4 Independent Banks Agree to Merger of Equals : Pact Would Create Facility With Assets of $418 Million

First National Corp. and three other San Diego banks on Wednesday said they had agreed to merge, a move that would create the county’s second largest independent bank with $418 million in assets, $32.2 million in capital and nine branches in the region’s wealthiest neighborhoods.

Describing it as the first “merger of equals” in the West, First National, parent of First National Bank, has signed an agreement in principle to merge with National Bankshares of La Jolla, National Bank of Fairbanks Ranch and Rancho Santa Fe National Bank of Fairbanks Ranch through an exchange of common stock, First National Chairman Malin Burnham said Wednesday.

“There is so much similarity” among the four financial institutions that “one wonders why we were four separate banks,” Burnham said.

The proposed transaction also signals what industry analysts claim is a trend of small banks merging so they can be financially well poised to compete in interstate banking, which starts in the West next summer.

The banks must still reach a definitive agreement and the deal will require both shareholder and regulator approval, which could take up to 120 days, Burnham said.

Several issues remain unresolved, including the name of the merged company, whether the banks will retain their own names, and who will direct and manage the new entity.

Each bank boasts prominent directors and strong, aggressive chief executives, and blending all of the personnel will be a complicated process, banking industry experts said Wednesday.

Press Conference

Seven top directors and executives from the four banks shared the dais at a press conference Wednesday to announce the merger plans, each stressing the logic of the transaction and each describing the deal as an “equal partnership.”

But the financial conditions of the stock exchange show that First National, which likely will be the acquiring company, is paying something of a premium.

First National’s $16.6 million in capital represents 52% of the combined banks’ nearly $32.2 million in equity. But First National’s shareholders will own only 43.9% of the new entity.

By contrast, stockholders of National Bankshares, parent of National Bank of La Jolla and 51% owner in National Bank of Fairbanks Ranch, will own 35.8% of the merged entity, but will contribute only 29% of the total capital.

The merger is a “win-win transaction,” according to David J. Primuth, chairman of National Bankshares. “It’s a combination of strength that will be unequaled.”

One Element Lacking

Each bank lacked either a strong capital or strong earnings position, according to Harold L. Campbell, National Bank of Fairbanks Ranch chairman.

First National brings the strongest capital base to the transaction, both in terms of volume and as a percentage of total assets--nearly 10.5%.

National Bankshares of La Jolla boasts the largest profits--$869,000 between it and its share of National Bank of Fairbanks Ranch for the nine months ended Sept. 30. Its capital-to-assets ratio is only 6.29%, however.

Combined, the merged banks will have a capital ratio of 8.24%, above regulatory requirements.

There was no regulatory pressure to arrange the merger, according to Paul I. Stevens, chairman of Rancho Santa Fe National. A combination of the four institutions will spell a “solid, clean banking system that San Diego sorely needs,” he said.

Positioned for Growth

The proposed merger will position the new consolidated bank not only for what Primuth called “faster growth,” but also for what analysts said will be increased competition next July, when banks in 14 Western states can cross state lines to make acquisitions. Interstate banking acquisitions will begin nationwide in 1991.

“They had to do it,” said one analyst of the proposed merger. After interstate banking, “the small banks will have a tough time competing against the large banks coming in. And somewhere down the road, the larger banks will be more attractive than small banks as acquisition candidates.”

The motivation for the merger is “to respond to the upcoming” interstate banking changes, agreed Dan Herde, chief operating officer at San Diego Trust & Savings, the county’s largest independent bank with $1.2 billion in assets.

The planned merger, Herde said, heralds the beginning of a shakeout of smaller independent banks. “In the longer run, the number of institutions locally will be diminished,” he said.

“The current thinking,” said Pete Davis, president of Bank of Commerce, with $85 million in assets, “is that interstate purchasers of banks will pay a premium for those banks with more than $300 million in assets.”

As a result, Davis said, there will be an increase in the number of mergers involving small banks.

Combined, the banks in the First National deal will have a strong commercial presence in downtown San Diego, where First National is based, as well as retail branches in some of the county’s most upscale communities.

There is virtually no overlap between the banks, officials said. Rancho Santa Fe National has branches in Rancho Santa Fe, University Towne Centre and in Escondido; National Bankshares and National Bank of Fairbanks Ranch have offices in La Jolla, Fairbanks Ranch, Del Mar, Kearny Mesa and Mission Valley.

The merger is a “good fit,” according to Murray Galinson, president of San Diego National Bank, with $105 million in assets. The merging banks all “deal with commercial and retail markets, although they will probably strengthen their position especially in the retail market.”

Merging the banks was first discussed about three months ago by Burnham and Stevens. The proposed deal was hammered out this week after the banks had hired Keefe, Bruyette & Woods, a New York investment banking firm, to assist in the negotiations.

A key to the negotiations, according to insiders, was First National’s settlement earlier this month for $6.9 million of the lawsuit filed against it by former investors of fraudulent J. David & Co. The investors claimed that the bank aided and abetted J. David (Jerry) Dominelli by allowing unauthorized transfers of funds between various J. David accounts.

First National will pay $1 million of that settlement--its insurance carriers will pay the balance--which will dramatically affect the bank’s earnings for the year. First National President Robert D. Richley spearheaded the effort to gain board of directors approval for the settlement.

Had a settlement not been reached, the other banks likely would not have agreed to merge, officials said.

“We had to get that behind us,” Burnham acknowledged. Proposed Merger at a Glance

First Rancho National Combined National Santa Fe Bankshares* Assets $168.8 $85.7 $163.7 $418.2 as of 9/30/86 million million million million Deposits 150.2 78.6 146.3 375.1 Common Equity 16.6 6.0 9.5 32.2 Post-merger 43.9% 20.3% 35.8% ownership ratio

*Includes 51% Ownership in National Bank of Fairbanks Ranch. SOURCE: First National Bank