Banker Stanley Pawlowski remembers the days when he would have to call on local drugstore owners, restaurant operators, doctors, lawyers and a host of small-business owners to persuade them to use his community bank in Anaheim.
With 48 independent banks based in Orange County in 1980, Pawlowski faced stiff competition for the deposit and loan accounts of small companies and professional partnerships--the heart and soul of community banking throughout California.
But over the years, things changed.
He helped build his El Camino Bank into a profitable institution, but it was eventually acquired by Wells Fargo Bank. For the last four years, he helped to guide Corporate Bank in Santa Ana through the long recession, and now it is being acquired by California United Bank in Encino.
Corporate Bank’s eventual demise, along with the sales of four other county banks this year, will reduce the local community bank population to 17, and at least three more are negotiating deals.
“We’ll probably have about eight banks here in five years,” Pawlowski said. “I think banking’s going to be a little different.”
For business customers, long accustomed to the personal service they can’t get at major banks, the coming changes will make it harder to find that personal touch, see the friendly and familiar faces in the bank, talk with the president, get loan approvals quickly--in essence, to feel like a big fish in the small pond that community bankers create.
A new wave of community bank mergers is hitting California, a wave that is rushing into recovering regional economies nationwide and promising to engulf more small banks than ever before.
“All of a sudden, everybody’s a target,” said Alex Sheshunoff of Austin, Tex., a longtime industry consultant.
About 70% of the nation’s 10,241 banks are tiny operations that hold less than $100 million in loans and other assets, and an additional 27% have no more than $1 billion in assets. Sheshunoff predicts that as many as half the community banks will be sold in the coming years.
The consolidation of the independents nationwide is gaining strength just as it has among the major banks.
In California, where Bank of America became the nation’s second-largest bank by swallowing Security Pacific National Bank three years ago, industry consultant Gary S. Findley in Anaheim figures that the growing merger mania could trim 50 to 75 smaller institutions from the ranks of California’s 399 banks by the end of next year.
“There’s a great deal of pressure on banking institutions to increase earnings per share,” Findley said, “and they recognize that the best way to do that is to acquire another entity and participate in cannibalizing--getting rid of administration, back-room operations and other non-interest expenses.”
For small-bank investors, many of them average wage-earners with a few hundred shares each in their local institutions, the mergers mean they’ll get a better price for their stock and be able to sell it easier.
Parts of California, especially over-banked Orange County, have been rocked by mergers. Six Orange County banks were sold or reached agreement to sell in the last 12 months. But only five healthy banks were sold in the previous 10 years.
In Ventura County, the venerable, 113-year-old Bank of A. Levy called it quits by selling to First Interstate Bank. Levy’s president, Marshall Milligan, lamented: “Community banking is a cottage industry designed to go the way of blacksmiths and butcher shops.”
Industry experts and Wall Street analysts say there always will be room for well-run small banks, but they point out that banking is changing dramatically, and those that can’t keep up will wilt.
“It’s been very tough to grow the top line, revenue,” said Sandra J. Flannigan, an analyst at Merrill Lynch & Co. brokerage in New York. “Given the overcapacity in the industry, I think consolidation has a long way to go. We’re in a very active merger-and-acquisition market.”
And no bank has been growing except through acquisitions, said Thomas Bishop, chairman of California State Bank in West Covina. Last year, his bank bought failed CommerceBank in Newport Beach, and the healthy Bank of Anaheim. It has a deal pending to acquire Landmark Bank in La Habra.
Many factors--notably more attractive purchase prices and tired directors who want to cash out--are fueling small bank mergers and acquisitions nationwide.
“The general feeling is that banking isn’t as much fun as it used to be,” said David L. Smith, director of KPMG Financial Services Consulting in Los Angeles.
Indeed, many bankers are simply getting worn out by dealing with stiffer competition, the vagaries of the economy, ever-stricter federal rules and the pressure of regulators. Many also are tired of waiting for a return on their investments, which they expected years ago.
“Orange County especially just had too many commercial banks,” said industry consultant John Hale of Irvine. “In the early 1980s, everybody thought they were going to get to $500 million in assets in five years and then sell out, but there was only so much room.”
Bank of Anaheim got a late start by opening its doors in 1984, but it fared better than most.
“Ours was a classic case,” said Gene W. Hobday, the bank’s president. “We had tired, older directors and a bank that was going nowhere. Good, healthy banks that have sold have had those characteristics.”
Investors, particularly the larger shareholders, thought they could build up the institution quickly and then sell it for a large profit. But with four dozen community banks competing for the same customers, few ended up being sold in the 1980s. Instead, many failed, and one of the worst recessions ever was on the horizon. Bank of Anaheim remained small and plodded on.
It weathered the recession well, but it had grown as big and as profitable as it could. It needed more cash to expand beyond its meager $76 million in assets, but directors, who controlled about 50% of the stock, didn’t want to reduce their stakes by bringing in new investors. Battered by regulators, they also didn’t want to take any more risks than necessary.
“When you start a bank, there’s a lot of enthusiasm,” Hobday said. “It lasts for three or four years, then the excitement for directors and advisers wanes. Most of my board members were over 65, and there is no retirement age for directors. Consequently, no one resigns and you don’t get the infusion of new and younger directors with fresh ideas and enthusiasm.”
Bank of Anaheim’s stock reflected its standstill approach. Its shares traded at 70% of their book value, which is essentially the bank’s net worth.
Finally, last year, consultant-lawyer Findley sparked talks that led to the bank’s $7.9-million cash acquisition by California State Bank. The price amounted to 145% of book value, which is 45% over the bank’s net worth, a ratio that county banks hadn’t seen in years.
“There’s going to be a huge appreciation in bank stocks when the economy recovers,” said Edward J. Carpenter, an Irvine banking consultant. “California hasn’t recovered yet, but it will. Meantime, the signs that bank stocks have begun to move in California are strong.”
With most problem loans behind them, bankers are seeing a slight increase this year in consumer and business borrowing, though it’s still tough to find quality loans. So healthy banks with excess cash are looking at growing through acquisitions.
Many of California’s community banks also want to grow to attract large, out-of-state buyers--whenever they’re ready to march in. “We don’t think out-of-state bankers are coming into California yet,” Findley said. “We think they’ll wait to see what happens to the economy here and the banking industry as a whole.”
At least two out-of-state banks, though, are aggressively pursuing California community banks.
James F. Dierberg’s First Banks Inc. in St. Louis has gobbled up two Orange County banks--Commercial Center Bank in Santa Ana and Huntington National Bank in Huntington Beach--and one county thrift, Irvine City Bank. It has made a major investment in Queen City Bank in Long Beach and has a deal pending to buy La Cumbre Savings Bank in Santa Barbara.
Dierberg, who is buying banks at prices just under book value, is awaiting federal approval to merge the entities into a new company called First Bank and Trust, which will be based in Santa Ana.
“We’re not trying to dominate one particular area” like most community banks, Dierberg said. “We’re just going into areas where we think there is an opportunity to do lending, where we can build relationships and be more responsive to potential borrowers.”
The state’s economy may be going “sideways,” he said, but it is still one of the world’s largest markets. “Even a small part of California is a huge opportunity,” he said. “Other states don’t have that kind of opportunity.”
Comerica Inc. in Detroit, one of the nation’s larger banking concerns, has continued its effort to build a $10-billion bank in California. Its Comerica Bank-California subsidiary bought four banks in Northern California and took its first big bite in Southern California with its agreement in May to buy Metrobank in Los Angeles.
Only a month earlier, Metrobank had completed its purchase of National Bank of Long Beach, giving the business-oriented Los Angeles institution $1.3 billion in assets and regional centers from Woodland Hills to San Diego. Metrobank started looking at ways to raise $10 million to pay for the purchase. Instead, it found a suitor.
“We were in a position of trying to maintain independence and grow,” said David Buell, Metrobank’s chairman. “But we had to be aware of a good deal.”
The stock swap transaction, valued at $136.8 million, would give Metrobank shareholders a premium--$1.70 for every dollar of the bank’s net worth, or 170% of book value. Since the deal was reached, Comerica’s stock has shot up, doubling the value of Metrobank’s shares.
A New Hampshire investor group, Dartmouth Capital Group, entered the scene 10 days ago with the announcement that it had reached a tentative agreement to buy Liberty National Bank in Huntington Beach for $14.5 million in cash.
Dartmouth’s operator, Robert Keller, said Liberty would remain intact as a separate community bank, though he expects that future acquisitions will boost its $140 million in assets to more than $1 billion.
Most of the merger activity, though, is among small banks in-state that are consolidating to cut costs, pump up earnings and compete more efficiently--or make themselves more attractive to out-of-state banks.
Craig Collette and his fellow directors at Landmark Bank know only too well the costs of staying competitive for a small institution.
The La Habra bank, with $240.2 million in assets, is one of the few to install the latest technology to allow customers to bank by computer. It is preparing for the days of electronic commerce that will allow customers on home computers to pay bills by transferring funds and to download money onto special “electronic money” cards that act as cash.
“The industry is changing very rapidly,” Collette said. “The ability to compete utilizing higher technology makes it very hard on banks of under $500 million, maybe even under $1 billion, in assets.”
Not only does the technology cost more for banks to install, it could lead to a loss of customers. From their home computers, for instance, customers will be able to look up competing information nationwide on interest rates for certificates of deposit and then transfer their funds from one bank to another that pays slightly higher rates.
“The thing that is going to draw industry consolidation more than anything is electronic banking and electronic money,” consultant Sheshunoff said.
“The scary part for the independent banks is that they’re going to have to offer electronic banking to customers, and that opens the door to losing some of their customers,” he said. “It will change a lot of the landscape, but the question is how fast.”
Collette isn’t too worried yet. California State Bank, which is paying $36.8 million in cash and stock for Landmark--or 165% of book value--will become one of the area’s larger independents with $715 million in assets and will be able to provide bigger loans and more services to business customers.
“The success of this merger is based on what we can do in making the combinations to reduce costs,” he said. “That’s the real key.”
It’s a key that could benefit consumers. California banks have to reduce their expenses if they expect to compete with out-of-state banks once nationwide branching becomes law, said consultant Michael Conover, who works both in Los Angeles and New York.
“The cost of delivering bank services in Southern California is more than in Upstate New York,” he said. Under a federal branching law, he said, out-of-state banks with lower overhead could open branches in California, offer lower interest rates on loans and still make a profit.
Community bankers are well aware of the need to slash costs. Southern California Bank in Anaheim moved quickly in May to absorb its purchase of two branches, $72 million in commercial loans and $27 million in deposits from Independence One Bank of California, a thrift that went out of business.
Larry Hartwig, the bank’s president, said that by buying only what it needed, the bank will add 10 cents to 15 cents a share to earnings. And Southern California Bank, Orange County’s largest independent with $480 million in assets, isn’t through yet.
“There’s a lot of dancing. Everybody’s heart is aflutter with the prices they’ve been seeing,” Hartwig said. “We’re now on the dance floor and looking for another partner.”
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To the Few, Much
Although about 70% of U.S. banks are small operations, with less than $100 million in assets, just 63 large banks, each wih assets greater than $10 billion, control half of all U.S. banking assets. U.S. banks by asset size, as of first quarter 1995:
Assets Number of banks Less than $100 million 7,122 ($310.3 billion) $100 million to $1 billion 2,727 ($667.8 billion) $1 billion to $10 billion 331 ($1,077 billion) Greater than $10 billion 63 ($2,061 billion)
Commercial Banks Consolidating
Since the decade began, the number of banks in the United States and in California has declined 17%. Analysts attribute the reduction mainly to acquisitions of small community banks by larger banks. Number of commerical banks:
1995 (through June): 10,241
1995 (through June): 399
Orange County Headquarters
The number of banks headquartered in Orange County has also shrunk, dipping 51% since 1990:
1995 (as of Aug. 7): 19
Orange County’s banks have seen two key measures of profitabilty-return on assets and return on equity lag far behind the state and industry standards in general. California banks are performing well when earnings amount to 1% of loans and other assets and 14% of shareholder equity.
Return on Assets
Orange County: 0.86%
Orange County: 0.12
Orange County: 0.08
Orange County: (0.09)
Orange County: 0.08
Return on Equity
Orange County: 10.62%
Orange County: 1.49
Orange County: 1.04
Orange County: (11.51)
Orange County: 0.94
Six of Orange County’s community banks have been acquired by larger banks since September, 1994. Details of the transactions:
Property: Landmark Bank
Location: La Habra
Purchaser: California State Bank
Value: $36.8 million (cash and stock)
Property: Commerical Center
Location: Santa Ana
Purchaser: First Banks Inc
Value: 32.5 million (cash)
Property: Mariners Bank
Location: San Clemente
Purchaser: Eldorado Bank
Value: 12.2 million (cash and stock)
Property: Huntinton Natl
Location: Huntington Beach
Purchaser: First Banks Inc
Value: 11.8 million (cash)
Property: Bank of Anaheim
Purchaser: California State Bank
Value: 7.9 million (cash)
Property: Corporate Bank
Location: Santa Ana
Purchaser: California United Bank
Value: 7.8 million (stock)
Sources: Individual banks, Times reports, Federal Deposit Insurance Corp., Carpenter & Co.,Alex Sheshunoff Management Services
Researched by JANICE L. JONES / Los Angeles Times