. Haunted by the bank's near-death experience, he studied deeply and developed a very conservative banking philosophy: attract loyal "core depositors"—those who don't flit from bank to bank seeking higher yield—by building local branches close to people's homes and businesses. Chuck eventually erected 27. As the '90s and then the '00s rolled on, he hewed to those values in the face of looser practices by his rivals, cultivating close relationships with trusted depositors and borrowers, especially small businesses. "I was one of those who remembered how close we came to going under," he says, unlike a lot of younger bankers today.

But as banking grew more complex—and lucrative—the Welter family drama grew more complicated too. First National Bank began to show steady growth, but nothing spectacular; it stayed away from mortgage lending, and while it bought up mortgage-backed securities, the bank purchased only guaranteed ones from Freddie and Fannie. Then a faster-growing regional upstart, South Bend–based 1st Source Bank, came calling with a rich offer. Chuck's brothers, sister and mother, all stakeholders, wanted to sell. His brother Wayne, two years younger and a vice president, had chafed under Chuck's conservative philosophy. "The family's thinking, let's get earnings up. OK, we didn't have the same returns some of the others had," says Chuck. "But we had a wonderful bank, No. 1 in its market." Chuck, once the reluctant banker, said he was absolutely opposed to selling: First National had built its reputation on the Welter name. He had grown to love the business. His children, Bill and Katy, had virtually grown up in the bank, roller-skating between the desks on school nights after dinner, when Chuck went back to work to examine the books. "We would talk about bank strategy at the dinner table. He had a one-track mind about it," Katy says.

All of a sudden the close family business Bill Welter had sought to create—each of his kids getting an equal share—blew up in their faces. After a tumultuous board meeting in 2006, Chuck, then 58, was outvoted, fired and replaced by Wayne, 56, who promptly cut a deal with 1st Source. Even their mother voted to sell. After 118 years, First National Bank came to an end. Financially the whole family made out well in the $135 million deal, but the split was permanent and bitter. The brothers haven't spoken since, nor have the younger cousins. "Too much happened between us," says Chuck. "The real thing he wanted that whole time was just a thank you," says Katy. " 'Thanks for making us all rich.' He never got that." Adds her brother Bill, who grew up to become chief loan officer: "When the bank was lost, it was truly like losing a family member." The worst irony of all, Bill says, is that in the three years since the blowup and sale, his dad's business approach has been vindicated. "It looks pretty darn good these days," Chuck agrees. (Wayne Welter did not return several calls asking for comment.)

Indeed, 61-year-old Chuck Welter—once seen as a fuddy-duddy even by his own family—finds himself very much in vogue, in a retro kind of way. And with banking deep in their blood, Chuck and Katy want to start fresh. In recent months, the two Welters became one of a handful of investor groups across the country—and one of the very few families—to gain approval for a national charter from the Office of the Comptroller of the Currency, which supervises national banks. The proposed name of their new institution: the Welter National Bank. "A lot of people know our family name around the region," explains Chuck, who will be president and CEO while Katy becomes executive vice president and chief financial officer. His reputation is on the rise back in Washington, too. "That's the kind of guy I want," says Timothy Long, chief bank examiner for the OCC. The FDIC seems to agree: under its new rules promoting community values, banks that stray from core depositors and use 25 percent or more of "broker" depositors—third parties from out of the area who slosh money around looking for investment opportunities—will now have to pay a premium for FDIC insurance. So will banks that rely on nontraditional borrowing.

Despite the credit chill, the Welters are pushing ahead. They have chosen a five-acre site, not downtown but near a popular mall, and construction is to begin soon. It won't be the massive granite edifice of yore. "It's going to be a very green space with a natural feel: a boulder campus, sandstone, a timber frame—and tax benefits from geothermal heating," says Katy. "We're calling it a pioneer style." The Welter National Bank's strategy is going to have to be somewhat different, too. "The real conundrum is how do we attract the younger depositors," says Katy. "People my age don't go to banks as much. I think the way we do it is to go back to core values: community." The Welters don't expect to open their doors until the beginning of 2010. But already "we're getting calls from old customers who want personal loans," says Katy. "It's like being in a football game and you want to get in there. We're itching to get out there and make loans."