Out-of-state investors jump into community banking in Southland.

L.A. COUNTY - As Southern California's economic rebound continues to pick up steam, several out-of-state investors are jumping into the Southland's market for community banks.

A handful of bank corporations either based outside of California or backed by out-of-state investment capital - have acquired community banks in Los Angeles, Orange, San Diego or Santa Barbara counties; some plan to use those banks as beachheads to build their own Southern California bank networks.

The activity signals a major shift in the community bank marketplace, which was pummeled by recession in the early 1990s. It also demonstrates how community banks are attempting to reposition themselves in the wake of the "mega-mergers" between their larger siblings, such as Wells Fargo & Co.'s recent acquisition of First Interstate Bancorp.

"We think California is coming back from its problem years," said James Dierberg, CEO of St. Louis-based First Banks Inc., which has been extremely busy in the state over the past year.

First Banks has acquired a number of Southern California institutions, including Santa Ana-based Commercial Center Bank, Irvine City Bank in Irvine, Huntington National Bank in Huntington Beach, Long Beach-based QCB Bancorp and La Cumbre Savings Bank in Santa Barbara. The five outfits, Dierberg said, constitute a new bank network, First Bank & Trust, which is headquartered in Irvine.

First Banks also recently announced a deal to acquire 75 percent of First Commercial Bancorp in Sacramento.

"Banks are supposed to assess risk and make a determination based on that risk," explained Dierberg. "We think the risk (in California) is worth it. It may be a minority viewpoint. But obviously, some people share our feeling."

Growing a kingdom

One banking company that shares Dierberg's optimism is Laguna Niguel-based Monarch Bancorp. Backed by a number of out-of-state investors, including the Wall Street investment firms Keefe Managers, Mutual Series Fund and Basswood Partners, Monarch recently announced that it has agreed to acquire Western Bank for just under $70 million. Western is a Westwood-based bank with $400 million in assets and five branches in West Los Angeles and the San Fernando Valley.

The deal is scheduled to close Sept. 30. After that, Monarch, which is substantially smaller but better capitalized than its new partner, will have seven branches and assets of almost $500 million.

"With the advent of interstate banking, California is becoming the country's biggest banking market," said E. Lynn Caswell, Monarch's CEO. "I think outside investors looking for a solid return on equity consider California a good place to be right now."

Monarch, Caswell added, is looking to add as any as three more banks to its network.

Meanwhile, Encinitas-based SDN Bancorp, a holding company for Gilford, N.H.'s Dartmouth Capital Group L.P., recently picked up Liberty National Bank in Huntington Beach. SDN also is bidding for a share of the numerous branches that Wells Fargo was forced to unload to complete its merger with First Interstate.

Mergers such as the one involving Wells Fargo and First Interstate are a big part of what is driving these community bank deals.

"If you try to stand alone, it's going to be tougher and tougher to compete for customers, markets and capital," said Caswell.

Boutique approach

Dierberg, for his part, said First Banks' new California network has been organized specifically to offer services that a massive bank such as Wells Fargo is unable to provide.

"We're more of a boutique outfit," Dierberg said. "We have better service. They're geared to transactions. We're geared to service."

Added Joe Morford, California bank analyst with the San Francisco office of investment firm Alex. Brown & Sons: "As big banks get even bigger, they have less interest in acquiring smaller institutions. Community banks are strengthening their market presence by combining with others in the marketplace that have complementary strengths."

Out-of-state investors aren't the only ones interested in community banks. Several in-state consolidations between community banks (generally with assets of less than $1 billion) also have been announced or closed in 1996. West Covina-based California State Bank and La Habra-based Landmark Bancorp recently joined forces in a merger of equals that creates an institution with 20 branches and $730 million in assets. That deal follows a similar marriage between Encino-based CU Bancorp and Signal Hill-based Home Interstate Bank.

Meanwhile, in an effort to boost market share, larger community banks have begun gobbling up some of their smaller competitors. Beverly Hills-based City National Corp., for example, recently acquired its ailing neighbor, L.A.-based First Los Angeles Bank, from an Italian holding company.

Despite their smaller size, community banks are not immune from the intense market pressures that have driven their larger counterparts to merge, according to Charlotte Chamberlain, analyst with the L.A. investment firm of Wedbush Morgan Securities.

"Shareholders will not sit still for sub-par returns on their investments," Chamberlain said. "A lot of these banks have not had investment-grade returns. Smaller institutions are now on notice that they're stepping up to a much more competitive game."