Community Banks Swimming Against a Powerful Current : Consolidation is taking over banking industry, as more small banks disappear. The small ones that remain hope personal service will help them compete against larger rivals.

Legend has it that when Achille Levy, founder in 1882 of Ventura-based Bank of A. Levy, was unsure about making a loan to a farmer, Levy would get up before dawn and drive his carriage to the farmer’s house. If the lights were already on, the farmer’s work ethic was proven, and he’d get the loan.

In a few months, the lights will go out for good at Bank of A. Levy. Surrendering to consolidation pressures that are sweeping the banking industry, Levy recently agreed to sell its 17 branches and $616 million in assets to giant First Interstate Bancorp, which already has 1,093 branches and $53 billion in assets.

Marshall Milligan, outgoing chief executive at Bank of A. Levy, and the great-grandson of its founder, was hardly sentimental when he explained the $86-million sale in a column for a local newspaper. “Community banking,” he wrote, “is a cottage industry destined to go the way of blacksmiths and butcher shops.”

Bankers at other small, independent banks in the San Fernando Valley area and Ventura County wince at Milligan’s pessimism, and say there will always be room for smaller community banks that offer competitive prices and personal service.

But they are swimming against a powerful current.

As of June, there were 10,715 banks in the United States, a 26% drop since 1984, and that number is likely to shrink even faster with the recent passage of the interstate banking bill, which in 1997 will knock down the few remaining barriers for nationwide banking chains. In California, the consolidation trend includes gobbling up small banks with less than $1 billion in assets: Through Nov. 15 of this year, 23 small banks in California have been sold, compared to only 10 such deals last year, according to SNL Securities, a research firm in Charlottesville, Va.

Executives who do run community banks are fighting to stay independent by hustling for loans and deposits.

At Valencia National Bank in Newhall, with three branches and $79 million in assets, its new CEO John Reardon spends one-third of his time driving around the Santa Clarita Valley to meet with customers and drum up business. At American Pacific State Bank in Sherman Oaks, with six branches and $265 million in assets, CEO Frank Ures organizes lunches, golf tournaments and even vacation cruises to keep his customers happy. And at Ventura County National Bancorp (VCNB) in Oxnard, with four branches and $272 million in assets, CEO Richard Cupp is writing and calling Bank of A. Levy’s best customers, hoping to capture deposits of those customers who don’t want to be swallowed up by First Interstate.

But Bank of America, Wells Fargo, First Interstate and other big banks have built-in advantages that are hard to overcome. Large chains have vast networks of branches and automated teller machines to serve mobile customers. Cupp, the Ventura County bank CEO, conceded that his own daughter banks at Wells Fargo because she lives in Northern California and attends Sonoma State University. Every month or so, Cupp slips out of his 10th-floor office in Oxnard to the nearby Wells Fargo branch to put money in her account. “It’s a pain,” he said.

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Large banks have lower overhead costs relative to their community bank counterparts. Simply by closing Bank of A. Levy’s headquarters, for example, First Interstate will cut 100 jobs and save about $4 million annually in payroll costs, all while absorbing Levy’s former business.

Often, a large bank chain can more easily afford to offer high-tech banking services. Bank of America and Ventura County National Bank both offer services that allow customers from home or office computers to check their account balances, move funds, and perform other transactions. Bank of America charges $39.95 per month for this service, but VCNB charges $100 per month.

Large banks also cover vast territories that often encompass several states, thereby avoiding the geographic risks faced by community banks. American Pacific was poised to set an earnings record this year, until the Jan. 17 Northridge earthquake hit, creating loan problems that could slice as much as $1 million from company profits that might otherwise have reached $3 million. “Everybody in the Midwest is making a fortune,” said Ures, whose 16th-floor office overlooks the San Diego Freeway. “We’d have had a banner year, but the earthquake killed us.”

VCNB was almost unaffected by the quake, but it barely survived the latest recession. Battered by loans that went sour with the troubled Southern California economy and real estate market, the bank lost $12.1 million last year, more money than the bank had made in profits the previous six years.

The one big weapon community banks have, their executives and customers say, is superior service. Strolling into the Westlake Village branch of VCNB last week, Karen Cozen said she gets “better personal attention” at VCNB, even though, unlike the Wells Fargo branch 50 feet away, VCNB is not open on Saturdays. “If I need money, I just get it at the supermarket or use my Visa” card, she said.

Thomas Cull, a 61-year-old computer consultant, said he finds the large banks too impersonal. At VCNB, he said, “I’m a name and a person, not a number.”

Cull said he has always preferred banking with community banks, but wonders whether someday he may have no choice. Community banks “are all being swallowed up,” he said.

Community banks are particularly attentive to their key customers--small-business owners who pay lucrative interest rates on their loans.

Don Whaley operates a balloon distribution company in North Hollywood and he is regularly courted by Bank of America and First Interstate, but he has been loyal to American Pacific since 1976 partly because tellers there remember his name. “It’s good for your ego when you walk into a bank and people recognize you,” Whaley said. “But it’s also nice business.”

So twice a month, Ures invites up to 12 of American Pacific’s best customers to the bank to lunch with top executives. Once a year, the bank spends $30,000 to put on a VIP golf tournament and dinner for its biggest customers. And every other year, the bank organizes an invitation-only vacation cruise.

Last month, Ures cruised the Caribbean for a week with 73 customers who represented a combined $35 million in deposits and loans. Customers pay their own way on such cruises, but by the end of the trip, Ures said, “they think we walk on water.”

Valencia National, which is too small to set up golf tournaments and cruises, instead emphasizes its community ties; last year, it donated more than $100,000 to local chapters of the YMCA, Red Cross and other groups. The bank also encourages its employees to do volunteer work with the local charities.

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John Reardon, Valencia bank’s 52-year-old CEO who arrived just two months ago, spent much of his life heading oil, real estate and banking companies in his native Oklahoma. Unlike the executive nests occupied by Cupp and Ures, Reardon’s office is on the second floor of a two-story building in a tiny Newhall shopping center.

His office furniture could have been purchased at Price Club, and the floor creaks above the ground-floor branch directly below.

Reardon said he was hired partly because directors believe his affable, straight-shooting manner will help him shore up relations with the local business community. Out of necessity, he has mapped a course of low-tech, no-frills service.

The bank has ATM machines at its three branches, but eschews the computer and telephone banking that many banks embrace. “If someone wants a car loan, they’re not told to call an 800 number,” Reardon said. “And I can’t imagine us ever going to voice mail.”

Even if community banks can pick off enough local business from large bank chains, they still face internal pressures. After all, their business is to collect deposits and make loans, but they must also generate wealth for their shareholders, and selling a bank is often one way to make investors happy.

Ures says the value of American Pacific’s stock has risen an average of 12% annually since the bank was founded in 1971. But Ures said he occasionally feels pressure from shareholders “who have been around a long time who say, ‘When am I going to have a little cash on hand?’ ” To feed their appetites, American Pacific two weeks ago approved a 10% stock dividend and a 10-cent cash dividend.

Ures, 53, acknowledges one reason he is not interested in selling is because he likes his job.

“The fun of what we do is more important” than simply cashing out, said Ures, who earns more than $220,000 a year, and holds 100,000 shares of stock currently valued about $9 a share. Still, Ures said, “If somebody came in and offered $25 a share, you might have a seller.”

VCNB was looking for a buyer earlier this year, but A. Levy’s sale probably spoiled VCNB’s chances, at least for a few years. So Cupp has focused on rebuilding, and the bank plans to lift its sagging capital base with a $5-million stock offering early next year.

VCNB is also counting on scooping up Levy customers who balk at being switched to First Interstate. Chain banks typically lose 10% to 20% of a community bank’s deposits following an acquisition, said Mary Martha Stewart, director of marketing at VCNB.

The bank has identified 1,000 of Levy’s biggest customers and inundated them with letters, phone calls and visits from VCNB officials, including Cupp.

It’s too early to gauge the success of their efforts, Cupp said, but if Levy customers “were going to bank with First Interstate, why weren’t they already banking with First Interstate?”

But First Interstate didn’t buy Bank of A. Levy to watch its deposits flee, and Ventura County National is still limping from last year’s heavy losses.

Meanwhile, another community bank, Santa Barbara Bank & Trust, recently said it too hopes to fill A. Levy’s void by opening three branches in Ventura County over the next year.

The local market is already overcrowded, and some community banks will undoubtedly be gobbled up. Who will survive? “We’re going to find out,” Cupp said.