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More Banks for Your Bucks


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In three and a half years, a dozen small banks have opened in San Diego County—four in the past eight months alone. Add to the mix a Texas-based outfit marching into California like General Santa Ana storming the Alamo, opening two branches in San Diego last year, with a third on tap for early this year.

Simply put, San Diego has become a hotbed of banking. Three fundamentals are behind this upsurge in new banks:

The ground was laid when a decade of bank failures, mergers and acquisitions reduced the number of banks operating in the San Diego region to less than half what it was in 1985. The locally owned and operated community bank had become an endangered species. This created a void that’s being filled at a remarkable rate. What’s more, investor interest was sparked anew after the technology-stock bubble burst in 2000 and stodgy bank stocks suddenly took on a new shine.

The key component, and one that continues to fuel industry consolidation even as new banks sprout up, is the region’s underlying economic engine. While sputtering over the past three years, it continues to chug along, catching the eye of bankers everywhere.

Some bankers believe the pendulum has swung too far, too fast. They say that while 20 or so new banks opening in the county since 1997 may be good for bank customers, a shakeout is inevitable—and some investors may get burned.

For now, the optimists are in charge. Between 1985—when the number of banks in San Diego peaked at 46—and 2002, the county’s population has risen 36 percent, bank deposits are up 45 percent, the number of businesses has risen 50 percent, and employment is up 56 percent, according to banking consultant Ed Carpenter, head of Irvine-based Carpenter & Company and publisher of the annual “State of the Industry: Joint Report on the Condition of California Commercial Banking.”

Meanwhile, Carpenter says, the number of banks has dropped by 60 percent. “The reason is that banks of all sizes tend to acquire smaller banks, big fish eating little fish, because in banking it’s cheaper to acquire another company than to develop the business yourself.”

Savings-and-loan institutions were hit hard following a collapse in the real estate market in the early 1990s, and almost every commercial bank in San Diego, including 114-year-old San Diego Trust & Savings Bank, either merged with others to form bigger banks or was swallowed by a “big fish.”

“In the more attractive regions, like San Diego, banks disappear the moment they are available in the market,” says Carpenter. “Consolidation [comes] from the desire to be in San Diego County.”

Bucking that trend, new banks began popping up in 1997, with the opening of Rancho Bernardo Community Bank in Rancho Bernardo, Southwest Community Bank in Encinitas and Neighborhood National Bank in San Diego—even as industry consolidation continued. That year, San Diego National Bank was acquired by Illinois-based FBOP Corporation, and in 1998, Grossmont Bank merged with First Pacific Bank and others to become California Bank & Trust, now a subsidiary of Zions Bancorporation in Salt Lake City.

That was followed by Bank of Commerce, Scripps Bank and Peninsula Bank being acquired by Minnesota-based U.S. Bancorp, operator of U.S. Bank. Torrey Pines Bank and North County Bank were folded into Wells Fargo. And that’s just to name a few.

The banking renaissance gathered steam in 2000 with the opening of two independent banks, followed by three more in 2001, three in 2002 and four last year. “When you look at where growth is happening—California, and in particular, Southern California—is doing better than a lot of other places,” says Michael E. Perry, president and chief executive of San Diego Trust Bank, which opened in late October.

What’s more, the consolidations led to a rise in customer dissatisfaction, particularly among small- to medium-size businesses, which felt they were being shoehorned into prepackaged services that didn’t meet their specific needs, Perry says. “There were also a number of out-of-work bankers who saw this unmet need as an opportunity, and with the flight of capital from the technology arena, banks looked like a pretty safe bet to investors.”

There’s plenty of business to go around, he claims. “I need to capture one-tenth of 1 percent of all deposits in San Diego over the next three years to realize our business plan. It’s a drop in the bucket.”

James Kelley, president and CEO of Discovery Bank, which opened in San Marcos in 2001, concurs, comparing his bank’s impact on the regional banking scene to a “flea on an elephant.

“I tell my shareholders: To be successful, I only need about 500 customers. I don’t have to be like Wells Fargo, Bank of America and Union Bank and have thousands of customers to succeed,” Kelley says.

Their mantra is “relationship banking.” These new community banks will succeed, they say, by providing better, more personalized service than big, monolithic banks.

“San Diegans want to be banked by other San Diegans, people who live and work in their community,” Perry says. “They don’t want decisions being made out of Los Angeles or someplace in Nevada or Salt Lake City.”

Like many of the de novo banks (open 36 months or less), San Diego Trust Bank and Discovery Bank figure to attract professionals, such as accountants and attorneys, and other small to midsize businesses.

“We’re not going to attempt to compete for the mass retail market with a Bank of America or Wells Fargo or the credit unions, because they’re competing purely on the basis of price,” Perry says. “We’re going to appeal to someone who wants a high level of service.”

Taking a somewhat different tack, Rancho Bernardo Community Bank is focused on construction loans, condominium conversion loans and mortgages on commercial properties, says Alan L. Douglas, president and CEO. Carving a niche limits the competition with the other small banks, although community banks tend not to compete with each other, he says,

“We get most of our loans from the U.S. Banks and Wells Fargos and Bank of Americas that usually have made one of their good customers unhappy,” Douglas says. “The customers opt to deal with a smaller community bank that knows who they are and gives them a level of service they can’t get at the bigger banks.”

Adds Kelley: “A lot of the big banks, while they talk about relationship banking, really can’t provide it because they’re just not set up to do that. They can talk the talk, but they can’t actually walk the walk.”

Generally speaking, that’s an accurate assessment, says Dennis Snow of Snow & Associates, a customer-service consulting firm in Orlando. “As banks get larger and larger, they lose that personal touch with their customers,” he says.

Community bankers also say they are more flexible in the way they deal with their accounts, because the decision maker is right there, whereas in the larger banks, there’s traditionally a centralized bureaucracy.

But this is changing, according to Snow, who advises big banks on how to act more like community banks. One of his clients is Raleigh, North Carolina–based First Citizens BancShares, which operates subsidiary IronStone Bank out of Austin, Texas. In May, IronStone opened its first California office in the Golden Triangle and added a second office in La Jolla in June. A Solana Beach branch is slated to open early this year. Additional branches are planned for Newport Beach, Mission Viejo, Rancho Santa Margarita and Sacramento.

Jay Parker, president of IronStone Bank, takes issue with the notion that large, out-of-state banks can’t provide personal service. “You can’t just say, ‘I’m a local bank, and I’m a local banker, and therefore I can give you better service,’” he says. “The proof is in the execution.”

IronStone is targeting the community bank niche, with a special focus on medical practices, as well as real estate brokerages, law firms and engineering firms. “We tell our customers, ‘We’re going to put a banker in front of you, not a salesman,’” Parker says.

San Diego National Bank, Union Bank of California and Wells Fargo also are taking pains to be perceived as community banks, not large and impersonal institutions headquarted in Chicago or San Francisco.

San Diego National describes itself as the “largest locally managed community bank.” President and CEO Robert B. Horsman has been with the bank since it opened in 1981 and says all decisions on loans are made locally.

“People don’t bank with banks; they bank with bankers,” adds Joseph Benoit, a native San Diegan who heads San Francisco–based Union Bank’s San Diego region. The San Diego community is very provincial, he acknowledges, but “instead of being one of the big money-center banks, we characterize ourself as a large community bank.”

Moreover, the independent banks don’t have the ability to be as involved in the community in terms of providing volunteers for charitable events and contributing to charitable causes, he contends.

Wells Fargo, also headquartered in San Francisco, takes a similar stance. With $370 billion in assets, it’s one of the largest banks in the country. But the bank has a decentralized structure with a regional president who acts like the CEO for the local market, explains public relations director Chuck Lemoine. All decisions concerning charitable contributions, marketing and pricing are made locally, not out of San Francisco.

“Wells Fargo has a value vision with an emphasis on customer service,” Lemoine says. “Our market share probably speaks for itself.”

The new banks are undaunted, and investors seem to agree, although interesting them in banks in the late ’90s was more difficult than it has been recently. When Douglas formed RBCB in 1997, some potential investors turned up their noses at the paltry 12 percent annual return anticipated at the time.

“It was the middle of the tech boom, and people were asking why they should buy our stock when they could get 40 to 50 percent a year in technology stocks,” Douglas recalls. “Well, there’s a thing called safety.”

Perry and his cofounders at SDTB turned away investors after receiving commitments for $21 million but were able by law to accept only $12 million. They weren’t alone—the offerings of the last seven banks to open in the San Diego region were oversubscribed, according to Carpenter.

From an investment standpoint, community banks have a good track record in San Diego, Carpenter says. Of the recent mergers and acquisitions, the average bank life was 19 years, and a $100,000 investment yielded $1.75 million, he says.

The brightest star was Peninsula Bank, which was founded in 1975 with $1.25 million in capital and sold in 2000 for a total of $107 million, including dividends. Granted, not every bank made money, but overall, “this sector has performed very well,” Carpenter says.

While most of the new banks are community banks, not all are. The Bank of Internet USA opened on July 4, 2000, to target customers nationwide. The on-line bank, which has a bare-bones office in Carmel Valley, now boasts 10,000 customers from all 50 states and closed out 2003 with roughly $310 million in assets. By having a low overhead, the bank can charge less for loans, pay more on deposits and have lower fees, says Gary Lewis Evans, president and CEO.

“We focus on consumers,” says Evans. “We want to reward people by giving better value.”

The cluster of new bank openings may be over for now, observers say—but not because there are too many banks, Perry contends. Rather, there aren’t enough qualified people to run them.

SDNB’s Horsman is not convinced. While he agrees that there’s a shortage of qualified personnel—he’s been trying to fill senior executive positions for a year—he’s concerned that history will repeat itself, that the new banks will be overly aggressive and stumble into the same pitfalls their predecessors did two decades ago. A veteran of more than 30 years in San Diego’s banking industry, Horsman has witnessed its highs and lows, including a similar upsurge in the early 1980s, when about a dozen banks opened.

“We went through this before,” Horsman says. “I think there’s room for about half as many banks as we have. Some of them are going to struggle to get the growth they need.” The trap the banks got themselves into 20 years ago, he says, is that to be competitive, they became aggressive and took too many risks. While some banks did well—Peninsula and Scripps in particular—others did not. “If you put the same investment in First National, you lost all your money, and if you put it in my bank, you did a little better than earning interest in a savings account,” he says.

At the time, there was a lot of split borrowing, Horsman says. “One customer would have unsecured lines of credit at two or three or four banks, and that created loan problems. These newer banks could fall into the same trap, and I think we’ll have the same shakeout going forward.”

George W. Haligowski, the president and CEO of ITLA Capital Corporation, which moved to La Jolla from Los Angeles in 1996, echoes that sentiment: “Not all of them are going to survive.”

ITLA’s subsidiary Imperial Capital Bank is a regional operation that specializes in commercial real estate throughout California and is not in the same market as the community banks. As such, Haligowski has something of an outsider’s perspective.

“We see tremendous opportunity for lending there,” he says, pointing to the redevelopment in the Gaslamp Quarter and Little Italy. But for the new community banks, it’s a very difficult market because they’re “competing for the same customer. They need to reach that critical mass, about $500 million in aggregate assets. I don’t think the market’s that big.”
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