Saudi’s Purchase of Bank Augurs More Aggressive Course
Independence Bank has long been short on flash. Never much of a force in exotic arenas such as international finance, Independence has been known over most of its 23-year history as a humdrum community bank that offered cheap car loans.
“They have had some limitation on their sophistication,” said Gerry Findley, a bank consultant in Brea.
Independence also has been tight on cash from time to time. In 1980, its 480 shareholders sold out to a group of Far Eastern businessmen, partly because regulators demanded that Independence raise more capital.
But the Encino-based bank’s days as a low-key operation of modest means appear destined to end because of another change in its ownership. Last week Independence was acquired for an estimated $23 million by Ghaith R. Pharaon, a Saudi Arabian financier who oversees a vast international business empire from offices in places such as London, Paris, Georgia and Jidda.
‘Assets Exceed $220 Million’
Now, said Morton R. Michaels, the president and chief executive of Independence: “I’ve got an owner who can say, ‘turn the damn thing loose, let’s go.’. . . Obviously, he didn’t buy this bank to have it stand still the way it does.”
Banking experts suggest several motives for Pharaon’s acquisition of Independence, the largest bank headquartered in the San Fernando Valley, with assets exceeding $220 million. They speculate that the transaction may be an effort to establish a foothold in California in anticipation of the arrival of interstate banking.
They also say that Pharaon, 45, who could not be reached for comment, may hope to gain influence in the state that could help him in other ventures here. And experts agree that Independence was an attractive buy--a healthy, if sluggish, bank based in an economically vibrant area.
Mold Is Set
Whatever Pharaon’s motive, many expect him to take Independence on the same path he took the Atlanta-based National Bank of Georgia. Pharaon acquired control of that bank in 1978 from Bert Lance, the controversial director of the Office of Management and Budget in the Administration of President Jimmy Carter.
“It was a quiet, backwater bank that just happened to be owned by Bert Lance,” said Richard Speer, an Atlanta-based consultant to banks and financial services companies.
Under Pharaon’s ownership, however, National Bank of Georgia has become much more profitable and has grown dramatically. It earned $10.4 million last year, up from $1.3 million in 1978 and a loss of $2.2 million in 1977.
Meanwhile, the Georgia bank’s assets climbed from $401.8 million at the end of 1978 to $1.3 billion at the end of last year. Along the way, the bank has shaken its reputation, similar to that of Independence, for making a lot of car loans and has become known as a more adventurous financial institution.
Other Acquisitions Likely
“They’re a bank that will talk about anything,” said Robert F. Tomain, president of Home Federal Savings & Loan of Atlanta, which does business with National Bank of Georgia.
After Pharaon took over, the bank reshaped itself by making acquisitions and by slowly turning over its management. Michaels said that Independence also is likely to buy some other banks.
And, although Michaels will keep his current titles of president and chief executive, Pharaon is expected to bring in a new chairman soon to oversee the bank.
The apparent choice for that job is Kemal Shoabib, an executive in the London office of the Bank of Credit & Commerce International. Pharaon, with an 18% stake, is the largest shareholder in BCCI, a Luxembourg-based bank with extensive interests in the Middle East.
Pharaon hasn’t always had the touch of Midas. He bought control of a Michigan bank in 1975 and abandoned it within two years, acknowledging that it had management problems.
In California, Pharaon and his investment partners bid unsuccessfully for the Parsons Corp. engineering and construction firm last year and reportedly tried to buy the parent of Bank of California in 1983. An investment group including Pharaon pulled out of a deal to buy Kaiser Steel in 1982.
Independence is a far cry from the sort of international construction, shipping, real estate and energy investments for which Pharaon is known.
Organized in November, 1962, by a group of Canoga Park businessmen, Independence has always seen itself as a community bank mainly serving the San Fernando Valley area. Under the direction of Carl Schatz, Independence’s president from its inception until last year, the bank developed a retail focus.
Network of Branches
It opened a network of branches to gather deposits from working people, not just businesses. Until the last couple of years, it made few commercial loans, instead concentrating on real estate loans as well as car loans and other kinds of installment credit.
Even though Independence has shown operating profits every year since it opened, the bank’s growth outstripped its capital base by the late 1970s. Federal regulators ordered Independence to increase its net worth, a bank’s cushion against losses.
That problem was solved temporarily in 1980 when a group of Far Eastern investors acquired Independence for more than $15 million. But, under the Far Eastern owners who called themselves Halifax Bancorp, Independence eventually stagnated.
The bank’s assets as of June 30, $222.6 million, were up only 16% from the end of 1981. During the first six months of this year, profits were $484,118, down 14% from the corresponding period in 1984.
Expansion Curtailed
Independence’s expansion was curtailed by several factors. In 1983, it sold branches in Thousand Oaks and Warner Center to cut expenses and eliminate overlapping territories.
Findley said Independence was slowed by its new owners’ unfamiliarity with U.S. banking practices and the change in management when Schatz was replaced as chief executive by Michaels a year ago.
“They haven’t been running at full speed,” Findley said. “They’ve been plodding along.”
Michaels said he intentionally retrenched after taking over because he anticipated sluggish demand for loans. He said any hopes that the bank had of rapidly expanding also were dashed by the disastrous financial reversals of one of its three principal owners, Singapore businessman M. C. Chuang.
Unraveled Ties
Michaels and others familiar with the bank said that the collapse of Chuang’s Allied Foods Ltd. last year effectively forced him out of the Independence ownership group. That, in turn, unraveled the ties among the existing owners, and they decided to look for a buyer.
Negotiations began with Pharaon’s representatives in November and continued until the deal was completed last Tuesday. Analysts considered the estimated $23-million purchase price a reasonable one, although perhaps below average, for a sound bank.
Rather than concentrate in any one area, Independence under Pharaon’s ownership “will do more of everything,” said John W. Hall Jr., chairman of InterRedec Inc., the company based in Richmond Hill, Ga., through which Pharaon manages his North American interests.
Location, Manageable Size
Hall said that Pharaon was drawn to Independence because of its location and “manageable” size. The bank employs 247 at eight branches in the San Fernando Valley, a branch in Westlake Village and another in downtown Los Angeles.
Hall said Independence also could support Pharaon’s other business interests in California. He declined to specify what those interests are, but said that Pharaon is trying to buy a large industrial corporation in the state.
Before Independence can become a fast-growing bank again, considerable hurdles will have to be overcome, banking experts say. Some question whether the bank has the management strength for the task. Sources close to the bank also say that there is concern that some of Independence’s large number of Jewish customers will be put off by the arrival of a Saudi owner.
How much patience Pharaon will have for resolving those issues is unclear. With his history of wheeling and dealing, it wouldn’t be out of character for him to sell Independence if it doesn’t meet his expectations.
“He’s a dealer,” said Speer, the Atlanta bank consultant. “He trades, he buys, he sells.”
