A law taking effect tomorrow that opens the state’s borders to big out-of-state banks was once expected to touch off a California banking gold rush. Now it looks as if the anticipated bonanza will be a big bust--at least in the short term--because many of the would-be buyers are having financial problems.
The biggest disappointment may come from those who founded California banks in recent years hoping to get rich by cashing out via a sale once the law took effect.
The new law allows banks from such states as New York, Michigan and Illinois to buy California banks, a right that institutions from other Western states already enjoy. Institutions in a few states where interstate banking remains restricted still won’t be allowed to buy a bank here--because the law excludes buyers from states where California banks are prohibited from making acquisitions.
Expectations just a few years ago were that interstate banking would bring huge changes to California’s lucrative banking market and its $500 billion in bank and thrift deposits. Big New York banks, such as Citicorp, Chase Manhattan and Chemical Bank, were expected to launch a D-Day-style invasion, buying up every bank they could get their hands on, paying outrageous prices and offering consumers terrific deals on interest rates, loans and fees just to gain business.
Now the phrases “non-event” and “a big yawn” are used most in describing interstate banking prospects here. Citicorp and Chase Manhattan, along with other giant New York banks, are too busy shoring up finances hammered by losses on troubled real estate loans. Loans in other areas are softening as well--such as those to consumers and to finance corporate buyouts.
“All of these lending problems have made it so they don’t have sufficient capital to embark upon major expansion programs at this time. Those who might have rushed in during 1991 will probably be putting those plans on hold,” said James Gilleran, California’s state banking superintendent.
In addition, with the economy ailing, banks are fearful of acquiring other banks for fear that the loans they inherit will sour. Also, bank stocks, the probable “currency” to pay for an acquisition, are selling at depressed prices. So the big invasion once envisioned is not expected to materialize.
“It’s much ado about nothing,” said Christopher Chenoweth, senior vice president and general counsel of the California Bankers Assn. in San Francisco.
So far, only Comerica, a Detroit bank virtually unknown here, has been active, arranging to buy one Northern California bank and another Los Angeles-area bank, effective tomorrow. Citicorp, which already operates a savings and loan unit in the state, has arranged to buy a small Northern California bank, but that is being done largely to obtain a state bank charter.
The lack of interest in interstate banking is disappointing scores of investors who had hoped to sell their banks to eager out-of-state institutions. No one knows exactly how many banks were formed with that intention because bankers and investors are loathe to discuss it. Regulators would clearly frown on anyone who formed a bank just to sell it a few years later.
But lawyers, consultants and some bankers acknowledge that it was clearly a factor in organizing some banks.
“Let’s face it. To be candid about it, there were a lot of banks formed with that thought in mind,” said John Keating, chief executive of California United Bank, a fast-growing mid-sized bank in Encino formed in the early 1980s. Keating says his bank wasn’t formed for that purpose, but like any public company, the firm could be acquired for the right price.
Michael Conover, a Los Angeles investment banker who works with independent banks, called selling later on “one of those unwritten, undisclosed and nondiscussed things” that was on the minds of bank organizers.
During the 1980s, new banks spread like Medflies in California. Most of California’s 434 banks were organized within the past 10 years. State Banking Department figures show some 323 were launched between 1980 and 1990, although not all still exist.
Harry Gage, a Pasadena consultant to community banks, estimates that 100 or so banks formed in California in the 1980s were founded by organizers whose main goal was to sell out eventually, either to an out-of-state bank, a foreign bank or a California bank responding to the competition.
“There was a euphoria,” Gage said.
Experts say many investors believed until recently that buyers would pay them three times their bank’s book value, or net worth, an outrageously high price. Instead, banks are typically selling for about half that rate.
The new reality is especially painful for investors and bank organizers because many small banks never paid dividends to their shareholders and bank stocks have been hammered. The only hope for those investors to realize a gain on their investment was through sale of the institution.
Many of these banks were formed with initial capital of between $2 million and $3 million.Investment banker Conover notes that a growing number of California banks, resigned to the fact that they may not be sold, have listed their shares on the NASDAQ computerized listing service for over-the-counter stocks to help investors who want to sell.
The slow bank-buying situation could change in a few years. Executives at out-of-state banks say they still want to be in the lucrative California market once their institutions regain their health. One banking law change that Congress is expected to consider soon would allow banks to open branches in other states without having to set up separate banks in each state.
In the meantime, organizers of many of the independent banks that had hoped to sell out after tomorrow must wait. For many, experts said, the alternative is now to merge with other small banks or to work to strengthen themselves for the day when there will be more buyers.
“If you’ve got to exit, then exit,” said Los Angeles banking lawyer Paul H. Irving. “But you are selling in a buyer’s market, not a seller’s market. Otherwise, hold out, dress yourself up and develop a conservative business plan.”