Consolidation Creates Opportunities for Local Banks

Facing an environment where capital is scarce, community banks have turned to consolidation as a way to pursue a growth strategy. That was the path taken by First Commerce Bank when it merged late last year with Grandpoint Bank, and it is what sent Ventura County Business Bank into the arms of Royal Business Bank this summer in a merger deal that remains pending. While consolidations mean that bank names disappear, the acquired branches and executives and staff working at those banks often remain intact. Most branches remain open along with their staffs to retain the familiarity with their customers, industry insiders said. “Grandpoint wanted us all in our place,” said Gary Nudell, an executive vice president and chief credit officer at First Commerce at the time of its purchase. “They wanted our relationships and our people.” In the past year, banks in the San Fernando Valley region have been actively adding to their operations. California United Bank in January purchased California Oaks State Bank for $17.2 million and added branches in Thousand Oaks and Simi Valley. First California Bank, based in Westlake Village, built itself into a 19-branch bank serving San Diego County through San Luis Obispo County through five acquisitions and mergers since 2005. Momentum has picked up as the community banking sector enters its next wave of consolidations, said Eliot Stark, managing director with Headwaters MB, a Denver-based private investment bank working with financial institutions. These smaller banks are feeling the pressure from increased regulations and from a scarcity of capital. In addition these banks face changes in their business model as they move away from real estate loans to provide more small business loans, Stark said. “That is what drives banks to be either a buyer or seller in this marketplace,” Stark said. Bringing the right buyers and sellers together involves a number of factors. First Commerce, for instance, wanted to make sure that its two branches stayed open and that its shareholders kept their interest of the bank. The attraction of Ventura County Business Bank for Royal was getting offices in areas it did not yet serve, said Jerry Lukiewski, chief executive of Ventura County Business Bank. The bank has branches in Oxnard and Westlake Village. “What they want to do is have an expansion along the coast,” Lukiewski said. When the merger finalizes this month, Ventura County Business Bank will add assets of $80 million and deposits of almost $70 million to that what Royal has already accumulated since its formation in 2008. Royal has branches in Los Angeles, Torrance and San Gabriel. Combining banks takes in considerations other than finances. Both Lukiewski and Nudell stressed the importance of meshing compatible corporate cultures. The executives at First Commerce were familiar with the three founding principals of Grandpoint. The executives had partnered on loans when the three founders were at another bank, so First Commerce knew that Grandpoint’s approach to client relations was similar to that used at its bank, Nudell said. First Commerce turned down acquisition prospects from other banks for various reasons. One of the suitors, for instance, had branches in the same neighborhoods First Commerce served. “It would have meant our offices would have been shut down and there would been layoffs,” Nudell said. Nudell has stayed on with Grandpoint where he has the title executive vice president and regional credit administrator. Former First Commerce President Jack Feldman is vice chair with Grandpoint. Other executives stayed on as well after the merger. Lukiewski will remain with Royal Business Bank after the acquisition of Ventura County Business Bank is completed. Community bank executives tout the personal relationship with their customers as the advantage they have over large, national banks. That makes those relationships with customers a key asset on the balance sheet in any consolidation, Stark said. “The acquisitions or mergers that work are because the combination of banks does a good job of staying in front of the customer,” Stark said. Ventura County Business Bank has made its customers aware of its acquisition, Lukiewski said, adding that a formal announcement will come after the deal closes. Customers of First Commerce needed reassurance the staff handling their financial affairs would remain under the Grandpoint name, Nudell said. During his banking career Nudell worked for small banks acquired by large ones where keeping customer contacts were not important. The Grandpoint acquisition was different in that regard, he said. “(Customers) are still dealing with the same contact people, there is still a receptionist who answers the phone,” Nudell said. “Our customers have been 100 percent reassured.” At the low point of the recession, the community banks that were bought up were those with heavy losses from real estate loans and those did not engage in relationship banking, Stark said. The banks that survived were those that put a premium on the customer relationships. That isn’t likely to change because it’s the best asset those banks have, Stark said. “Investors do not look at bank stocks as attractive so it is difficult to raise capital,” Stark added. “There is no institutional market to buy stock in sub-$300 million banks. That is the challenge for small banks.”