Strategies : Bank of San Clemente Back in Black, a Proud Survivor of a Rough Ordeal

The Bank of San Clemente began a downward spiral three years ago that generated $2.3 million in red ink. It was on the regulators’ death list--earmarked for being seized and closed.

However, the bank recently reported its first profitable quarter in more than three years, and has satisfied the last of regulators’ demands by raising $1.5 million in new capital from an Irvine investor.

But before that final hurdle was cleared, a new management team headed by Michael Dunahee revamped and revitalized the bank by trimming its staff, paring accounts, working out bad loans and, perhaps most of all, believing that the bank could be saved.

In fact, directors and officers are most proud that they managed to turn the bank around before the new money came in, according to Franklin J. (Bud) Dimino, a Santa Ana lawyer and chairman of the bank and its holding company, San Clemente Bancorp.

“Oh, it feels good,” said Connie Clevenger, vice president for marketing and a 10-year bank employee. “Coming through all that to reach the point we’re at, it’s so exciting. You feel like a winner.”

The bank became a diamond in the rough for real estate developer John E. Wertin, whose $1.5 million was needed to satisfy the last demand of regulators: an infusion of capital.

Wertin, president of the Pacific Co., recently picked up 1.5 million newly issued shares of the holding company at $1 a share, giving him 80% ownership. And he paid $700,000 more to erase company debts and rescue the bank from the junk heap.

“There’s no question about it, it was a great investment (for Wertin),” Dimino said. Wertin left for an extended overseas trip just after closing the San Clemente Bancorp deal on Nov. 6 and could not be reached for comment.

Dimino and Bank of San Clemente President Dunahee are generally credited with devising and carrying out the program that turned the failing bank around.

Dunahee, a veteran Thousand Oaks banker and marketing specialist, was initially recruited by Dimino in August, 1985, as a consultant to help draw up a new business plan for the then-failing institution.

Bank of San Clemente opened for business in April, 1975, in a small trailer parked behind the city’s Greyhound Bus station.

But with real estate values soaring and speculators and developers pouring into South Orange County, the bank was soon flying high, posting impressive profits and asset growth--mostly because of its real estate lending.

When the bank celebrated the 1980 opening of its branch near San Clemente General Hospital with two nights of partying, 900 guests showed up each night, Clevenger said.

But in 1982, even as the bank moved into its new downtown headquarters, built on the site of the old bus station, earnings began to collapse.

Like most banks that put too much money into real estate loans in the early 1980s, Bank of San Clemente wound up with many foreclosed properties and non-paying borrowers when the real estate market collapsed.

“Property values were gaining 15% a year,” Dunahee said. “People were buying real estate and selling it before escrow even closed, and they made $20,000 a deal. Couple that with a non-attention to detail and inflated views of appraisals, and you’re set up for quite a hit.”

At the end of 1982, for instance, 56% of the bank’s loans were in real estate. The following year, that figure rose to 57.9%. Typically, California banks maintain about 33% of their loans in real estate. The Bank of San Clemente is now down to that level.

But by the end of 1984, nearly 25% of the bank’s $38 million in loans were delinquent or non-paying.

But what was worse for the bank, said Dimino, who then became the board’s chairman, was that top managers at the time were not telling directors how bad the bank was doing.

“We were surprised because management had been telling us certain things. Then the regulators told us after an audit that we had been lied to by our management,” he said. “We were led to believe--and were reviewing records and reports showing--that everything was fine.”

Luckily, he said, the bank did not suffer from insider loans or self-dealing, traits often found in banks declared insolvent and seized by regulators.

Heads began to roll, and about half a dozen top managers--including the president at the time--left the bank, Dimino said.

State and federal regulators, concerned about the bank’s financial condition, began issuing orders to improve the capital position, change lending policies and find new managers.

At first, Dimino persuaded former banker Richard Lewis to come out of retirement to take over as the bank’s new president, but Lewis left after a year, and Dimino hired Dunahee as a temporary consultant.

Two months later, Dunahee became acting president and chief executive officer. Six months after that, in April, 1986, the job was made permanent.

Under Dunahee’s direction, Dimino said, the Bank of San Clemente has retooled its operations and rejoined the ranks of the county’s healthy financial institutions.

“Dunahee’s done a helluva job,” said Gerry Findley, a Brea-based consultant hired by the bank in 1984 when its financial chaos first became apparent. “I give him a great amount of credit for putting the bank on its feet.”

Dunahee’s performance has been “particularly strong . . . given the fact that while he was managing the bank, he was continually negotiating several transactions for new capital,” said Edward Carpenter, a Costa Mesa-based industry consultant.

As part of the package of deals that Dunahee helped to arrange, Dimino loaned the bank $670,000 in 1986 to boost its capital and keep off regulators. The other directors then paid Dimino back in proportion to the amount of shares they held, spreading the risk of loss in the event that the bank collapsed. The $700,000 that Wertin came up with to pay off holding company debt was used to retire those loans.

Dimino said that the turning point came shortly after the regulators began issuing all of their orders to clean up the bank’s act.

“I sat down with the regulators and said, ‘This is where we are. We’re honorable men, there were no personal profits here and we’re going to turn this bank around. Just don’t make demands on us that are impossible for us to meet,’ ” Dimino said.

Still, the bank’s chances for survival were shaky, and consultant Findley was not confident that Dunahee was the right man for the job when Dimino proposed bringing him in.

“We had some reservations (about) whether he could do it philosophically,” Findley said. “When you’re cleaning up a bank, you got to step on toes, you got to be a mean bastard. Cleanup artists don’t last very long, maybe two or three years, before they burn out. We told Mike it was a situation quite different than anything he ever had before.”

But Dunahee, 46, is rare, Findley said, because he is a bank marketing specialist who also knows the technical side of banking.

Dunahee spent 10 years at Security Pacific National Bank, rising to vice president for corporate planning. Tired of the commute to downtown Los Angeles from the San Fernando Valley, he joined the Bank of A. Levy in Oxnard, where he worked for 10 years and rose to senior vice president and branch administrator overseeing 22 offices.

Eventually frustrated with his job, he quit to start his own consulting business. In less than two years, Dimino called him and asked him to draw up a marketing plan for the Bank of San Clemente.

“Coming out of major banks, I thought a small community bank would be easy to run,” Dunahee said of the bank board’s request six months later that he become president and chief operating officer.

“But it’s a lot harder because you don’t have any staff. You’ve got to know everything, like whether you’re in compliance with labor laws. Bank of America has a whole department to handle that. Here, you have to figure it out yourself.”

He had bigger crises to handle, though, including a demoralized staff, shareholders’ anger and customer complaints over the elimination of such services as free checking.

“We needed systematic management,” he said. “You can’t dance with the problems, you’ve got to wrestle them to the ground.”

He hired two former bankers to beef up loan collections. The two consultants took over $8 million in substandard loans, went over the files and began pressuring customers to pay up. Now, the bank is recovering more money than it’s writing off on those loans and should have less than $1 million in bad loans by the end of the year, Dunahee said.

To cut losses and regain control, he said, the bank also started filing more lawsuits to collect overdue payments, shut down its escrow department, chopped the bank’s total staff to 44 from 70, reduced its non-earning assets to $200,000 from $5 million--largely by selling properties it had taken onto its books in foreclosure actions--and brought in personal computers for quicker handling of loan documents.

Most of the job elimination came through attrition; just three workers were laid off, Dunahee said.

The bank also instituted checking fees for those with accounts of less than $500. Dunahee said customers used to be lined up out the door of the downtown office, and most of them had less than $100 in their accounts.

It simply cost the bank too much money to handle the accounts, he said, and the fees encouraged small depositors to take their money elsewhere. But core depositors, merchants with much larger bank balances, remained and helped to keep the bank stable. About 70% of the bank’s accounts belong to retail customers, Clevenger noted.

“When Mike came in, he was honest with the community,” she said. “He let them know where we were, and being honest with the community is what helped bring the bank through.”

In the process of its restructuring, the bank lowered its assets to $39.6 million at the end of November from $63 million at the end of 1983. The drop in assets, along with the other changes Dunahee instituted, helped the bank to post a $58,000 net income for the third quarter.

Meanwhile, nearby Mariners Bank and Dana Niguel Bank have been growing, each ending the month with $38 million in assets. And Mariners plans to open its second branch in San Juan Capistrano in February. Mission Valley Bank, the fourth locally based bank, had $15.1 million in assets at the end of the month.

Consultants Findley and Carpenter said the city has too many banks for the area and predicted that some will probably be acquired by other banks.

Dunahee believes that his biggest competitor is the local branch office of Bank of America and that the competition will heat up more if Congress enacts new banking laws to allow banks to get into such areas as securities, insurance and tax services.

Now, Dunahee said, he is looking for ways to generate fees. He said he has not yet had a chance to talk with Wertin about the bank’s future but is considering programs such as offering below-market loans in return for an equity stake in the borrower’s company or project.

But whatever the bank does, he said, it will be done on the basis of the “strength that comes through adversity.”

“And we survived,” he said. “Any bank that has not handled a major crisis is not prepared for the future.”