Commercial Center Bank Expecting to Find Buyer at Last : Finance: Institution has solved many past problems, amassed impressive assets while becoming county’s biggest community bank. Hopes are high for selling it this year.
Commercial Center Bank has become Orange County’s biggest community bank in spite of a dubious distinction that sets it apart from all other local financial institutions: It has been up for sale longer than many bankers care to remember.
Now, though, the Canadian operators of the bank are getting serious about completing a deal this year, and they have hired a Wall Street investment bank to solicit bids, mainly from out-of-state banks.
“We have two or three excellent prospects,” said C. Garth MacGirr, a Price Waterhouse Ltd. partner in Canada who acts as the bank’s chairman and chief executive. He wouldn’t identify the prospective buyers.
The bank, with nearly $400 million in loans and other assets, has enough cash for a bank twice its size. Though plagued by problem loans throughout the 1980s, it now has none that are past due. And it has revamped its computer software, which has allowed the bank to reduce staff size 10% through attrition to 280 employees.
The Santa Ana bank also has an unusual branch network. Instead of expanding to fill its geographic base, as community banks typically do, it has branches in Walnut Creek, San Jose, Beverly Hills and San Diego. That statewide spread might appeal to a larger Eastern bank looking for a broad, established base in California, MacGirr said.
But because the bank doesn’t dominate any community in which it operates, that could be a detraction, said Gary Findley, an Anaheim banking lawyer and consultant.
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Commercial Center also has a more nettlesome problem: holding onto good talent. David T. Blankenhorn left this week as president and chief operating officer to join Bank of Newport as president and chief executive. The main reason for the switch, Blankenhorn said, was his own uncertain status at Commercial Center should a sale go through soon. His departure is part of the bank’s relatively high turnover rate of about 20% a year among employees.
Alan Holbrook, the bank’s executive vice president, was promoted Tuesday to interim president and chief operating officer to take on administrative duties. MacGirr will oversee marketing and credit duties.
“If a sale doesn’t work out this year, we’ll talk about a much more permanent position,” MacGirr said. “But we think something’s going to happen in 1994.”
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One thing that won’t help, he said, is an expected loss for last year. Commercial Center lost $6 million on its mortgage servicing operation, which sends bills to borrowers and collects loan payments.
The bank acquired that operation 18 months ago and, like many financial institutions that have bought servicing rights, had to write down the value of those assets as recent mortgages were paid off in the flurry of refinancing last summer and fall.
The bank, which has had only four money-losing years since 1982, has not yet reported its results for 1993. For the first nine months of the year, however, it lost $2.5 million.
“You base your sale price on earnings. People pay a price for something that will give them a good return,” MacGirr said. “Fortunately, this loss on mortgage servicing should be a one-shot deal.”
Indeed, the bank’s plan for this year projects a profit of $5.5 million, he said.
Last year’s difficulties seem almost inconsequential considering the bank’s cat-like ability to survive a series of near disasters. Founded as Westlands Bank in 1970, the institution has had three brushes with insolvency. It avoided a merger with a businessman later accused of raiding treasuries of other banks he controlled, and it got through a $70-million run on deposits caused by a computer error.
It was sold in early 1984 to Canadian Commercial Bank of Edmonton, in Alberta, and its name was changed. But its rescue was short-lived. Late in 1985, the Canadian bank became that nation’s first bank failure since 1923, and its collapse sent shock waves throughout Canada’s financial community, MacGirr said.
Fortunately, Commercial Center already had enough cash on hand that it no longer needed the Canadian bank.
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But it went on the block again when Price Waterhouse of Toronto, the court-appointed liquidator, began selling Canadian Commercial’s $2.5 billion in assets.
MacGirr, who is based in Toronto, spends about 60% of his time on bank matters, including a visit to Santa Ana one week a month to oversee the operation and occasional trips to seek out potential buyers.
“It was impossible to sell the bank at first because there were too many issues unsettled,” he said. “The bank had some loans that were not really bad loans in the sense that they were non-paying. They were very unfocused, troublesome loans.”
Westlands had lunged into real estate lending, especially in the office construction field, and was hurting not just from the 1981-82 economic downturn but also from its customized loan documents. Each major loan had different terms and conditions, and each one seemed to have some clause that no banker should ever use, MacGirr said.
Some construction loans, for instance, gave borrowers the option of invoking built-in extensions. Borrowers then could ignore payments and give themselves more time to repay loans.
“That’s not good banking,” MacGirr said. “Those loans became an albatross.”
The bank standardized its loan application forms, and by 1989 Commercial Center had cleaned itself up enough to attract suitors. MacGirr said another Canadian bank, Central Guaranty Trust Co. in Toronto, had been on an acquisition binge and was poised to pick up Commercial Center, but directors decided they had bought enough banks.
“We pulled out of the market for six months after that, and when we came back, the market had turned against us,” he said. “I’m convinced there’s good value here, and I’m not prepared to give it away.”
Because the bank has $51 million in capital--about twice what is considered an adequate cushion against losses--MacGirr figures that $20 million or so could be moved to the bankruptcy estate of the Canadian bank and that Commercial Center could be sold with $25 million to $30 million in capital. Price Waterhouse, he said, is able to structure a deal almost any way.
But, banking lawyer Findley notes, the deal would probably have to be in cash, and not many banks have money available to acquire a medium-size community bank that doesn’t dominate any of its markets. Stiil, he said, prospects for a sale this year are “reasonable.”
“It’s got a franchise. It has a large market share. And they’re not asking an exorbitant price,” Findley said. “I just haven’t seen other financial institutions come into Orange County recently.”
Commercial Center has profited and lost from its close association with real estate over the years. While no payment problems exist now in its portfolio of more than $240 million, it still relies heavily on real estate loans and on the mortgage servicing operation.
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A big chunk of its assets--about $50 million--is devoted to construction and land development loans, which are among the riskiest that banks make. It also has about $55 million in home mortgage loans and more than $85 million in commercial and industrial real estate mortgages.
About $45 million is invested in business loans, the kind that help manufacturing companies buy equipment and give professionals operating capital. The loans are typically secured by inventory, machinery and other assets borrowers might have.
“In 1923, when Home Bank failed, the Canadian government said, and I remember reading the exact quote, ‘Excessive lending on overpriced real estate’ was the reason for the bank’s failure,” MacGirr said. “The same could be said of Canadian Commercial 62 years later,” as well as some of the problems Commercial Center once had.
“But it is not real estate that kills banks,” he said. “It’s bad lending.”
That, he hopes, has been corrected at Commercial Center.
A Profit Roller Coaster
Over the years, earnings at Commercial Center Bank have been volatile. With its bad loans erased and with what it hopes will be a one-time loss from servicing mortgages, the Santa Ana bank sees nothing but profits ahead.
Net income (loss) in millions: 1982: $0.4 1983: (3.2) 1984: (15.8) 1985: 2.4 1986: (4.8) 1987: 1.4 1988: 3.0 1989: 5.2 1990: 3.8 1991: (0.9) 1992: 3.9 1993*: (2.5)
* Through first nine months
Source: Findley Reports, Anaheim; Researched by JAMES S. GRANELLI / Los Angeles Times
