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Wait Was Worth it For Santa Cruz Bankers

February 23, 2004 Sarah Lacy

The following is an article from the Silicon Valley/San Jose Business Journal

After three years of trying to find the right leadership, a determined group of Santa Cruz businessmen has opened a new community bank.

Headed by John Rossell, one-time CEO of San Jose's Heritage Bank of Commerce, Santa Cruz County Bank started quietly opening checking accounts and processing loans on Feb. 3.

As it turned out, the three-year lag made the timing even better.

When the organizing effort began there had been several strong local players. One was the similarly named County Bank of Santa Cruz, which once had 40 percent of the county's deposits. Another was Coast Commercial Bank, which had just been acquired by Greater Bay Bancorp but was still being run as an independent bank. The third was Monterey Bay Bank.

But Greater Bay Bancorp has since centralized its network, and just last year Union Bank of California purchased Monterey Bay Bank.

The result? Hundreds of local shareholders have just made good money investing in community banking. Redundant employees are getting laid off by Union Bank, and several Greater Bay employees are ripe for recruiting.

And now Santa Cruz County Bank can claim to be the only true community bank left in town.

That's important in an area like Santa Cruz that has a strong bias towards mom-and-pop operators, Mr. Rossell says.

When the former County Bank of Santa Cruz was at its zenith, Santa Cruz was the only county in California where Bank of America didn't have the biggest market share of deposits, says David Heald, executive vice president of the new bank.

"Santa Cruz is its own place, physically removed from the major hub of the Bay Area," says John Flemming, president of Carpenter & Co., a Southern California bank consultancy. "Many of the most successful banks in the state are in markets like Santa Cruz. They have a strong sense of themselves as a place and an affinity for community."

That's been evidenced by Santa Cruz County Bank's brisk capital campaign -- about five weeks to raise $13.2 million from some 400 investors. Several more millions had to be sent back, Mr. Rossell says.

"When we did Heritage there were more competitors and a lot of natural skepticism about us being the little guy," Mr. Rossell says. "Here, it's just the opposite. They want the little guy."

While Heritage Bank's founders banged on doors to raise $14 million, Santa Cruz County Bank merely sent out circulars and fielded phone calls, he says.

It only took five months from the approval of the bank's management and business plan to the day the bank opened its doors.

While the board was able to find a CEO with local community bank experience in Mr. Rossell, he wasn't known in Santa Cruz. He wouldn't take the job unless he had a strong No. 2 who was well known in the community. That's where Mr. Heald, the former second in command at Coast Commercial Bank, came in.

The bank "chased" him for about three months.

Although Mr. Heald was unhappy with the way Greater Bay was changing the bank, he'd been the No. 2 for about 20 years.

Moving to Santa Cruz County Bank meant investing $250,000 of his own money and walking away from Greater Bay stock options at a time when he had kids going to college.

He became convinced as he talked to people in the community and when he saw that the founder list included several of his best customers at Coast Commercial. Mr. Heald has recruited several Greater Bay Bank employees. For them, the business plan is familiar: Replace the old Coast Commercial Bank.

That's been a recurring theme in the wave of new banks starting up in the Bay Area, especially in the last year as much of Greater Bay Bank's management has been replaced with people with big-bank experience and the banks have all been pulled under one charter.

Jim Mayer, who left Greater Bay's Mt. Diablo Bank in October 2002 to start Diablo Valley Bank, points to the 2001 hiring of chief operating officer Byron Scordellis as the turning point. Mr. Scordellis has since been promoted to CEO.

"Greater Bay is becoming a big bank," Mr. Mayer says. "Byron is a big-bank guy. The guy who replaced me is from a big-bank background. The new senior loan guy at Mt. Diablo spent 25 years at Bank of America. It has the outward appearance of a community bank, but it really isn't."

Mr. Heald says the change started even earlier.

"It pretty well started right after they got ahold of us," he says. "Operationally they made changes that impacted the branches and they changed products immediately. Products from the Mid-Peninsula Bank and Cupertino Bank family didn't necessarily suit my market that well."

Specifically, he has noticed an increasing reliance on sending customers through automated systems rather than talking to a live bank representative.

"People are expensive," he says.

Mr. Mayer says customers in the East Bay don't notice the difference until they try to negotiate different terms to a product; flexibility was something the old Mt. Diablo bank prided itself on.

Mr. Scordellis did not return calls seeking comment for this story. He has said in the past that although the banks have been rechartered, the customers still see the same autonomous community banks.

SARAH LACY covers venture capital, banking and nonprofits. Reach her at (408) 299-1843.

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