When size matters

A new crop of small community banks sprouts to fill gaps left in the wake of bank mergers

BY DAVID SPEAKMAN

Recent bank mergers have some longtime valley bankers saying the time is ripe for a new crop of small, community-oriented independent banks.

Their market target is small businesses and people who want more personal service from top bank management that is not possible with huge regional banks.

In the past two years, at least four new banks have started organizing in the Bay Area, hoping to capture the hearts and wallets of small businesses that yearn for a more personal touch.

One of those banks is Legacy Bank, which is organizing in Campbell.

“Our bank was started by local, successful business people unhappy with their current bank service,” says Rick Whitsell, president and CEO of Legacy Bank.

Whitsell says he is confident business owners and individuals, Legacy’s potential customers, feel alienated by the mega banks.

“It’s a cliché, but the big banks do make you feel more like a number than a person,” he says.

Craig Woker, a bank analyst with Chicago-based Morningstar Inc., says established banks shouldn’t take customers for granted.

“What it gets to is some customers feel neglected, get disgruntled and start to leave [big banks], and it is tempting to go across the street to the smaller community bank,” he says.

The new banks say the market for their services exists.

“It is very clear that population and deposits have increased, but individual bank branches have decreased,” Legacy’s Whitsell says.

Part of that decrease is the result of local bank mergers in which cutbacks cause branch managers to leave or face a lower probability of rising into top management.

“The new, smaller banks usually get started by big-bank refugees,” says Morningstar’s Woker. “They have established relationships with businesses that are essential to a successful startup bank.”

A look at Legacy Bank’s Whitsell, a 30-year banking veteran, fits that description.

“I first got involved with Bank of America in the 1970s when managers had authority and could have an impact on the community,” he says.

Management at three other bank startups also have long Bay Area financial pedigrees.

John Schrup, president and CEO of United American Bank, which is forming in San Mateo, cut his teeth working for San Francisco-based Wells Fargo & Co.; Bridge Bank N.A. president and CEO Daniel Myers helped develop previous startup Heritage Commerce Corp.; and Diablo Valley Bank in Danville is being organized by a management team that struck out on its own after Palo Alto’s Greater Bay Bancorp. bought Mt. Diablo National Bank.

Recent banking consolidation includes Citigroup Inc. of New York’s purchase of Golden State Bancorp, U.S. Bancorp of Minneapolis’ acquisition of San Mateo-based Bay View Bancorp, and Greater Bay’s emergence as a regional player through buying numerous Bay Area community banks.

Greater Bay CEO David Kalkbrenner, who points out his bank was once a startup itself, says the community banks under the Greater Bay umbrella still operate as individual banks with autonomous authority remaining with local management.

“If you go in to San Jose National [for example], you go in and the same people are there — the same board of directors, the same management and the same clients who see it as their community bank,” he says.

Instead of targeting Greater Bay, startups would do better to focus on the two giants that have about 70 percent of the market, Kalkbrenner says.

“Community banks, to be successful, have got to beat Wells Fargo and Bank of America every day,” he says.

After looking over the startup banks’ prospectuses, some investors are believing that community banks can compete.

United American recently received its permit to begin fund raising and within the first week expects to be near the halfway point to its minimum funding. The bank has a goal of raising between $11 million and $14 million. If all goes as planned, the bank plans to open its doors to customers by Memorial Day.

It’s a similar story in Campbell where after four weeks of fund raising, Legacy Bank has $4 million of its targeted $10.2 million in financing needed to open.

Whitsell says Legacy’s pitch to investors is simple: Go over business plans and show the market research.

“People say with international tensions and possible war in Iraq that it is not the best of times to go out and ask people to invest in a local bank. But people are investing,” he says.

While the banks may be competing for startup capital and are all located in the Bay Area, none of them see the others as a competitive threat to their home territory, which is usually five to 10 miles from their headquarters. It’s almost like the smaller banks are cheering each other on.

“It’s an affirmation to see other new banks organizing in other communities,” says Legacy’s Whitsell. “There are business cycles and we’re at a point where there is a demand for community banks. There were 17 or more community banks in the valley in the mid 1980s — now there are three.”

He and the other bankers hope to change that.

Whitsell says with Legacy’s focus on Campbell and the Soth Bay, United American, and Diablo Valley are off the radar.

“The local market is big enough,” says Whitsell, adding that there are more than enough customers to go around. “There are 1.7 million people in the Santa Clara valley and 26,000 businesses within five miles of Campbell.”

These would-be banking moguls don’t want to miss their window of opportunity.

“We feel strongly it’s the right time,” Whitsell says. “When would there be a better time? Interest rates probably aren’t going to get any lower.”