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Competitors are changing apace, with all of the mergers and acquisitions taking place here and across the country. Recent developments — including Citibank's merger with Travelers Group to form a $700 billion multi-discipline financial institution, Bank of America and Nations-Bank Corp.'s $62-billion marriage, Bank of New York's pursuit of Mellon Bank and Banc One's successful wooing of First Chicago — follow a slew of others, led Bank of Commerce's Pete Davis to muse while awaiting approval of his bank's merger with Rancho Vista National Bank, "I hope the Fed doesn’t take these applications in order of size. We’ll be standing in line forever."
These boom times not only show up as excellent return on assets (see chart), but also have the dividend of excellent returns on equity— many showing 15 percent to 30 percent returns — and doubling or even tripling prices in their traditionally dormant independent bank stock.
Leon Reinhart, president of First National Bank.
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Indeed, banks are flush and — like any other business — are looking for things to do with their healthy stock or profits. This year was one of pursuing sidelines and setting up future projects. Perhaps nowhere is that more evident than at First National Bank in Downtown San Diego, which was purchased in 1996 by former Mexico City banker Leon Reinhart, Mexican investor Eloy Vallina and about 200 others. Their goal is to build an international bank, with specific focus on the US-Mexico economies; this year, that goal is being bankrolled.
"We’re building for the future," Reinhart, who serves as First National Bank's president, says of his fledgling (about 20-month) acquisition. "So we’re probably spending a lot more money than the competition . . . we have tax credits for the next few years, and while we have that benefit, we’ll go full bore." Reinhart's been on a hiring binge, adding staff, "about half of which are new to the bank" bringing the total to 200-plus employees. Among them are former Danielson Trust's chief Vince Siciliano, to watch over the bank's |
resuscitated trust department, with about $500 million in assets under management; Walt Trask (who once headed up Bank of America trade finance efforts in Holland) to augment the new First National department; and Reinhart even pulled in some of Bank of America's top staff from its San Ysidro branch.
Toward the end of last year, First National purchased two branch offices near the Mexican border from California Commerce Bank, adding nearly $40 million to its deposit base. While that is still a far cry from Wells Fargo's $200 million in border deposits, says Reinhart, the larger bank is consolidating its offices, so First National is hoping to pick up some of that business. A representative banking office was opened in Mexico City, and the cities of Guadalajara and Monterrey also are being eyed.
First National's international banking and foreign exchange department is now up and running, bringing the only foreign exchange trading room to San Diego as well as getting a line on international trade finance. "We are, like no other bank in California, much less San Diego, ready and willing to take Mexican (loan) exposure." Right now, dollar-based loans to Mexican businesses is a modest, but growing $35 million of its nearly $200 million in total loans, but the goal is to grow that area to 25 percent of the portfolio. "Clearly, we need to build our loan portfolio," says Reinhart, with a nod to deposits of $357 million at year-end, and total assets of $557 million.
"I’m banking on the globalization of this economy. No longer can any of us consider our market to be just San Diego . . .We’re having fun . . . there's $9 billion worth of trade with Mexico out there, and we think we’re ready to get our share," he adds.
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La Jolla's Scripps Bank took advantage of the economic timing to raise $9 million in new capital — it finished a successful $5 million rights offering as well as landed the $4.5 million Sefton Family Trust. The year’s good fortune furthered its unwavering and highly successful game plan: continue its focus on its three markets; add branches and expand its trust operations. The bank's customers are small- to medium-sized businesses, professionals and high net-worth individuals, and they will now be able to bank elsewhere than the headquarters office in the village of La Jolla and branches in Point Loma, Kearny Mesa and Encinitas. Within the next few years, if all goes well, another seven to 10 de novo branches, "strategically located throughout the county" may be added, says president Ron Carlson.
Scripps Bank was one of a handful of banks whose trust departments swelled after San Diego Trust left the market two years |
Ron Carlson, president of La Jolla's Scripps Bank.
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ago via First Interstate Bank; at year-end 1997, Scripps could tout more than $700 million under management in addition to its $400 million in bank assets. Loan to deposit ratio is closing in on 70 percent, from the 60 percent rate of a few years ago, says Carlson, despite fierce competition in the loan arena from banks and non-bank lenders. "We can’t always get the yield that we’ve gotten in the past . . . and we’ve lost some business to others . . . in the end, though, we’ll usually see the business come back."
The lending competition is something about which Rancho Santa Fe National Bank chief executive Jim Boyce feels strongly. "In a bank like ours, it’s as much an emotional attachment as a financial relationship. But, we’ve lost a couple of longtime relationships to out-of-area or non-bank lenders that are, in our minds, giving away the store." One example he cited was a longtime customer with a $4 million Rancho Santa Fe National Bank line of credit who was offered $8 million, with no personal guarantees or additional collateral required. "When the economy turns around, lines like that will be called and business owners won’t have a lot of options," Boyce says. "They'll be at a disadvantage."
Jim Boyce, chief executive with
Rancho Santa Fe National Bank.
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There is only so far he or other bankers can go when trying to meet or beat competition, he continues. "We’ll keep our interest rates as low as we can, but when the profit margin is cut to the quick, we have to let it go." More and more chief financial officers are sharpening their pencils, playing one lender against the other, looking for the best deal. "Sometimes, that means ending long-term relationships for annual relationships."
Rancho Santa Fe National Bank has offices in Carlsbad and the Golden Triangle; and a loan production office in Riverside, which it supplements with region-wide courier service, in addition to its headquarters site. No immediate plans are pending to add other sites, Boyce says, who instead is concentrating on improving the bank's efficiency ratio. He projects growth of about 15 percent this year, to the $150 million (asset) range. In 1997, ROA was 1.70, a drop from 1996's 2.02, which had been bloated by tax credits. "Last year was a pure, fully taxed position. . . it’s been fun to see developers, physicians,
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attorneys, customers across the board enjoying themselves again and not having to worry about damage control," he says.
One item on Boyce's to-do list is his well-known hunt for a partner to move into the next century. "We’ve had lots of people come to us, but they are of different cultures. We are very much a niche player in the commercial/industrial and real estate lending field . . . we really have no retail base." But there is no hurry, he says. "I’ve got time."
One banker who is making use of stock and profits to expand is Pete Davis, of Bank of Commerce. If all goes according to plan, Rancho Vista National Bank will be folded into downtown-based Bank of Commerce around June 1, with the resulting bank swelling to approximately $700 million in total assets. The deal is a book value-for-book value swap, with two Bank of Commerce shares exchanged for one share of Rancho Vista. "Because our stock is trading at six times book, we can offer more market value" than other offers, Davis explains. "Rancho Vista shareholders win because they are getting a highly liquid stock. We win because we pick up a solid bank — we have been doing their data processing for years, so there are no surprise credit problems lurking — and push up our market penetration and book value all at once."
Rancho Vista brings three branch offices to the union, which is only one portion of an ambitious expansion plan for Bank of Commerce. Retail banking aside, Bank of Commerce is first and foremost a Small Business Administration (SBA) lender. Seven SBA loan production offices will open across the country in 1998 — Chicago, Atlanta, Salt Lake City, three in Texas and one in Boise, Idaho — supplementing 12 others in the West.
"My competitors scoffed" when Bank of Commerce embraced SBA loans, but Davis feels as though he's getting the last laugh these days. Loan demand for SBA products is unceasing, he says, with the upshot being, "while other banks are having to search for loans they can make profitably, I am in my secure niche where I could care less that people want prime-rate loans." Because the SBA product is 90 percent guaranteed by the federal government, the bank's exposure is minimal. That gives SBA lenders like Bank of Commerce the ability to pay more for deposits, which they turn right around and send out as SBA loans.
But then, there aren’t many banks as unswervingly committed to SBA loans as Bank of Commerce, which is the leading SBA bank lender in the nation. "We are making loans at record rates, which we can sell [the guaranteed portion] for 10 points or sell for the spread," Davis continues. In December, the bank sold $24.7 million of the unguaranteed portion of its SBA portfolio to GE's Small Business Finance Corp., allowing it to book a $3.2 million pre-tax gain for the fourth quarter.
At year-end, Bank of Commerce showed a 1.51-percent return on average assets of $556 million. Loans on the books totalled $384.5 million. By the end of 1998's first quarter, the bank's ROA moved up to 1.87 percent. "My lifetime goal," Davis jokes, "is to post an ROA of infinity."
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