Smaller Banks Capitalize on Big Asset: Service : Profits Grow as They Lure Disenchanted Customers From Their Larger Rivals

Owen Roofing and Bank of America grew up together. When the roofer opened its doors in Los Angeles on Oct. 23, 1916, its business account was at the Bank of Italy, the predecessor to B of A.

Nearly 70 years later, the company switched to an upstart independent bank with a focus on medium-sized businesses.

“Bank of America was not too concerned with Owen Roofing Co. anymore,” said John R. McClain, general manager of the firm, one of the state’s largest commercial roofers. “We had seven to 10 account officers the last few years. Errors in the handling of our account were taking lots of extra time.”

Similar shifts are occurring with increasing frequency in California these days as smaller, independent banks wrest a bigger chunk of the pie from the banking behemoths that have dominated the state for decades.

The severe pressures of today’s banking environment have taken a heavy toll on the largest banks in California--B of A, Security Pacific, Wells Fargo and First Interstate. All have been forced to close branches and cut staff, leaving some longtime customers feeling ignored and ill-served.

‘The Real Bankers’

Almost unnoticed, top independent banks have aggressively exploited openings created by the disenchantment, wooing away customers with personalized service--such as daily pick-up services for deposits--and products as sophisticated and price-conscious as those of the big boys.

“These guys at the smaller banks are the real bankers today,” said Gerry Findley, a consultant who has kept an eye on California banking for three decades. “They know how to take care of customers and they are out there making a buck for the shareholders.”

The proof is in the numbers. Local banks--institutions serving narrow niches or specific areas--increased their share of customer deposits in California from a nationwide low of 13.8% in 1982 to a respectable 23.7% in 1986, according to figures compiled by Danielson Associates, a bank consulting firm in Maryland. The company expects the little guys’ share to jump more when new figures come out later this month.

‘Premier Performers’

Not only are the smaller banks in California thumping their big in-state rivals. They are outperforming nationwide banking averages, as measured by two key indicators--return on assets and return on equity.

Last year, California banks with assets of $25 million to $500 million achieved a mean ROA of 0.75% and a mean ROE of 9.2%,compared to national averages of 0.13% ROA and 2.6% ROE, according to the California Banking Department.

Findley calls the best of these small banks “premier performers” in a book he will publish in June, and the numbers this select group posted last year were little short of astonishing. The 30 rated tops by Findley had an average ROA of 2.2% and an average ROE of 20.8%.

Many of these high performers are relatively new and have been consistently growing by 25% to 30% a year since 1982, the year that deregulation began changing the face of banking. They tend to have assets ranging from less than $100 million to $400 million and unfamiliar names, such as 1st Business, Ventura County National, Lincoln National, Guardian and Truckee River.

Clear-Cut Strategies

But some are not so new. Exchange Bank in Santa Rosa, recently called one of the five best banks in the country in Barron’s, celebrated its 98th birthday on May 1. Mid-State Bank in Arroyo Grande is nearing 30 years old.

What these top banks share is a clear-cut business strategy that emphasizes old-fashioned attention to customers and a sharp pencil on expenses. In most is a thriving entrepreneurial spirit that some feel their bigger colleagues have lost. They also seem to be effective in avoiding the risky loans that have plagued big banks.

When Owen Roofing left Bank of America four years ago, McClain transferred the business to 1st Business Bank in downtown Los Angeles.

1st Business was started from scratch in 1981 by four former officers at Union Bank, the state’s fifth-largest bank and a specialist in serving the lucrative market for mid-sized businesses.

Better than 95% of the more than 700 mid-sized businesses that are customers at 1st Business have come from one of the five big banks. Enough of them have defected from the majors to push 1st Business Bank’s assets over $350 million.

“We are benefiting from the problems of the big banks from the standpoint that the independent bank is no longer assumed to be less sound or secure than a major bank,” said Robert W. Kummer Jr., chairman and chief executive of 1st Business.

Indeed, few banks of any size can match the earnings record of 1st Business in the past seven years. Profit has increased by more than 20% a year each year, and earnings jumped 29% in the first quarter of 1988.

Serving Middle Market

Another indicator of productivity is assets per employee. Last year, 1st Business had an average of $3.7 million in assets for each of its fewer than 100 employees, tops among the state’s best independent banks, according to Montgomery Securities, a San Francisco investment firm. The figure was far above the industry average of about $1.5 million per employee.

1st Business is among the strongest of a bevy of independent banks that have sprung up in the past decade to concentrate on serving companies with annual revenue of $3 million to $100 million, the so-called middle-market businesses.

These companies often feel that they have been virtually ignored by the big banks, which have turned their attention on the larger corporations with far greater needs. And they find the independents eager for their business.

Plaza Bank of Commerce in San Jose has carved out an enviable niche serving Silicon Valley companies. Guardian Bank and Lincoln National Bank have grown dramatically by serving middle-market companies and specializing in escrow and title firms in the Los Angeles area.

“Seventy-five percent of our deposits come from a courier service that we send around to customers daily, and we keep the back office open until 11 p.m. for same-day posting,” said Paul M. Harris, chairman of Guardian Bank, in explaining one way that his young bank accommodates customers and has grown to $177 million in assets since opening in late 1983.

The entrepreneurial spirit at Guardian extends right up to members of the board, who are rated on the amount of business they bring to the bank and do not stay long in their $18,000-a-year positions if they are not helping Guardian grow.

‘Everything For Sale’

Some new banks were formed with an eye toward selling out to bigger institutions once they become established, and that possibility becomes more enticing as 1991 approaches. That is the year California opens its doors to interstate banking and institutions here become open to takeover by out-of-state banks.

“I don’t lie to our clients,” said John J. Keating, chairman of 6-year-old Lincoln National Bank in Encino. “Everything in the world is for sale, and this bank is for sale, if the price is right.”

Not all of the top-performing independents cater to a particular clientele. Some, such as Valley National in Glendale, Mid-State in Arroyo Grande and Chino Valley in Chino, are established community banks that compete head to head with branches of the big banks.

Many analysts believe that the best of these super-community banks is Santa Rosa’s Exchange Bank.

William Bowler, a New York money manager with a reputation for discovering obscure, undervalued stocks, was the subject of the recent Barron’s article in which he pegged Exchange as one of the five best banks in the country. And James C. Hale of Montgomery Securities called Exchange “just a wonderful, strong bank.”

Part of the bank’s success reflects the prosperity of the region it serves. Santa Rosa and surrounding Sonoma County have grown steadily on a diversified economic base. So the bank can thrive and stick exclusively to the territory it knows best.

“A foreign loan to us is something outside Sonoma County,” said C. William Reinking, the bank’s president.

Exchange also is the only bank in the area that still has drive-up and walk-up windows, “so customers can deal with a human teller all day,” Reinking said. And some of its 16 branches are open on Saturdays.

For the past three years, Exchange has posted record growth and earnings. Assets were $461 million at the end of 1987, and problem loans are virtually nonexistent. Despite lending to a diverse customer base that includes the relatively risky commercial construction and home building sectors, only about $10,000 worth of loans in its $222-million portfolio were behind on payments in 1987.

Unlike some of the other hot banks, Exchange is in no danger of losing its independence, either willingly or unwillingly. Fifty-one percent of its stock is owned by a trust established by its founding family, and one requirement of the trust is that Exchange remain independent.

Arnold G. Danielson, president of Danielson Associates in Rockville, Md., said the emergence of independent banks in California will spread across the West in the next few years as smaller banks continue to grow faster than big banks.

“For years the big ones had more than their natural share of the market, but that’s changing now,” he said.