Bank Presidents in Orange County Busy Sprinting From Job to Job
In the old days, a bank president’s position was as secure as the institution’s vault. Bankers were leading citizens who could look forward to frequent games of golf and eventual retirement.
But it has been a different ballgame since the federal government began deregulating the industry in 1978. Now bank presidents, especially in hot markets like Orange County, are changing jobs about as fast as George Steinbrenner hires and fires managers for the New York Yankees.
Last year, about 17% of the 412 independent banks based in California saw changes in the position of president and chief executive. In Orange County 18% of the 45 county-based independent banks experienced changes in the office of the president. From 1983 through 1985, 57.3% of the county’s banks changed presidents.
That’s a far cry from the mid-1970s when the turnover rate for bank presidents was a more modest 10% per year.
Some bankers and consultants say the increasing rate of turnover of bank presidents won’t slow down any time soon. In fact, eight Orange County banks, or about 18% of all county-based banks, have changed managing officers in the first four months of this year alone.
Shake-Out to Continue
“The shake-out will go on as long as people need to learn how to deal with a new (deregulated) industry,” said David T. Blankenhorn, a consultant who formerly headed two Orange County-based banks. “I’ve been a banker 23 years, and I’ve seen more changes in the last three years than in the previous 20.”
The increase in management turnover “indicates a significant amount of instability and also signals certain difficulties that banks are having,” said Gerry Findley, a Brea-based financial institutions consultant and publisher of the Findley Reports on California Banks.
With revolving-door management, smaller banks could lose the edge they historically have had on big city banks--personal service.
Customers may find that constant changes in management leave them with service no more personal than that offered by branches of major statewide banks, analysts said.
Bank Chief Pivotal Role
The chief executive is the pivotal person in independent banking. He has to be an agreeable sort who knows state and federal regulations, understands the new services banks can offer, creates a staff that holds down operating costs and takes conservative, calculated risks in lending.
Since the start of 1983, a few of the departing Orange County bank chiefs retired or left for other opportunities. But most of the local chief executives who have resigned were forced out by directors.
A number of factors have led to these board room showdowns:
- The boom in new banks--34 new ones in Orange County in the last seven years--created a demand for experienced, top-level talent that did not exist. Some of the new presidents failed to develop adequate plans for growth, made high-risk loans, could not get along with directors or could not contain costs.
- The boom in new bank formations sparked a dramatic rise in salaries and other benefits for top executives. Smaller banks often could not afford to offer such lucrative compensation packages.
- The bottom fell out of the real estate market, leaving real estate lenders with bad loans and property no longer worth the amount loaned against it. Real estate is an important underpinning for most banks in California and the critical foundation for nearly all Orange County-based banks.
- Traditional bankers with decades of experience were not necessarily prepared to handle such new services as interest-bearing checking accounts, insurance and even brokerage services allowed by deregulation. And the younger, entrepreneurial breed of banker often found the once-fat profit margins severly reduced in a more competitive deregulated environment.
- Just as banks entered the new era, bank regulators began cracking down. Eight banks have been closed statewide since 1982.
Directors, who typically own a controlling block of stock, also are getting irritated with putting in more work than they bargained for and seeing lower returns than they expected on their shares.
“I think there are a lot of shareholders that are really interested in selling out,” said Richard Stenton, chairman of Laguna Bank in Laguna Beach.
“They’re disenchanted. They were sold five years ago on the idea that everyone would double their money overnight with a new bank. But the banking business is not the type of business that is going to get a 50% return every year. It’s a slow-growth business.”
Yet Laguna Bank, which opened in December, 1981, switched chief executives in March primarily because directors did not see the bank’s profits double. Rebounding from losses in 1983, the bank earned $125,000 the following year and $127,000 last year. Its assets rose modestly to $29.6 million last year from $26.7 million the previous year.
Dashed Expectations
“We felt we should have made $250,000 in 1985,” Stenton said. “We didn’t, and there was nothing planned for 1986 that would make us do any better than we did in ’85.”
Because the projections were not met and because certain board requests were not implemented, the directors and veteran banker John B. Watz reached a “mutual” agreement that Watz should resign as president and chief executive. The bank hired Charles E. Keneley, who held the same position at First Arroyo Bank in South Pasadena, to replace Watz.
Watz, who joined the larger Bank of Orange County in Fountain Valley as a senior vice president, said that he helped make Laguna Bank a “pretty solid bank” but that he did not want to discuss his reasons for resigning.
The position of president-chief executive “seems like a two-year job,” Watz said. “I was there 3 1/2 years and figured I outlived the odds.”
Short Job Life
Indeed, the average job life for a bank president during the past decade is 2.8 years, said Ed Carpenter, a Newport Beach financial institutions consultant. But 80% of the departed chief executives find similar positions at other banks, he said.
One California banker, Carpenter said, recently was named president and chief executive of the seventh bank he has headed since 1974.
But more often the frequent changes keep a surfeit of chief executives between jobs--time they usually spend as consultants to other banks.
Mission Viejo National Bank, for instance, has three former bank presidents working to help it recover from huge losses it suffered last year.
Former Chief Executives
One, James Howatt, former head of Cerritos Valley Bank in Norwalk, is employed as a vice president. The other two, Meredith Russell and Richard Cordova, are consultants.
Russell formerly headed the failed Capistrano National Bank in San Juan Capistrano and the defunct First Beverly Bank in Beverly Hills.
Cordova left California City Bank in Orange last September in a bitter dispute involving a split board.
Saying there was an “unwritten agreement” not to discuss the situation, Cordova would not comment about the dispute or about any legal restrictions on speaking out. Likewise, Robert Hoyt, vice chairman and the bank’s president before Cordova, declined to talk about the dispute. Cordova was president for only nine months.
California City Bank had lost $239,000 in 1983 and cut the losses to $19,000 the following year. In 1985, however, the bank took another plunge, losing $353,000.
More Mergers Seen
“Like the airlines, banks are going to be merging because they are in a deregulated industry now and the competition is fierce,” Hoyt said. “It’s tough with deregulation to make a profit.”
Mission Viejo National sent its president, Lloyd Miller, packing last September primarily because he was spending too much money, especially on salaries and electronic equipment.
Last year, the bank reported a loss of nearly $1.6 million, the second-worst record in the county (Valencia Bank in Santa Ana lost $2.8 million and was closed by regulators on Feb. 7). Mission Viejo National has posted a modest $75,000 profit in the first quarter this year.
“Miller had no control on expenses,” claimed Jack Barnes, a director who took over as president and chief executive. “Salaries here ran $140,000 a month. I’ve reduced the salaries (to $85,000 a month) and still have the same number of employees and better productivity.”
The difference was mainly what Miller and his top managers were getting and what Miller was paying for electronic equipment, Barnes said.
No Bitterness
Miller, who spent less than two years on the job, said he had no bitterness in leaving. “I was with a small independent bank long enough,” he said.
His background in marketing and corporate banking, he said, made him more suitable at Commercial Center Bank in Santa Ana, where he is a group vice president.
Miller believes, in general, that directors are meddling too often in bank management, which they usually know little about.
“It’s a tough situation reporting to a group that doesn’t know banking but is responsible to regulatory agencies for the decisions that were made,” he said. “There’s a fine line on how much the board should get involved.”
Three-Strike Rule
Consultant Findley has a three-strike rule for directors: The first firing of a chief executive is accepted as a mistake in hiring, the second firing is suspicious and “the third time, we tell the directors to look in the mirror--the fault lies with them.”
Bankers also face uncertain futures when directors themselves either lack direction or mislead their management team, particularly as the specter of mergers looms with the expected passage of an interstate banking law.
“The board members themselves in most cases are dishonest with management,” said E.D. Bonta, executive director of the California Bankers Assn. “They’re dishonest because they should say at the start they plan to sell the bank. Managing to sell a bank and managing for the long term are two different things.”
Bonta said directors sometimes fail to define exactly what kind of a bank they want. And, being mostly entrepreneurs with few restrictions on their previous enterprises, they sometimes meddle in management affairs with little concern for the regulatory nature of the business, Bonta said.
Lack of Communication
“To a great extent, it’s just lack of communication between the board and the senior management,” he said. “Senior management really (has) an obligation to the board to tell them where the industry is going. And a lot of board members who don’t want to talk about banking philosophy really need to listen.”
Directors who were once enamored with increasing their assets are now more eager to boost profits. One prime reason is that the proposed law that will allow interstate banking--mainly allowing the major New York banks to enter California--is all but certain to pass the state Legislature. And many independent banks are preening their books as they dream of possible courtships.
“With 443 banks in California, I can’t help but think there are going to be only 250 banks in the next few years,” said Blankenhorn, the consultant and former president of Heritage Bank in Anaheim, which failed in 1984, and Orange City Bank in Orange, which was sold last December to a Colorado financier in a friendly takeover.
Blankenhorn and other bankers, analysts and consultants said a combination of too many banks, too little return on bank stock investments and the likelihood of out-of-state courtiers soon will make mergers and consolidations with in-state as well as out-of-state banks prevalent.
Turnover to Continue
“Also,” he said, “it’s difficult to obtain capital, and the costs of independent banks are high. Making a bigger entity means more cost efficiency. With a bigger capital base, you also can absorb more risks--and there are more risks to absorb today.”
Even with fewer banks, many directors fear the interstate banking bill will spur the game of musical chairs and will start a new round of bidding for the services of chief executives and other top management.
New York banks, they believe, will be willing to spend more money for local executives who know the area rather than sending in Eastern administrators unfamiliar with California banking.
“Bankers making $40,000 are now demanding $80,000, and the salaries are not related to competence,” complained Barnes of Mission Viejo National Bank. With new banks searching for talent, the movement will continue, and the price tag will go up again, he said.
BANKING’S MUSICAL CHAIRS
(4 months) Year 1986 1985 1984 1983 Number of Banks * 44 45 45 41 Number of Changes in CEOs ** 8 9 12 6 Percent Changes 18.2 20 26.6 14.6
* The figures include Commercial Center Bank in Santa Ana, formerly the independent Westlands Bank that was fully acquired in 1984 by a Canadian bank but remains based in Orange County.
** The Figures include four banks that changed CEOs more than once: First American Bank & Trust in 1986 and 1983, Commercial Center-Westlands Bank in 1986 and 1983, Far Western Bank in 1985 and 1984 and Orange City Bank in 1986 and twice in 1985.
Source: The Findley Reports on California Banks.
