Look for More Banking Deals, Venture Money in Play
FINANCE
SPECIAL REPORT
By RAJIV VYAS
2002 brings a key question for Orange County: which local bank will get acquired?
In 2001, Laguna Hills-based Eldorado Bancshares Inc. was acquired by Salt Lake City-based Zions Bancorporation and folded into its California Bank & Trust unit around midyear.
In August, Brea-based Pacific Western National Bank was snagged by First Community Bancorp of Rancho Santa Fe. Orange-based BYL Bancorp was bought by San Francisco-based First Banks America Inc. in November.
OC saw the results of other banking deals, too. In July, Sanwa Bank California and Tokai Bank of California combined to form United California Bank, but not for long. Earlier this month, France’s BNP Paribas SA detailed plans to buy United California Bank, which has 17 OC branches.
“There will be further acquisitions,” said Stephen Gordon, chief executive of Irvine-based Commercial Capital Bancorp. “Lots of financial institutions have trouble growing,” making acquisitions attractive, he said.
Every seven to 10 years, community and regional banks get gobbled up by larger banks, leaving a void to be filled by new banks, according to Robert Steiner, chief executive of Pleasant Hill-based Steiner Associates, a consultant to banks and credit unions.
That scenario has played out in OC. The past year saw a handful of new banks crop up, including Newport Beach-based CommerceWest Bank and Santa Ana-based California First National Bank.
But who’s ripe for acquisition next year? Most of OC’s larger banks are gone, but a short list could include Fountain Valley-based Bank of Orange County, Costa Mesa-based Pacific Mercantile Bank and Tustin-based Sunwest Bank.
Expect continued tough going for banks and thrifts next year. Eleven interest rate cuts and credit losses spurred by a slowed economy have resulted in lower profits. Downey Financial Corp., for one, saw net income drop 17% to $21.8 million in the third quarter.
Next year, “bank earnings are going to come under pressure,” Gordon said. “Healthy institutions will be in a strong position to make acquisitions, while weaker institutions will get weaker. There is going to be continued consolidation. There is going to be a line that will define acquirers and those who get acquired.”
Subprime auto lenders also could see added pressure next year, and not just on the public relations front. A company to watch in the sector is Irvine-based Consumer Portfolio Services Inc., which deals in auto loans to people with less than perfect credit.
In September, Consumer Portfolio completed a $68.5 million sale of loans to investors, its first securitization since hitting hard times in 1998.
“We have put this (company) back in the securitization market,” said Charles Bradley, chief executive of Consumer Portfolio. “It will allow us to grow again.”
For the quarter ended Sept. 30, Consumer Portfolio reported a marginal profit of $250,000, compared with a net loss of $1.2 million in the year-ago period.
After a year of holding back, look for new activity by venture capital and private equity firms. While investments slowed last year, venture and equity firms were busy raising money,the impact of which is likely to spill over into 2002 and beyond.
Around 10 venture and equity funds here are sitting on around $1 billion in cash.
“2002 will surely begin to see some growth in investment by venture capitalists,” said Greg Yurkovich, associate at Newport Beach-based Forrest Binkley & Brown. “Not only will the economic situation probably make investing more attractive next year, the tremendous amount of capital that has been waiting on the sidelines will have to eventually find a home.”
Still, only select companies stand to be beneficiaries of new venture money, since investors still are risk-averse in the wake of the technology meltdown. Money likely will go to biotechnology, medical devices, manufacturing, some data networking and chip designers, and management-led buyouts. Unlike the late 1990s, dot-coms are unlikely to see any of it.
And much of the funding could go to second or third rounds,rather than early placements where the risk of failure is highest. Companies already in the portfolios of local venture firms could grab the lion’s share.
Only a few firms, including Corona del Mar-based Miramar Venture Partners and the Newport Beach office of Versant Ventures, plan to back early stage companies.
Fundraising is set to continue in 2002. Three venture firms are expected to close funds in the first quarter, raising a targeted $300 million combined.
Stock brokerages could see more consolidation next year. Merrill Lynch & Co. merged two of its branches here last year, while others laid off brokers. U.S. Bancorp Piper Jaffray closed its year-old OC brokerage entirely in October, laying off about 30 people.
“Some of the firms that over-expanded probably will be contracting again,” said Richard Lanni, senior vice president and divisional manager at Los Angeles-based Wedbush Morgan Securities.
One to keep an eye on: Newport Beach-based Roth Capital Partners LLC. In the past year, the investment bank has offset the downturn on Wall Street by doing more deals for less money. Early in 2001, Roth sold a 24.5% stake of the firm to Zions Bancorporation,a cash infusion that’s help weather a down year for deals.
