Banking’s Other Trend: Small and Community-Minded

With merger deals coming thick and fast, NationsBank acquiring BankAmerica, Citicorp and Travelers Group becoming Citigroup and Norwest merging with Wells Fargo, you might think big fish getting bigger was the only game in banking.

Indeed, 1,960 banks have disappeared in the last five years as consolidation has reduced the total number of U.S. banks to 8,984. And more mergers are inevitable as banks see acquiring and combining as the easiest way to cut staff, cut costs and become “competitive.”

But there is another trend in banking, smaller but significant: The number of new banks starting up is growing, from 50 five years ago to 188 last year and 154 so far this year. In California, 21 new banks have received charters this year, 26 have done so in Texas, 20 have in Florida and in Georgia, and 11 have in Minnesota.

Bank officers displaced in the consolidation of larger companies are starting these small community banks. Most of them have the backing of sophisticated investors. Which raises an interesting question: If big banks say they have to get bigger to be competitive, why are smart people and investors founding small banks? What opportunity do they see?


They see the possibility of being bankers in the old sense of lending to the small and medium-sized companies that are the backbone of the U.S. economy. “The future of banking” lies in a small number of big institutions and many small ones, says David Buell, who has just opened Prime Bank in Century City. Buell, who earlier served as an officer of Union Bank, founded Metro Bank of Los Angeles and sold it three years ago. His new bank, Buell says, will lend to companies with revenue of less than $25 million, small firms that can use cash management and business advice along with the loans.

Banks overall make only 20% of the total loans to U.S. business now that large corporations finance themselves through markets for commercial paper, bonds and stocks. But banks make half of all loans to small and medium-sized companies.

“Community banks are the equivalent of lending officers, who are the first link in the chain of financial support that undergirds our business system,” says Martin Mayer, author of “The Bankers: The Next Generation,” a recently published update of “The Bankers,” his 1974 classic book.

In their support of small business, such banks recall one of history’s greatest bankers, Amadeo Peter Giannini, who founded Bank of America in 1904 in San Francisco when he was 34 years old. Giannini, who was born in San Jose, got a break when other banks in San Francisco wouldn’t lend to Italian fishermen who wanted to buy their fishing boats. Giannini didn’t see ethnicity; he saw opportunity. He knew hard-working businesspeople would work to pay off loans on their boats--which were collateral against the loan in any case.

Bank of America went on to help finance the building of California’s movie and agriculture industries and its growth of home ownership. Giannini originated the idea of installment payments to help people buy their homes. He was so savvy that when he tried to take Bank of America nationwide, banks in the East and Midwest, fearing his competition, persuaded Congress to pass laws blocking interstate branching.

In a sense, Hugh McColl, the 63-year-old chairman of NationsBank, has fulfilled Giannini’s vision by adopting the Bank of America name for Charlotte, N.C.-based NationsBank. McColl in a single decade has built a North Carolina regional company into a nationwide powerhouse,

But McColl’s expertise is in deal-making, not in lending to entrepreneurial business. He acquired the biggest bank in Texas in 1988 only after forcing the U.S. government to take all the risks of bad loans. NationsBank is admired by Wall Street analysts for the way it cuts costs after mergers; it plans to cut $2 billion in costs after acquiring Bank of America.

There may not be much hand-holding for small business in such a bank, but in fairness to McColl, his bank fits its time. “There’s not as much need for lending officers when big banks get most of their revenues from investing and processing capital in the money markets,” notes James McDermott, president of Keefe, Bruyette & Woods Inc., an investment company in New York specializing in the banking industry.


For example, Banc One, which has just acquired First Chicago NBD, leads in credit card financing. Citigroup is second. Citigroup itself brings in most of its revenue from international business. It linked with Travelers in hopes of getting insurance and stock brokerage products to provide to consumers worldwide.

To be sure, big banks can and do lend to small business. Most have computerized credit-scoring methods that allow them to judge small companies by sets of financial criteria. And Norwest, the Minneapolis bank that is acquiring Wells Fargo and moving its headquarters to San Francisco, puts lending officers out in branches to serve small business.

But for the most part, the size and bureaucratic sclerosis of big banks leaves many opportunities for smaller, locally focused banks.

City National, the Beverly Hills-based bank that is now expanding to Riverside, Ventura and other counties in Southern California, is a case in point. City, which has more than $5 billion in assets, is not small. But at 1,500 employees, it’s “in the sweet spot,” says Chairman Russell Goldsmith, to serve the small and medium-sized companies that predominate in entertainment, technology, real estate and other local industries.


Others see similar opportunity. Bank officials who left giant U.S. Bancorp in Minneapolis have created Newport Beach-based Western Bancorp with $1.4 billion in assets by acquiring the former Santa Monica Bank and Southern California Bank. Mutual fund manager Michael Price and other institutional investors are backing Western, which aims to offer “sophisticated financial services” to the area’s teeming entrepreneurial businesses, says Arnold Hahn, Western’s chief financial officer.

But such customers are not easy to get. Banking is not a sentimental business and you don’t get clients just because you’re small, says Don Griffith, chairman of First Coastal Bank in El Segundo. “If a small company can get a credit line from Wells or BofA, they’ll take it. Why shouldn’t they?” says Griffith, who was chief financial officer of the old First Interstate Bank when it tried to take over BofA in the 1980s.

“The way I get business is by offering service,” calling the business owner when finances are tight and being there to help, he says.

What it all comes down to is that the enormous changes in U.S. financial markets are pushing both the giant mergers and the surge in new bank charters. New competitors arise all the time. Just a week ago, the government gave the go-ahead for giant State Farm Insurance to get into banking.


Innovations in finance typically come from outsiders, whether discount stock brokerage by Charles Schwab or online banking and finance by software company Intuit.

Meanwhile, all the big banks can think of is getting bigger--and even then they mess it up. The most visible results so far of this year’s mammoth mergers have been the firing of high executives--McColl booted BofA President David Coulter and Citigroup co-Chairmen John Reed and Sanford Weill fired James Dimon, the president of their newly formed company. Somebody should tell them that office politics is not the key to competitiveness.


Closing, Opening Accounts


Mergers have rapidly reduced the total-number of U.S. banks in recent years. At the same time, there has been a surge in new bank charters.

Total Banks

Annual and latest figures, in thousands

First half of 1998: 8,984



New Bank Charters

Annual and latest figures

Through Thursday: 154


* Sources: FDIC, Bauer’s Financial Reports