When Ash Patel worked for Bank of Orange County in the 1990s, he was besieged with loan requests from owners of small hotels who shared his last name. “I was the only Patel that was a banker,” he said.
And so a niche was born: loans to motel-owning families named Patel with roots in the state of Gujarat in India.
Patel is now president of Premier Commercial Bank in Anaheim, but he retains his roster of hotel clients. That specialized focus, he said, helped his small bank establish a foothold against a crowded field of competitors.
To the casual observer, the California banking scene may seem like a gallery of ghosts. Old-line institutions such as Crocker National, Security Pacific and First Interstate disappeared years ago. Mighty Bank of America Corp. was uprooted from San Francisco in a 1998 takeover and moved cross-country to Charlotte, N.C.
Although many of the big names have fallen, scores of smaller banks have quietly risen. Instead of trying to handle every financial need, the start-ups often carve out specialties to serve small-business owners or professionals.
And their recent profitability -- no California commercial bank founded from 1988 on has failed, according to the Federal Deposit Insurance Corp. -- has attracted flocks of investors.
New institutions are being formed so fast that the number of banks in California rose to 274 last year from 253 in 2004, marking the first increase since 1990, said Edward Carpenter, whose Irvine-based investment bank produces an annual report on the state’s banking industry with the California Bankers Assn.
Nationally, the number of community banks also has edged up after two decades of decline. The total of FDIC-insured banks and thrifts with less than $1 billion each in assets bottomed out in 2004 at 7,186, then rose to 7,337 at last count, the agency says.
In California, the small-bank boom is being abetted by the state’s vibrant ethnic communities. Institutions such as East West Bancorp Inc., Cathay General Bancorp, Hanmi Financial Corp. and Nara Bancorp Inc. began in L.A..'s Chinatown and Koreatown and became multibillion-dollar institutions.
Their success has bred imitators: More than 20 Asian American banks are now based in Southern California, including two formed last year to serve Orange County’s large Vietnamese community. A planned bank in Long Beach would be the first in the U.S. to focus on Cambodian immigrants, and banks targeting Latino businesses opened last week in Glendale and downtown Los Angeles.
California’s diverse and entrepreneurial population of 37 million provides opportunity for founders of new institutions, who are often bank executives left jobless after takeovers.
“More and more CEOs are selling their banks and then returning to the fray by starting a new one,” Carpenter’s latest report said. Their e-mail address books and Rolodexes brim with former clients -- potential investors as well as customers.
With big banks dominating mass-market products such as mortgages, auto loans and credit cards, the start-ups often have concentrated on commercial real estate lending and construction, said Robert DeYoung, an economist for the FDIC. In real estate, local banks often have an edge because of their knowledge of office, industrial and apartment markets and business owners in the community.
That’s the niche that Premier Commercial has focused on since it was founded five years ago when Patel’s previous employer, Bank of Orange County, was in management turmoil.
Patel, 45, describes himself as “the quintessential Indian entrepreneur young upstart.” To start the bank, he partnered with Kenneth Cosgrove, whom Patel calls “the quintessential mainline American banker.”
Cosgrove, 59, had built up Orange National Bank for 19 years before it was sold in 1999, and he had a wide range of former small-business customers that he called on to help start the new bank and become its customers.
In 2001, Patel and Cosgrove mailed prospectuses to potential investors the weekend before the 9/11 terrorist attacks. Despite the ensuing economic shock, they managed to raise $7.3 million, topping the $6 million that they needed to get started.
Premier Commercial’s one full-service branch is on the bottom floor of a 12-story office tower in Anaheim. The bank has grown so much that its administrative offices occupy the second floor, too. Its neighbors include a Hooters restaurant, the Angel Stadium parking lot and a train station.
“It’s not exactly the kind of place where you pull in off the street,” Cosgrove, who is the bank’s chief executive, acknowledged.
But with its specialty niche, Premier Commercial didn’t need the visibility of retail banks.
More important, Cosgrove said, were its links to small-business clients, including a younger generation of ethnic Indians who were turning their parents’ mom-and-pop motel businesses into larger hotel investment and management firms.
Manhattan Beach-based Indigo Hotels, for example, has bought or built 10 properties and plans to expand in Arizona as well as Southern California. Premier Commercial has provided Indigo with a wider range of loans than other lenders offered, including fixed-rate mortgages, hotel improvement loans and lines of credit secured by hotel equity, Indigo director Barrett Patel said.
“I didn’t have to educate them on what we were doing, which you typically have to do with bankers,” Barrett Patel said.
Although hotel loans at times have made up as much as 40% of the bank’s lending, it limits exposure to that segment by selling some loans to larger partner banks such as Salt Lake City-based Zions Bancorp.
Fewer than 25% of the loans it keeps for itself are on hotels, and that percentage is falling as other lenders move into the lodging business, including Korean American banks, Wachovia Capital and Barclays Capital, the bank executives said.
“What was a niche for us -- start in 2001 and fast-forward five years -- is no longer a niche,” Ash Patel said. “We have tremendous competition now.”
Premier Commercial’s growth pattern illustrates why rivals have moved in. The bank opened Nov. 28, 2001, and had $848,000 in loans at the end of that year. By Sept. 30 of this year, Premier Commercial had on its books $232 million in loans and $284 million in deposits.
Premier Commercial recorded a $1.7-million profit for 2005 and $1.8 million in earnings for the first nine months of this year. It has set aside $2.8 million to cover lending losses, although so far none of its loans has gone bad.
The bank’s parent, Premier Commercial Bancorp, formed in 2004, has raised capital in a series of securities offerings, the largest of which was a stock sale last July that yielded $17.6 million, half to be used to help the Anaheim bank grow and half to start a new bank in the high-growth market of Mesa, Ariz.
Premier Commercial’s stock, initially issued at $10 a share in 2001, changed hands this week at $22 in over-the-counter trading.
In addition to the potential for financial gain, owning a stake in a bank carries a certain prestige, investors say -- almost like joining a private club, but with an edge.
“It really has some of the excitement of a risky investment -- the illiquidity and uncertainty,” said Lloyd W. Talbert, president of a Los Angeles manufacturing business.
Talbert invested $30,000 in Premier Commercial in 2001, watched the stake double in value and invested another $30,000 this year.
The risk is tempered, he said, because investors in small banks typically know and trust the founders. Talbert, who had gotten to know Cosgrove while attending sporting events with mutual friends, liked the roster of clients and bank directors Cosgrove had attracted, including operators of successful contracting, electrical, building supply and insurance businesses.
“It’s not a dot-com,” he said.