Slow Start Didn’t Stop First National Bank : Profits: It took a while to find the right combination that made the bank one of San Diego’s most profitable companies.
Mountains of capital, sound management and a clear business focus are important ingredients in succeeding at any business, especially in starting up a new bank. But patience too can be an imperative.
Take First National Bank of San Diego, one of six San Diego County-based companies to make the annual Times 100 list, published today, of California’s most profitable companies. The bank posted profits of $6.5 million in 1990 and $5.3 million in 1989 for a two-year average return on shareholders’ equity of 16.3%, good enough to place 84th among all publicly held California companies.
But the eight-branch bank, now with $584 million in assets, was slow to blossom, despite all the advantages imaginable at its founding a decade ago.
First National opened in 1981 with the proceeds from a $15-million initial public stock offering, up to then the largest ever by a new bank. The bank’s board of directors included several local luminaries, including John Burnham & Co. Chairman Malin Burnham and Cubic Corp. Chairman Walter Zable, who were expected to draw hordes of friends and contacts as bank clients.
The bank determined early that its niche would be commercial banking, not consumer accounts. As such, First National was interested only in client businesses doing $2 million to $30 million in annual sales and in “high net worth individuals” such as doctors, lawyers and entrepreneurs. Customers looking to open checking accounts and car loans were politely shown the door.
Great strategy, but the bank’s founders soon discovered that the market was flooded with competition for that select sort of client, and that it was much easier to raise a big pile of initial capital than to get the bank’s assets to grow both prudently and profitably.
Four years after opening, First National’s assets had grown to $136 million and its profits to only $533,000. The profit amounted to an O.4% return on assets and 3% return on shareholders’ equity, neither of which were anything to shout about in an industry where a 1% return on assets and 13% or 14% return on equity were considered benchmarks.
The bank was also tarred by the J. David investment scandal, and in 1986 paid $1 million to settle investor lawsuits, although the bank’s then-chief executive Robert Richley and Burnham insisted that the bank had done nothing wrong.
The turning point came in 1987, when First National merged with National Bank of La Jolla and National Bank of Fairbanks Ranch, said Michael West, who since 1990 has been chief executive and vice chairman of First National Corp., the bank’s parent firm. Previously, West was chief executive of both First National Bank and, before then, CEO of National Bank of La Jolla.
West said the merger was a good fit because it matched First National’s overly abundant capital with the revenue-producing assets it needed. In short, the deal was a melding of an overcapitalized bank in First National and two undercapitalized merger partners, he said.
Another key event last year was the bank’s purchase of mortgage-loan servicing contracts totaling $1.4 billion from the Resolution Trust Corp., which had confiscated most of them from a failed savings and loan in Mississippi. The addition of the loans to First National’s existing portfolio created “a critical mass that became highly profitable” by late last year, a bank spokeswoman said.
Despite improving profits, First National’s stock has been languishing. At its current price of about $11, First National’s stock is selling at about half its all-time high recorded two years ago, a decline that West attributes to troubles in the savings-and-loan industry and to poor performance by small bank stocks in general.
The bank recently was named in a lawsuit filed by investors in Pioneer Mortgage, a bankrupt mortgage brokerage and investment firm in San Diego. The suits are in connection with loans totaling $3.5 million that the bank made to Pioneer and its principal, Gary Naiman, that are currently in default.
In a statement read at last week’s annual shareholders meeting, the bank said the litigation “against the bank is without merit and is simply an attempt to sweep solvent parties into the unfortunate Naiman situation.”
Entities controlled by Frank Goldberg, formerly a First National director and still the bank’s largest single shareholder, also made loans totaling $1.1 million to Pioneer that are also in default. Goldberg withdrew his name from renomination as a bank director earlier this month, citing “unfair publicity” accruing to the bank as a result of his loans to Pioneer.
TheTIMES 100
The Times’ annual ranking of California’s top-performing companies, The Times 100, appears today as Business Part II.
