CLYDE H. GOSSERT : Declarations of Independent : Chief of Small Bank Talks About Survival in a Big Market

The last decade has brought the best of times and the worst of times for nearly 390 independent banks still operating in California.

Despite turning in their best financial results ever last year, the independents’ stocks have languished, and industry leaders predict that most of them won’t be around at the turn of the century.

In Orange County, home to nearly 10% of the independents, bankers are trying to shore up capital so they can compete better--or prepare their institutions for mergers--as the state opens itself up next year to nationwide interstate banking.

With its recent acquisition of California City Bank in Orange, CommerceBank in Newport Beach became the largest independent bank based in Orange County. But bulk alone will not enable it to compete better, says Clyde H. Gossert, the bank’s president and chief executive.

An independent essentially serves its surrounding community, and CommerceBank has prospered over its 11-year existence by focusing on a smaller group: businesses in its community, particularly real estate developers and builders.

Gossert, 49, has worked at Imperial Bank, Union Bank and Avco Financial Services during his 28-year career. Most of what he has done at those institutions centered on business banking.

In a recent interview with Times staff writer James S. Granelli, Gossert talked about his bank’s acquisition of California City, the county’s banking industry and the nature of business banking.

Q. With CommerceBank’s purchase of California City Bank, there are now 38 independent banks based in Orange County. That’s still quite a few. Why so many?

A. Back seven to 10 years ago, that was the thing to do. Everybody wanted to be in independent banking. They thought this was a great marketplace, and the regulators were allowing them to get new charters. As a consequence, we had a lot more new institutions come into the county. But in recent years, there have been more banks going out of business for a variety of reasons--because of merger, failure, etc.--than there have been new banks opening. So there are still a lot of banks around, but fewer now than a few years ago.

Q. Do you expect to continue seeing the number of banks shrink?

A. I expect to continue to see that, yes. By the year 2000, of the 38 that are left in Orange County, I would expect there would probably be a third left.

Q. What attracted so many banks to base their operations in Orange County?

A. The reason has been and continues to be that Orange County is a great marketplace. Things were going very well down here. It got to be a situation where you didn’t know that it’s too much until it was too much. Now, I would think that the marketplace is going to contract considerably.

Q. With a robust, diversified economy, why hasn’t Orange County attracted the headquarters of a much larger bank, as it has some multibillion-dollar savings and loans?

A. I think that if you want a billion-dollar bank within five years or so, would you look at Orange County or would you look at Southern California as your marketplace? My feeling is you look at Southern California. Then a variety of other factors come in, such as where are my investors and where do I want to be. So the fact that a big bank doesn’t headquarter here is part of the perception that this is only part of a larger marketplace.

Q. Is there a perception among bankers that they have to grow at a faster rate than they have been growing to prepare for interstate banking next year?

A. I think some people think of it that way. I think banks need to be bigger to be attractive to someone and to be acquired at a good price. Personally, I don’t think that’s really the answer. What if you aren’t acquired? What do you do?

Q. That was my next question. Only so many are going to be acquired. Is there room for smaller banks?

A. If I were in a small bank, I’d want to be bigger because I think you need to be bigger to compete. It’s not because I’m trying to be a buyout target. I think you need to be bigger because you need to have a bigger capital base to compete. If you don’t have that capital, you’re going to have an awful time competing in this marketplace. I think that if I were at a smaller bank--a $50-million bank or a $60-million bank (in assets)--I’d be scared to death. I’d be looking for some way to get a bigger capital base so that I could go forward. Now, I also believe that this market is going to continue to cycle such that there will be a period of consolidation that will open up a market for smaller banks. So I don’t think they’re going out of existence.

Q. A number of Orange County bank mergers have fallen apart in the last few years. What are the roadblocks that are slowing the consolidation process?

A. My personal perception is that it has to do with how the proposed acquisition takes place. If you look at our acquisition of California City Bank, as opposed to some of the others that were proposed, there’s one big difference--ours was all cash. We paid money. They got a check. They didn’t get another piece of stock that may be as illiquid as the piece of stock they had. They couldn’t sell it. There isn’t a market for it. If you’ve been a director or shareholder at that kind of a bank for seven to 10 years and that stock really hasn’t performed very well for you, why do you want to do it again? Why do you want somebody else’s piece of paper when you don’t control anything? To me, that’s not a good deal.

Q. Through much of the 1980s, independent bank stocks have not fared well for a number of reasons. Do you see any rebound any time in the near future?

A. We keep in touch with the market makers in our stock and our investment bankers quite a lot. It seems as though when the big banks go up, we kind of get dragged along. We get dragged along slowly because the heavy money goes in at the top--the Wells Fargos, the Bank of Americas--and eventually some of that trickles down to us. I mean, we’re not A-1 class investments. If you were going to design your own portfolio for just high-quality stuff, you’re probably not going to put many independent banks in there. So, that being the case, it kind of has to trickle down a little bit before we get dragged up as a whole marketplace. And then it seems that when the market goes the other way, we get pushed down quickly. We get dragged up slowly and slapped down quickly, and that’s what happens to independent bank stocks. I think it’s just the nature of the investment.

Q. But your bank as well as a number of other Orange County banks did very well last year with returns on equity and assets that were much higher than the major banks. Why hasn’t that attracted investors?

A. They don’t perceive us as the same quality stock as a Wells Fargo--and we’re not. We’re still a little institution. At $320 million in assets, we may be the largest independent bank headquartered in Orange County, but we’re still a peanut operation. The market still sees us as a small operation headquartered in Orange County. And that’s true. So from an investor’s viewpoint, if you’re in New Jersey and you’re looking at CommerceBancorp stock, you’d say: “It’s a small independent holding company based in Orange County with assets of about $320 million. What’s that?” That’s all it is.

Q. So we have too many banks, stock at most independents isn’t moving and now we have nationwide interstate banking. Eastern banks are poised to move into California. They’re already making loans on property here.

A. They have been for years. Comerica Bank, for instance, which bought Plaza Bank of Commerce up in San Jose, has $1 billion in car paper (auto loans it purchased) in an office in Newport Beach, and has had for a number of years. And it’s based in Detroit.

Q. Is Comerica licensed to do some limited banking activities in California?

A. I’m not quite sure what its license is, but they buy car paper. They’ve been in that business for a number of years. And we call them newcomers to the state. Well, they’re hardly newcomers. They’ve been down here for a long time. But there are all kinds of banks that have those things going on.

Q. A number of Eastern banks are believed to be interested in business banks. Many Orange County banks say they’re business banks, but how many truly are?

A. It depends on how you define that. My perception of a business bank is what Union Bank was before it was originally sold (to a British bank in 1979. It now is owned by Bank of Tokyo). To me, that was a commercial-business bank. Its customers primarily were business-related entities--manufacturers, wholesalers, distributors, real estate developers, service companies--as opposed to customers at other banks, who were looking for individual checking and savings accounts. A true business bank doesn’t put branches in places where it’s not going to get those companies as customers.

Q. As a business bank, CommerceBank picked up retail operations with the purchase of California City Bank.

A. True. One of California City’s two offices--the one on East Chapman Avenue--is a retail office, mainly because there’s nothing else around there. We’re not going to be pulling business customers from the industrial side of Anaheim into that office. Like it or not, that’s the way it is. Now the other California City office on Main Street is a commercial operation. You can do commercial business out of that office. So if you go look at banks that are in commercial areas, to some extent you’ve already defined what kind of office you’re going to have. And if you put it in a retail area, you’re going to have retail business for the most part.

Q. Do you plan to keep the retail office and to develop more retail trade?

A. We haven’t really changed the focus of CommerceBank. We did pick up a retail office, and we’re going to run it for a while to see how it works. I can’t give you an answer today, except to say that we’re now in the retail business. And it’s a very small portion--about $12 million out of a total of $320 million in assets. But as far as the focus of the bank at this time, we have no intention at this point of changing. We’re still a business bank and we’ll probably continue to be. What we hope to do, of course, with the California City operation, particularly the Main Street office, is to continue to build that up with commercial business much as we do here.

Q. So how many Orange County banks are truly independent business banks under your definition?

A. Well, there aren’t very many. I consider ours probably as pure a commercial bank as there is in Orange County. There may be one or two others, but most independent banks here are more retail than they are anything else.

Q. So what are all these small banks doing? Are they all out basically trying to get the the same kind of retail consumer trade that the big banks serve?

A. A lot of them are.

Q. Doesn’t that make it tough for them to compete?

A. You bet it does. Let me give you an example to point out what I’m talking about. California City Bank had roughly $65 million in assets at the end of the year. We closed the year at $254 million. When we consolidated the two operations, California City had roughly the same number of (deposit) accounts as we had. We had roughly 6,500 accounts in each of the two operations, yet CommerceBank was four times larger. So, one big tale of the tape is how many accounts you have. If you’ve got a whole lot of accounts but not a whole lot of deposits, you know you have a retail operation because the deposits are small.

Q. If an independent bank is trying to be a business bank in Orange County, who are its customers?

A. Manufacturing, wholesaling, distributing, service and real estate companies. It depends on what your view is toward real estate development. Some people love it. Some people like a little bit of it. Some people don’t like it at all. But there is a tremendous amount of customers who are privately owned, for the most part, and are somewhere between probably $1 million and $40 million in sales. They’re manufacturing something and they’ve been in the business five to 25 years. We see a lot of those kinds of companies at CommerceBank.

Q. Are you competing against each other or are you competing against the major banks for your business clients?

A. Most of our competition at CommerceBank comes from the major banks. We don’t compete very often with other independent banks, but we do compete often with the majors--Bank of America, Wells Fargo, First Interstate, Security Pacific.

Q. Why is that? What is it you have to offer business executives that Wells, BofA and the others don’t offer?

A. In terms of loan products, pricing and that sort of stuff, we don’t have anything more to offer. It just becomes a service issue. It’s kind of an old statement to say that again, but as many times as I look at the marketplace, it’s about the only thing we really have to offer. We don’t have anything else. We have a closer relationship with those individuals who run their companies, and they feel and we feel that we do a better job of giving them service because of the personal interest we take in their business. Frankly, I can’t really attribute it to anything else. My money’s not cheaper. I don’t have as big a delivery system. So I’d better have better people who can deliver the product in a more satisfactory manner.

Q. In making loans, for instance, bankers look at character, credit and collateral. Does the notion of better service mean spending more time on the character aspect than the major banks do?

A. Yes, hopefully it’s that we--I’m talking about independent banks as a whole--get to know those customers and their business better. And we typically don’t have the kind of turnover in personnel that they have. That gives a businessman some comfort, so he doesn’t have to re-educate the loan officer every every six months. To that extent, I think that helps the relationship.