New Fund Investing in State’s Small Banks

A $75-million investment fund headed by former Postmaster General Anthony M. Frank has taken majority control of a tiny Orange County bank as its first step in preserving locally operated California community banks.

The fund bought a 52% stake in Security First Bank in Fullerton for $3.5 million and plans to make “significant” investments in other small banks in Los Angeles and Orange counties, said Thomas Byrom, one of the fund’s four principals.

“The ongoing larger bank consolidation is producing a gold mine for smaller banks,” Byrom said. “A lot of customers like dealing with smaller banks, and there are a lot of disaffected customers who have had accounts moved around amid the mergers.”

The banking industry has been in merger turmoil in recent years both at the big bank level and among smaller institutions, several of which are fattening up to make themselves attractive buys for major banks.

Community banks made up most of the state industry’s 450 institutions during the 1980s. Today, the state has about 250 banks.

Frank and his partners say they want to make sure independent banks remain on the scene. They see opportunities at institutions others often overlook--the money-losers that still have good prospects, as well as those with less than $500 million in loans and other assets.

They formed the California Community Financial Institutions Fund to invest in those undervalued banks. A veteran savings and loan executive, Frank headed First Nationwide Bank, based then in San Francisco, and later headed Caliber Bank in Arizona before selling it.

In a departure from other investor groups, the new fund doesn’t want to take over any bank’s operations. Instead, it plans to acquire large stakes--10% to more than 50%--in banks it likes and then work with current executives and directors.

Though it has a majority stake in Security First, for instance, it is putting only one partner, Richard W. Decker Jr., on the eight-member bank board. Decker is a former chief administrative officer of First Interstate Bank, which was sold last year to Wells Fargo & Co.

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Among those that gave the fund its first $75 million are the California Public Employees Retirement System, the GTE pension fund and the San Diego County retirement fund.

“This investment group is for real and will have a significant impact on the Southern California banking business,” said industry consultant Kenneth Slezak of Vista Marketing in Irvine.

Initially, Byrom said, the fund will make up to a dozen significant investments mainly in urban and suburban California banks. Under its rules, the fund must invest 90% of its money in California financial institutions and is barred from engaging in unfriendly takeovers.

A second round of funding, which closes in March, is aimed at gathering an additional $200 million, he said. Byrom said the fund plans to stay with its investments for seven to 15 years, making it a long-term player in an era known for businesses that cash in on gains quickly.

The investment fund created a bank holding company, Belvedere Bancorp, to expedite future bank investments. The Security First investment took about six months to win regulatory approval, but future investments should go through must faster, Byrom said.

Security First moved early this year to Fullerton from Anaheim, where it was started as Pacific Inland Bank.

Pacific Inland poured millions of dollars into big loans that went bad during an often-troubled 13-year history. It bet heavily on development and construction loans in desert areas, and lost big when those markets faded.

The bank earned more than $1 million in only one year, and lost a total of $9.9 million over the last three years. Industry experts had expected Pacific Inland to be the next in a long line of bank and thrift failures in Orange County.

But a turn-around team brought in three years ago began to cut losses. Now, as Security First, the bank sees a brighter future. Its assets, long in decline, grew 41% to $39.5 million at the end of September.

“We’re going to lose money this year, but we’ve pretty well turned the corner,” said Robert Campbell Jr., hired early this year as the bank’s president. “Compared to the hole the company was in, we’ve had a big improvement.”