Countering the Big-Bank Trend


By JAMES FLANIGAN
Published: March 15, 2007

“A small bank is the vein that carries blood to the heart,” said Edward Carpenter, chairman of Carpenter & Company, an investment bank that in 33 years has organized the founding of 708 banks in California and across the United States.

Mr. Carpenter, 58, is passionate about the need for community banks, by which he means locally owned banks created with $16 million to $30 million in capital from investors and operating with a state or federal charter.

Carpenter & Company, based in Irvine, Calif., organizes an average of 15 banks a year by recruiting investors and executives, raising money and guiding the proposed bank through the regulatory process.

Community banks keep financing flowing to local entrepreneurs and family companies, Mr. Carpenter said, at a time when mergers have reduced the number of banks in the nation to 7,402 at the end of last year from 14,411 banks in 1977.

The consolidation, in his eyes, has given rise to the need for the more personal touch found in local banks. Mr. Carpenter’s ideal is a bank founded by some 25 to 50 organizers who put up risk capital. A typical bank, he said, will have 12 directors, including top executives and other pillars of the community, and managers who have experience in banking.

“They raise $20 million to start the bank and plan on having $200 million in deposits and $150 million in loans in the third year. With an average loan of $1 million, all they have to do is generate 150 loans in three years,” said Mr. Carpenter, who has a master’s degree in business administration from the Wharton School at the University of Pennsylvania.

Business is brisk these days at Carpenter & Company because the number of banks being formed in California is greater than the number being absorbed by other banks in mergers, according to the California Bankers Association in a joint study with Carpenter & Company. Entrepreneurs and investors are attracted to banking for several reasons, among them the fact that companies are being created in all industries.

The United States has 26 million independent businesses, according to the Census Bureau, up from 21 million in 1990. Banks of every category, from national giants to regional powerhouses to local community banks, are devoted to serving the needs of small to medium-size companies: those with 100 or fewer employees and annual revenue ranging from a few million to $50 million.

Banks formed with Carpenter & Company’s assistance illustrate aspects of the entrepreneurial trend. Coronado First Bank, for example, is focused on its local market. Coronado is an island city of 15,000 people in San Diego Bay that is renowned for its naval base and resort hotels. The bank opened in 2005, thanks to the efforts of Thomas C. Stickel, a businessman and former trustee of the California State University system.

Mr. Stickel, who lives in Coronado, said he was disturbed when the city’s local bank was acquired by San Diego investors in 2002 and merged into a larger banking company.

“So I attracted a good group of organizers and directors, including our local hero, retired Vice Adm. Edward H. Martin, and Gerald R. Sanders, who is now mayor of San Diego,” Mr. Stickel said. Admiral Martin, a prisoner of war in Vietnam, was a cellmate in Hanoi of Senator John McCain of Arizona.

Mr. Stickel attracted $13 million in capital and a chief executive, Bruce A. Ives, who said he saw Coronado First Bank as capable of growing to $250 million in assets serving local businesses and residents.

How can a small community bank realistically compete with branches of larger institutions?

“Technology,” Mr. Stickel said. These days with computerized services that banks can buy from outside vendors and Internet banking, “our technology is competitive with anybody’s.”

More ambitious is 1st Enterprise Bank in Los Angeles and Orange County, founded last year by K. Brian Horton, president, and John C. Black, chief executive, who were recruited by Mr. Carpenter. Both had worked for 1st Business Bank, a bank for entrepreneurs that had grown to $3 billion in assets and was acquired in 1998 by the Mellon Financial Corporation.

Mr. Horton and Mr. Black worked at Mellon until 2005, when they went out on their own and with Mr. Carpenter’s help raised $27.5 million to open 1st Enterprise Bank last July. “We’ll take this to a $1 billion assets bank by catering to clients in Los Angeles and Orange Counties,” Mr. Horton said.

Ethnic group banking is a growth industry. “There are 12 Hispanic-led banks being organized in the United States, 7 of them in California,” Mr. Carpenter said. They include Banco Tepeyac, which is being organized by a former Citibank official, Emilio Sanchez-Santiago, and 80 investors from Mexico and the United States who are putting up $18 million.

Pending approval of a state charter, Tepeyac will open its doors as a retail bank in Huntington Park, a heavily Latino city of 62,000 in Los Angeles County. Its name in the Nahuatl language, derives from the hill of Tepeyac outside Mexico City, the site of the Basilica of Our Lady of Guadalupe.

Another example is an effort by Kevin Rosenberg, managing partner of an executive search firm, to start a bank. Mr. Rosenberg wanted to expand office space for his 40-year-old company, BridgeGate, and asked his bank for a loan. He was turned down, and so he is starting a formal effort to raise capital for a bank he has named Access Business Bank.

With all the small banks starting, it would be easy to overlook that the largest lender to small business is Bank of America, with 4.9 million small-company clients. Bank of America, with $1.46 trillion in assets and the nation’s second-largest banking company, behind Citigroup, has a small-business division devoted to serving companies with $2.5 million or less in annual revenue. It made 13,000 Small Business Administration loans last year through its 5,800 branches nationwide.

“We make loans of $100,000 and less every day,” said Mark Hogan, president of the bank’s small-business banking unit. “And we provide online management for payroll and invoicing services for small companies on a 24-hour, seven-day basis.”

Christopher D. Myers, chief executive of CVB Financial, which owns Citizens Business Bank of Ontario, Calif., agrees that large banks offer international and sophisticated cash management services that are beyond the abilities of most small banks. But even in local markets, size matters, Mr. Myers said. Over 34 years, he has taken Citizens Business Bank from a single office to 33 cities in Southern and Central California and $6 billion in assets.

Last month, the bank agreed to a $35 million deal with First Coastal Bank of Manhattan Beach, extending Citizens reach to the coastal cities. “Now we are local bankers in 42 locations,” Mr. Myers said. He sees competition heating up for community banks. “Founders may have to wait longer for their good returns,” he said.

One attraction of community banks is that founders can make a good return on their money over five to seven years. In fact, that is what Mr. Carpenter intended. He worked in the early 1970s for Security Pacific, a Los Angeles bank that acquired others. (Security Pacific was itself acquired by Bank of America in 1992). Mr. Carpenter saw takeovers and layoffs and did not like it.

“This dislocation of corporate America really bugged me,” he recalled in an interview. “I saw my friends losing jobs and I thought I can help them found their own banks and hire other friends as senior officers and never treat their people the way they were treated. ”



http://www.nytimes.com/2007/03/15/busin ... f=business