Farmers & Merchants Bancorp (FMCB)

[Enterprising Investor]

Guess who's jumping into Bay Area banking? (11/13/15)

By Mark Calvey

Several Central Valley bankers are expanding into the Bay Area to take advantage of the region's phenomenal growth.

Sacramento-based River City Bank (OTC: RCBC) recently opened a full-service branch in Walnut Creek and Lodi-based Farmers & Merchants Bank of Central California has plans for several branches in the East Bay, where it has operated a Walnut Creek location for two years.

In addition to those expansions, First Northern Bank of Dixon opened a loan office in Walnut Creek in mid-2013 and Rancho Cordova-based American River Bank (NASDAQ: AMRB) has loan offices in San Ramon and San Jose.

The big draw: the Bay Area boom.

"The San Francisco Bay Area economy is enjoying the biggest economic expansion in the world, probably in history," said Kent Steinwert, chairman and CEO of Farmers & Merchants Bank.

Farmers & Merchants Bank, (OTC: FMCB) or F&M as the bank is more often known in areas where farmers are few and far between, plans to build a second branch in Walnut Creek on the site of the current Target Garden Store. That location will also serve as F&M's East Bay headquarters.

Elsewhere in the East Bay, F&M opened a branch in Concord last April and has a Lafayette branch on the drawing board. The bank is also eager to enter Oakland, where Steinwert and his team have met with the mayor and community groups over the past year.

"Opening a bank is a little bit longer process in the Bay Area," Steinwert said.

That's putting it mildly. Bay Area residents tend to greet a proposed bank branch with the same lack of enthusiasm that comes with opening another corner liquor store in a down-and-out neighborhood. Let's just say things are far different in the Central Valley — a region so close and yet so far away from the Bay Area.

"In the Central Valley, the opening of a bank branch is welcomed, because the bank helps the local community grow," said Steinwert, who worked at Bank of America for several years before taking the helm of F&M in 1997.

Steinwert knows the right things to say to one day realize his Bay Area banking ambitions. He points to the bank's diverse workforce and F&M's "outstanding" rating for meeting requirements of the federal Community Reinvestment Act.

"We want to make a difference in Oakland," Steinwert said.

F&M Bank, founded in 1916, serves a dozen Central Valley communities through 25 branches from Sacramento to Merced, plus an office in Orange County's Irvine. (For those whose trip to the Safeway produce aisle is the closest they get to the Central Valley, F&M's hometown of Lodi is located about 85 miles northeast of San Francisco.)

Steinwert expects the bank's financial strength and high level of customer service to be a draw for Bay Area customers. He's eager to tout the bank's top rating for financial strength from Bauer Financial for the past 25 years. That's no small feat in Central Valley banking, especially given how hard the home-construction sector was hit in the financial crisis.

Steinwert also notes that most of the bank's shares are in the hands of individual investors, typically bank customers.

Steinwert said F&M only had four foreclosures during the housing crisis because it was able to work with many troubled borrowers since its mortgages are held in the bank's loan portfolio.

During the historic financial crisis, the New York Times and other media outlets covered the Central Valley's foreclosure crisis with tales reminiscent of the Great Depression.

But asked to comment on F&M's success navigating those treacherous times, Steinwert simply says, "We did what any community bank should do."

River City Bank also finds the Bay Area fertile ground for growth. The Sacramento bank began a big push into Bay Area lending after Steve Fleming took the helm as CEO in 2008. Today, 25 percent of its loan portfolio is in the Bay Area.

River City Bank recently opened a branch in Walnut Creek to expand beyond commercial real estate lending.

Leadership at River City Bank has deep roots in the Bay Area. In addition to Fleming, who was founding CEO of San Francisco-based Presidio Bank, the bank's board includes Ryan Gilbert, who is CEO of San Francisco-based Better Finance. The bank's management team includes Chief Credit Officer Pat McHone, who also has strong ties to the Bay Area.

River City has done quite well since making its big push into the Bay Area, long known for its boom-and-bust cycles.

Is Fleming worried that the good times might end?

"I'm a lifetime banker, so worrying is part of my DNA," Fleming said. Helping him sleep better at night, no doubt, are the bank's conservative lending policies. River City's average loan-to-value in its real estate portfolio is 45 percent.

The bank's conservative lending style makes its 24 percent loan growth in the 12 months ending Sept. 30 all the more impressive.

"We'll compete on service and price, but not on risk appetite," Fleming said. His bank plans to expand business lending, or so-called commercial and industrial loans, for successful businesses generating between $5 million and $100 million in annual revenue.

As for the health of the Bay Area economy, Fleming said, "A downturn in the Bay Area economy is a case of when, not if."

Fleming says he's not seeing any signs of a downturn, pointing to rents moving ever higher and home prices escalating, although at a slower pace.

http://www.bizjournals.com/sanfrancisco/blog/2015/11/san-francisco-bay-area-banking-bank-central-valley.html