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Bolstering Loan Loss Reserves Leads to Difficult Year for Banks

Last year’s results for local banks show profits were tough to find.

From the top 20 banks that are part of the San Diego Business Journal’s Local Banks list that ran in the 2010 Book of Lists, only nine had net income for 2009.

Three of the banks are no longer around, having been seized by federal regulators because of their under-capitalized positions.

The most recent to fail last month, La Jolla Bank, is really a savings and loan and different from a commercial bank. The other two failures were San Diego National Bank and Imperial Capital Bank. Some may also count Temecula Valley Bank, which had six of its 11 offices in this county when it was taken down in July.

Many of the money-losing banks had to put aside more funds into their loan loss reserves as a result of more borrowers defaulting or paying late on their loans. That money comes off the bank’s bottom line.

A good portion of the banks now experiencing losses and defaults were heavy lenders to contractors and land developers, and were burned by the ongoing turmoil related to commercial real estate values.

While the local banking sector appears to be struggling, the outlook for the entire banking industry on a national basis is more positive.

The Federal Deposit Insurance Corp., the nation’s top bank regulatory body and its insurer, reported that in the fourth quarter the aggregate net profit for the nation’s banks, more than 8,000 institutions, was $914 million.

For the full year, the nation’s banks’ net profits totaled $12.5 billion, compared with $4.5 billion in 2008.

More than half the banks reported year-over-year improvements in their fourth-quarter results. But nearly one-third reported net losses, down from the prior year’s fourth quarter, when 34.6 percent of the banks reported net losses.

The FDIC noted that the banks’ loan loss provisions in the fourth quarter dropped for the first time since the third quarter of 2008.

But there’s still a lot of red ink that banks are dealing with. Charge-offs totaled $53 billion in the last quarter, up from $38.6 billion in the prior year’s fourth quarter.

Even more critical is the number of banks that the FDIC classifies as having serious problems. As of the end of December, there were 702 banks on the problem list — 150 more than at the end of the third quarter.

The FDIC doesn’t release names of the guilty parties, but any check on the balance sheet and capital levels should prove illuminating.

• • •

Sunrise Bank Merger Approved: Four regional banks that are majority owned by Lansing, Mich.-based Capital Bancorp Limited received all regulatory and shareholder approvals needed to merge under the new bank name Sunrise Bank effective March 5, Capital Bancorp announced March 2.

The merged banks are Sunrise Bank of San Diego, the Bank of Escondido, Point Loma Community Bank and Palm Desert-based Sunrise Community Bank.

Capital conducted similar consolidations of other majority held banks last year in the Midwest and Northwest.

Sunrise, based in San Diego, will have about $300 million in assets and four offices. Scott Andrews was named chairman and CEO. Mike Peters, president at Bank of Escondido, becomes president. The other banks’ CEOs, Tony Calabrese at Point Loma; Randy Cundiff at Sunrise Bank of San Diego; and Stu Bailey of Sunrise in Palm Desert become regional presidents at their offices. Gary Weitner is chief credit officer and Millie McKibbin chief operations officer.

• • •

California Community Loses For Year: Escondido-based California Community Bank, with four offices, reported a net loss for the year of $552,000, compared with a net loss of $65,000 for 2008.

For the fourth quarter, CCB reported a net loss of $235,000, compared with net income of $112,000.

CEO Larry Hartwig said the bank had to increase its loan loss reserves by $1.2 million to cover a larger loan portfolio that grew 19 percent to $164.5 million, and the possible loss associated with a single nonaccrual loan of $1.1 million.

CCB also had higher expenses associated with its 2008 opening of an Encinitas branch, he said.

In other key metrics, it reported assets of $220.6 million and deposits of $192.6 million, which were up by 26 percent and 31 percent, respectively, over the prior year’s fourth quarter.

Capital continues to be strong, with total risk-based ratio at 13.48 percent, above the 10 percent ratio to be regarded as well-capitalized.

• • •

PacWest Sells Problem Assets At Loss: PacWest Bancorp, parent of Pacific Western Bank, reduced the size of its problem loan number last month when it sold 61 nonperforming loans, totaling $323.6 million, for $200.6 million. According to the bank, the sold bad loans represent more than half the bank’s non-covered adversely affected loans. These are loans that PacWest made, not the sizable number of problem loans it inherited with the acquisition of failed Affinity Bank.

Chief Financial Officer Vic Santoro said the expected after-tax loss from the sale is estimated at $41 million.

At the end of December, PacWest reported holding $283 million in problem loans, 7.56 percent of its total loans. Most banks try to keep nonperforming assets to below 3 percent.

• • •

Small Change: Union Bank, N.A. won seven awards for excellence in middle-market and small-business banking from Greenwich Associates, a Connecticut-based consulting firm.

Send any news on locally based financial institutions to Mike Allen via e-mail at mallen@sdbj.com. He can be reached at 858-277-6359.

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