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Joseph Reid agrees that bank mergers, whose pace so far this year hints at the industry's pre-recession matchmaking fever, show no signs of going away.
But that won't stop his Lansing, Mich.-based Capitol Bancorp, (CBC) from pursuing a 14-year strategy of starting one-branch community banks in towns such as Elkhart, Ind., or Yuma, Ariz., and then keeping their growth in check.
 Even after the banks reach profitability, Capitol discourages mergers or even branching. Their focus is the local Laundromat owner, and their selling point is personal service.
"One of our key ingredients is to stay small," he said. "Our banks don't have a 1-800 number - if you have a problem, you call the president."
Chartering A New Bank
A focus on hometown banking isn't unique to Capitol, although owners of most startups do envision a sale at some point. In the first nine months of last year, 94 new banks started, or 22% more than in the same period of 2002, according to Sheshunoff Information Services, based in Austin, Texas. And some 48% of the country's banks and thrifts have less than $100 million in assets. (Citigroup, the nation's biggest, has $1.3 trillion.)
New charters haven't offset the number of mergers. They are expected to pick up with the rebounding economy after steadily shrinking from 1999 to 2002. Their numbers give an early view of what the banking industry in America might look like in 20 or 30 years.
Take California. As a result of several multi-billion asset mergers in past 10 years, the top three banks control roughly 50% of the deposits. But the state claims about 100 banks with just two branches or fewer. Out-of-state banks snapped up many of the midsize banks and thrifts, attracted by their sizable branch networks and deposit bases.
The country is undergoing a similar shift.
Following J.P. Morgan Chase's (JPM) $59 billion deal for Bank One (ONE) and Bank of America's (BAC) $47 billion bid for FleetBoston Financial, (FBF) the top 20 banks are poised to create bigger regional and even national banks. In fact, all four of these banks were products of the last big consolidation wave in the 1990s.
As bank consolidation continues, "we'll have more of the same barbell shape," said Dan Hudson, chief executive and founder of Bankmark, a California-based consulting group that advises management and investors on starting banks. Bankmark also runs Web sites like www.nubank.com.
"We'll wind up with giant banks and then a vast number of community banks."
Many retail customers and large corporations prefer larger banks with more extensive ATM networks and a broader range of services, and for corporations, a bigger balance sheet.
Small Business Focus
But startup banks typically focus on the small business owner or employee. These customers make frequent trips to a branch and value face-to-face interaction with management.
The number of banks and thrifts has fallen 12% from 1998, to just over 9,000, mostly because of mergers, according to the FDIC.
And the fever to ink deals has returned. January's 25 deals worth $66 bil outranked any month since April 1998, says Thomson Financial.
These mergers spur new charters. Integrating two banks with overlapping services and branches often means many senior and middle managers lose their jobs or become unhappy in their new roles. These experienced but disenfranchised bankers often seed startups with their capital and their desire to have their own businesses.
"Often there are people who think they can take their talents elsewhere and cash in economically," on the mergers, said Peter Weinstock, an attorney with Hunton & Williams in Dallas who handles new bank charters. In fact, Houston-based Sterling Bancshares's acquisition of Eagle National Bank in 2002 caused three former Eagle officers to set up three new banks in Texas, Weinstock says.
Mergers also create business opportunities. Changed systems or new personnel prompt some customers to shop for different banks. And deals encourage potential investors to put together startups, as they get a tantalizing idea of what future buyers might pay for the bank if they want to sell it.
Golden State Business Bank opened its doors in the Southern California town of Upland on Dec. 1 after four of its directors sold their old bank, Pacific Western National Bank, to First Community Bancorp. (FCBP)
The founders saw an opportunity, says chief executive Mike Wilson, because acquisitions had taken out banks based in the growing residential and manufacturing community at the foot of the San Gabriel Mountains. For real estate developers and small business owners, having local management is important, he said. (As of October, Sun Country Bank also is headquartered in Upland.)
Mergers free up potential customers that fit the bill.
"When a big bank buys a smaller one, they anticipate losing 20% of their deposit base, just because of a lack of services. If it's a $500 million-deposit base, they just lost $100 million," he said.
"That'll fund us very nicely."
Population and income growth are the other drivers for bank chartering. So it's not surprising that the states that see a lot of new activity are some of the fastest-growing. In the third quarter, three new banks started in each of these states - Texas, Florida and California - and four started in both Georgia and Minnesota, according to Sheshunoff Information Services.
David Downs, an investment banker with the Livingston, New Jersey-based Ryan Beck & Co., said the mid-Atlantic and Northeast, which have seen several regional and superregional tie-ups in the past 12 months, could be next.
"I would think they'd be ripe for new charter activity."
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