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Southwest
Community Bank is not only a successful bank but a successful data servicing company as
well
FINANCIAL
COMMUNITY BANK
(OTC: SWCT)
Southwest
Community Bank
PO Box 131690
Carlsbad, CA 92013-1690
Phone: 760-918-2616
Frank J. Mercardante
President & Chief Executive Officer
Interview conducted by:
Lynn Fosse
Editor
CEOCFOinterviews.com
February 2003
Bio of CEO,
Frank J. Mercardante is a seasoned 36
year banking veteran. During his career, he has worked with institutions across the
country ranging in asset size of $6.5 billion to the start-up of Southwest Community Bank.
He has both purchased and sold banks and has consulted with boards of directors of
numerous institutions. During the early 1990s, he worked closely with the FDIC and
the Resolution Trust Corporation in resolving problem institutions.
In addition to his successful banking
career, Mercardante is an ordained Permanent Deacon in the Roman Catholic Church and
spends much of his free time in various aspects of ministry. He serves on numerous
not-for-profit and for-profit boards including the Finance Council for the Diocese of San
Diego and a title and insurance company.
Company Profile:
Southwest Community Bank (OTC: SWTC), which recently celebrated its five year anniversary,
is a San Diego County headquartered, full service bank with branches in Carlsbad,
Encinitas, San Diego, Escondido, El Cajon and Murrieta, Calif. Regulatory approval has
been received to establish an Orange County facility, which is scheduled to open during
the second quarter of 2003 in Anaheim. The bank is also the majority owner of Financial
Data Solutions Inc. ("FDSI"), a technology company that provides data processing
and other services to banks, credit unions and thrifts throughout the state. FDSI operates
from its two data centers in Murrieta and El Monte, Calif. and is projected to open a
third center in San Leandro, Calif. Early 2003.
The Bank offers a full range of
deposit and loan services to thousands of businesses and consumers with a no-nonsense,
personalized approach to banking.
The bank has received numerous awards
for its commitment to SBA lending including a commendation from Congressman Ron Packard.
In addition to being designated as San Diego’s largest SBA lender for the last
three years, the bank has been designated the largest SBA lender to minority owned and
women-owned businesses and has received the "emerging" lender award from the
local CDC at various times.
FDSI, a technology
based service company partners with California-based financial institutions to provide
innovative solutions to a broad array of business challenges from its three data centers
in the state. The impact of this commitment on clients of FDSI is tangible: enhanced
operational efficiencies, increased profitability, optimization of marketing opportunities
and growing customer satisfaction levels. Financial institutions partnering with FDSI have
access to a wide array of services specifically designed to create and maintain a
state-of-the-art data processing and communications environment for both the institution
and its clients.
In June 2002, the Bank increased its
Tier 1 Capital base by $5,500,000 through the sale of 211,540 new common shares at $26 per
share. The offering was oversubscribed and provided the Bank with the necessary
capital to continue its growth strategy. In December of 2002, the Bank announced plans to
form a holding company, Southwest Community Bancorp, during the first quarter of 2003.
The holding company will afford the Bank more options for raising capital in the
future and provide it with greater flexibility in capitalizing on future opportunities and
executing its business plan.
CEOCFOinterviews: Mr. Mercardante, tell us about the vision
of the bank when it was first started, and where you are today.
Mr. Mercardante: The vision of the bank began back in the mid
1990’s when, as a consultant, I prepared an analysis of the migration of deposits in
San Diego County. I discovered that with the consolidation of the financial services
industry in San Diego County during the late 80’s early 90’s due to mergers and
failures, there was a tremendous shift in the deposits from community banks and savings
and loan institutions into major banks and credit unions. The number of community
banks had dwindled significantly; their deposit market share had likewise dwindled, with
the major banks and local credit unions being the primary beneficiaries. That led me
to the conclusion that the market was ripe for a de novo bank. We put together an
organizing group and decided that the bank would cater to the local business community
since the consumer market was already well served by the major institutions. It
would be difficult for a start-up bank to effectively compete for the lion share of the
consumer market initially given the broad market coverage of the major institutions.
So, we set out to become the premier bank business in San Diego County,
differentiating ourselves based on service and local decision making.
Five years ago, in
December 1997, we got off the ground and today we are $250 million asset bank.
Assets and profits both grew by 100% in 2002. We earned $1.8 million after tax and
expanded to 6 locations covering 2 counties. We will make our first entry into
Orange County during 2003 with our planned office in Anaheim.
Our vision is being realized early in our corporate life. For the last three years
running, we have been designated the number one SBA lender in San Diego County, which
along with providing customized deposit services for major account relationships continues
to be a major part of our overall business strategy. Our early success in SBA
lending can be attributed to the seasoned staff we have been fortunate to assemble.
Our ability to offer specialized account services for major account relationships is due
to the bank’s decision to capitalize on a window of opportunity during our first year
of operation and form a separate data servicing company, Financial Data Solutions Inc.,
(“FDSI”) to provide state-of-the-art data services to other California based
financial institutions.
With the
competitive advantage of FDSI, we have been successful in capturing significant deposit
relationships that require the specialized services we can offer. That has enabled
us to achieve a ratio of demand deposits to total deposits of over 75%, which is, quite
frankly, unheard of in the industry. The answer to your question is, yes, we believe
we are realizing our initial vision and we will continue working hard to maintain our
momentum in the future. We have expanded our sites to much of Southern California as
we make our way into additional counties.
CEOCFOinterviews: Why the formation of a holding company?
Mr. Mercardante: I have always been the first to say,
“you don’t form a holding company unless you have a good business
reason.” In today’s environment, we have an excellent business reason
to. With a holding company, a community bank can take advantage of additional
capital vehicles when seeking to raise new capital. Specifically an instrument
called a “trust preferred” can only be issued by a bank holding company. A
trust preferred is a highbred debt/equity instrument that counts as Tier 1 capital at the
bank level and the interest paid is tax deductible.
Once we obtain all
the necessary regulatory and shareholder approvals, the holding company will issue a trust
preferred in the range of $6.5 to $10 million. In today’s historically low
interest rate environment, we can generate new capital at very low rates of under 4%.
The holding company would take that capital and downstream it to the bank as equity
and we, therefore, increase our capital to allow us to continue to grow the bank without
creating any dilution to our shareholder. There are other business opportunities
that are available once you have a holding company. In the event we decided to do an
acquisition of another bank or enter a new line of business, we would have a lot more
flexibility in how we structure the deal.
CEOCFOinterviews: What is the economy like in the area that
you serve?
Mr. Mercardante: San Diego is, well, San Diego: it is the
market everyone wants to be in. I can remember in the early 90’s when I was
doing problem bank resolutions I would try to raise capital for problem institutions and
one of my key selling points was, the market may not be all that strong right now, but
this is San Diego, it will come back and be even stronger than it was. In the long
run, people are going to want to live here and set up their businesses here.
In the last ten
years, San Diego’s economy has continued to diversify having attracted both tech and
bio-med industries. So the economy in San Diego right now is probably stronger than
the rest of the nation. We have fairly solid employment base and while unemployment
is high, it is not as high as the rest of the state or the rest of the country. So
overall, the economy in San Diego is good. Our biggest problem is the high cost of
real estate and the markets ability to keep pace with increasing demand for affordable
housing.
CEOCFOinterviews: How have you fared under the 11 unprecedented
rate cuts?
Mr. Mercardante: Well, it’s a matter of how you balance the
balance sheet. When rates came down in 2000 or 2001 it had a very significant impact
on us. What we had to do was grow the portfolio which, for us, was the best way to
overcome that squeeze of interest margin. We went out and hired good strong people
who can generate business for us to help us work our way through any downturn in the
economy.
CEOCFOinterviews: How do you do in the way of non-performing loans
and is that something that you need to be extra careful about when you do have such a
commission staff?
Mr. Mercardante: First of all none our commission staff have
any lending authority. All of the loans they generate are approved by senior lenders
outside of the sales team. Our non-performing loans are negligible. I hate to use
that term, but they are negligible, less than a $150,000 on a $130 million dollar loan
portfolio. For two years running it has been a negligible number. We are very
gratified that we have managed to maintain strong underwriting in the midst of a growing
portfolio. Asset quality is always a key concern for banks and you never know when
the shoe is going to drop so we try to always be cautious, doing our job as diligently as
possible both, in following our existing loans and looking at new loans.
CEOCFOinterviews: Was going after SBA business part of your initial
strategy?
Mr. Mercardante: It was a strategy from the very beginning.
As I said, when we formed the bank we knew we had to have our own niche in the
marketplace in order to be successful; we chose the small business market as our niche and
have been very devoted to it right from the very beginning. We are five years old
and for the last three years running, we have been the largest San Diego SBA lender.
We put our mind to it; got the right people, said we were going to do it and we are
doing it.
CEOCFOinterviews: Why are people coming to you as opposed to your
competition?
Mr. Mercardante: We talked about wanting to provide a
“high touch”, “high tech” service. That to us means providing a
high level of customized personal service followed up with all of the electronic
capabilities that are available in the marketplace today and we have been fortunate to be
able to do that very effectively. We have been very selective in staff hiring.
We have hired some people from major banks and some from independent banks, all of whom
are dedicated to providing a high level of customer service. Our people know their
accounts; they know their customers and how to follow-up with them and that is really what
makes the difference. Everyone is going to make a mistake from time to time. I
don’t care if you are a Bank of America a Southwest Community Bank or somewhere in
between. The difference is how quickly do you address your mistakes and take care
of it with your client. Generally, we have managed to do that quite effectively.
CEOCFOinterviews: Is there much community involvement for you and
the bank?
Mr. Mercardante: Yes, on both accounts. I am involved
in a number of things and a number of the staff is involved in many community events.
We sponsor a number of worthwhile activities in the various communities we serve;
we are involved in our chambers, with various charity outreach programs, and we assist in
community activities in many other ways. Sometimes we will underwrite the cost of
their monthly or quarterly newsletters, which to them is a tremendous help. We get
the added benefit by having our name in their newsletters stating, “sponsored by or
provided by” and everyone wins.
CEOCFOinterviews: Are there services that you are not currently
offering that you feel you need to or plan to offer down the line?
Mr. Mercardante: We always try to keep our eyes open and
follow where technology is leading the industry. For a bank our size, I think we
have been just behind the cutting edge, ensuring that we can provide a full compliment of
services that equal or exceed the offerings of the other banks and institutions. As
technology continues to evolve, there will likely be other services that we will need to
provide and we are certainly watching for that, keeping a close eye on how the industry
develops.
CEOCFOinterviews: Do many of new customers take advantage of the
wide services that you offer or is that an area that needs some work?
Mr. Mercardante: I think most institutions will tell you they
need some improvement in this area. The goal is to cross-sell many products to one
same client as you possibly can to lock them in and make it more difficult for them to
leave you. We are about average for the number of services we provide to each
client, but we are not quite where we would like to be. That is still an area we
will be working on.
CEOCFOinterviews: Tell me more about FDSI, how much of the business
is that?
Mr. Mercardante: First of all, shortly after forming the
company, we sold 49% of it off to another independent bank. I did that, because, quite
frankly, I was in the process of bringing a new bank out of the ground at the same time
and I was concerned there would be too much start up costs for our shareholders to bear.
But, the company has done exceedingly well. It’s been in operation now for
about three or four years. In its first year of operation, FDSI generated $1.5
million in revenue and in the second year $3.2 million and in the last year $4.6 million.
Last years, total profit contribution was just under half of a million dollars of
which, Southwest’s share is 51%. It is a growing business; we have two
locations currently, headquartered in Murrieta with second office in El Monte. Later
this month we will be opening a third facility in the San Francisco Bay area in the
community of San Leandro. So, we continue to have big plans for this company.
CEOCFOinterviews: Whom do you compete with in that arena?
Mr. Mercardante: Everyone, national firms and other private
companies!
CEOCFOinterviews: Then why are people using you? What
is it that your provide that the others are not?
Mr. Mercardante: That is a good question. First of all,
when we got into there was definitely a gap in the marketplace. There was a window
of opportunity because the major providers, Aurum, Jack Henry and Fiserv who are the
national providers were not offering full check imaging services. We entered the
marketplace with full image technology while they were still figuring out what they were
going to do. What I mean by image is, when we capture the check, we not only capture
the MICR data we also capture an image of the front and back of the item. Instead of
returning the clients checks in their monthly statement, we send them images on 81/2 x 11
inch paper. Without all the checks to handle, reconciliation of the account is made
easier. With imaging postage costs go down and back office research at the bank is
quicker and cleaner, saving staff time, all of which equates to significant savings.
While the financial institution saves money, they also provide a great service for
the customer. We can also put a customer’s statement out on the internet if
they want us to. If they chose this method of receipt, they log onto a secure system
and bring up their statement and images of the checks along with their balance and other
functions.
That was three
years ago. That window of opportunity is closed now because all the other service
providers have caught up to speed while, at the same time, there have been new providers
who have entered the market. So, competition has increased significantly over the
last three years. We compete at FDSI the same way do for the business at the bank,
with superior service and competitive pricing. That is we try to make difference in
both the area of service as well as pricing.
CEOCFOinterviews: How do you get customers and grow FDSI?
Mr. Mercardante: To start out with, we got them just by
pounding on doors and telling our story. Now, we have over 45 clients that we
service up and down the state and so our story has gotten out there. We attend all
of the major banking and credit union conventions and promote our company by demonstrating
our services. We have commissioned sales staff working the marketplace and we are at
a point now where we have been in business long enough to have enough satisfied clients
who, by word of mouth, have become a significant factor in our ability to obtain new
relationships.
CEOCFOinterviews: Tell me about the expansion plans for the bank.
Where are you going to go and do you see acquisitions as part of your strategy?
Mr. Mercardante: In the last six months, we will have opened
two branches and it takes a while to digest that kind of de novo expansion, so I do not
envision any additional branches this year after we get Anaheim open. But, I would
say next year we will be back looking at an additional location or two. The goal is
to open one or two new offices every two years. As far as acquisition opportunities
are concerned, we always have our eyes open for either bank or branch acquisitions.
We have looked at a number of opportunities over the last two years, however; nothing made
enough sense to execute. We will continue to be vigilant in monitoring
opportunities.
CEOCFOinterviews: What should shareholders and potential investors
know about Southwest Community Bank?
Mr. Mercardante: I think any prospective investor would
want to look at a couple of things. They would want to look at the strength of the
management team running the company and that management’s track record in recent
years. They also want to look also at management’s vision. I think we
have been very fortunate and have assembled a very strong management team in this company.
We have gone from zero to $250 million in a very short period of time. There
have been banks that have been around for many more years than us, fifteen or more, and
have not broken the $100 million mark in assets yet. But growth in size isn’t
everything; quality is very important and that is where you look at how we have managed
the process and look at our track record. The quality of our portfolio is very sound
by virtue of the limited number of problem loans that we have. Our ability to
continue to grow the company and manage both the bank as well as our data servicing
company is evident as both of those continue to grow. If you look at the performance
of our stock, last year alone shareholders realized over 75% appreciation, which exceeds
the performance of all of the major stock indexes.
Now, can not we promise that we can continue to perform that way given all the
uncertainties in the economy? But, Have we
demonstrated that we have the ability to capitalize on opportunities in the marketplace
and do well? Yes, and we have every reason to
believe that we will continue to do that into the future.
One of the things that has helped make our bank very successful is that we
have one of the largest commission sales staff of any community bank in southern
California. I have some folks that last year
earned mid six figure incomes all on commission. I
am very happy to see them do it. We sought to
hire the best people available, people who can generate quality business for us and help
us work our way through any downturn in the economy and achieve our goals.
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