Fresh Breeze in Banking : New Institutions Fill Special Needs and Geographical Gaps

Wally Bragdon, whose 2-year-old bank in Petaluma is sporting a life-size cow and calf in its lobby for National Dairy Month, is capitalizing on a budding trend in California banking.

After some lean years, interest seems to be picking up in opening new banks in the state.

Banks are being created in small communities such as Petaluma and Redlands, where bank mergers are leaving gaps, and in urban neighborhoods where a special need exists, as in East Los Angeles, where a new bank is planned by a group of Latinos.

The figures are not dramatic, and the number of applications for new banks does not approach the flurry of the late 1970s and early 1980s. But regulators and other industry watchers see the potential for considerable new banking activity in the coming months.

Mainly because of mergers, “Everyone had been saying we’d have 350 commercial banks in California by this year, and I thought that made sense,” said Jon Joseph, a San Francisco attorney specializing in banking. “But the figure never dropped that low and, starting last year, we have seen a marked increase in new bank applications that we expect to increase.”

So instead of 350 banks, California had 433 at the end of 1988 and the number is expected to climb. There appear to be three primary reasons for the renewed interest.

Last year was profitable for the state’s banks in general. A new report by independent analyst Stephen D. Cummings of Ventura says 1988 was the best year since the mid-1970s for banks in California. Performance was particularly strong at banks formed since 1985, according to the extensive analysis.

Second, the ratio of bank offices to people has changed. Regulators approved so many new banks earlier in the decade that California became “overbanked.” Simply, there were more banks and branches than the population could support profitably.

The imbalance has disappeared over the past few years as the big banks have closed hundreds of branches and the population has jumped. The State Banking Department reports that there are 6,300 residents for each bank office in California, compared to 5,200 in 1983.

Finally, and perhaps most significantly, big California banks have been acquiring smaller independent institutions, creating gaps that local business people are eager to fill.

“Wherever a successful independent bank is being merged into a larger one, there is a strong tendency to create another new bank,” said Gerry Findley, a banking consultant in Brea who specializes in independent banks.

For example, the acquisition of independent Bank of Redlands completed Friday by Pasadena-based Community Bank has motivated local people in the San Bernardino County community to begin organizing a new bank, Findley said.

The Bank of Petaluma opened its doors in the Northern California town of about 40,000 people on Sept. 21, 1987, soon after the local bank was acquired by a larger company.

Petaluma also was changing, making the transformation from an agriculture-dominated economy to one that supported new businesses fleeing San Francisco, 30 miles south.

“The perception of our founding directors was that they wanted a locally owned, locally managed bank,” said Walter E. Bragdon, who had spent 19 years with Union Bank before he became president and a founder of the new bank. “They wanted a bank that could respond to the needs and wants of people here and do a very personalized business.”

Sense of Community

The cow and calf in Bank of Petaluma’s lobby this month reflect that sense of community.

Henry B. Jamison, who spent 29 years as a banking regulator, shares Bragdon’s view and has employed it in creating three small banks in recent years.

“A community-oriented institution that will treat people as individuals can still do very well,” said Jamison, who is president of Marin Community Bank in San Rafael. The institution is expected to open later this year.

Also expected to open later this year, in a converted auto dealership in East Los Angeles, is Angeles National Bank. Its organizers say it will be the first metropolitan area bank founded by Latinos in about 25 years, and its staff will be bilingual in English and Spanish.

“We’re going to be focusing on the community with direct services while being very much aware of what the community’s needs are,” said Richard Amador, one of the organizers.

Operators of new community banks say they are not motivated by the approach of full interstate banking in California in 1991. Some of the state’s medium-sized banks and possibly its larger ones are expected to be targets for acquisition by the out-of-state banks that will be allowed to move into California then.

But the new banks are regarded as too small to be noticed by a big bank trying to make a splash in California. In fact, a wave of acquisitions could improve opportunities for community banks if the public turns away from institutions bought by out-of-staters.

Even if the pace of new bank approvals by the regulators picks up considerably, it appears unlikely to reach the pitch of the early 1980s, when 30 or more banks were opening each year.

“It’s no secret that in the early ‘80s in California anybody with 2 or 3 million dollars got a bank charter,” said Jerry B. Saylor, an official with the Federal Deposit Insurance Corp. regional office in San Francisco.

The regulators have been tougher recently, partly because of the high rate of failures in the savings and loan industry and less serious problems in banking. While FDIC officials refused to confirm it, several industry observers said the agency has rejected applications for at least two new banks in California in recent months.

Saylor said the agency, which insures deposits and regulates banks, wants to make sure that new banks are being formed where there is a legitimate economic need and by experienced business people with a commitment to the community.

Setting up a new bank can be costly. Legal and consultant fees can run to $50,000 with no guarantee of approval by state or national regulators. If the proposal is rejected, the seed money is lost.

Stock Offerings Raise Capital

Once a bank receives approval, pre-opening costs for items such as preparation of a stock offering, salaries and a building can easily top $250,000.

Joseph, the lawyer, said the minimum capital needed to start a bank is $1 million, but in urban areas the figure is usually $4 million or more. The capital is normally raised through a stock offering.

Founding a local bank can be a source of prestige and influence, but the possibility for quick profits is pretty slim. Industry figures show that most new banks do not earn a profit until their second year, and serious problems often do not show up until the third year.

“The third year is when they have to eat all the mistakes they made in the first two,” said Findley, the consultant.

The mistakes are mostly the result of making bad loans in an effort to increase an institution’s business too quickly, Findley said. The new banks that stick to a solid business plan are the ones who avoid those errors, he said.

NEW STATE-CHARTERED BANKS IN CALIFORNIA Year-to-year carryovers create some discrepancies between number of approvals and openings in a single year.

Year Applications Approvals Openings 1980 40 31 29 1981 25 26 31 1982 31 18 22 1983 29 24 17 1984 17 16 31 1985 5 3 8 1986 10 3 5 1987 1 7 4 1988 8 2 2 1989* 4 3 1

*1989 figures through end of May Source: California State Banking Department Times staff writer Jesus Sanchez contributed to this story.