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After a Calm 2006, Rough Waters Could Be Ahead for Local Banks

Bankers may have grumbled as interest rates rose and squeezed profit margins, but it was a rare local bank that didn’t grow or report higher profits in 2006 than the year before.

Yet all that could change this year.

“It will be a much more difficult year for both bank growth and profitability,” said Vince Siciliano, chief executive officer of 1st Pacific Bank of California. The nationwide economic slowdown, plus the increased costs of attracting deposits will continue to erode earnings, he said.

After a two-year stretch when the Federal Reserve Bank boosted short-term interest rates 17 times, several bankers said they expect the Fed to respond to this year’s economic slowdown by cutting rates.

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“We’ve seen the end of the recent rate increases and, if anything, I think we may see a decline of 50 to 75 basis points (a half to three-quarters of 1 percent) over the next 12 months,” said Dan Yates, CEO of Regents Bank, which has $265 million in assets.

Although several bankers expressed concerns about an economy slowing, they remain confident about its overall health. They agreed that the U.S. economy’s in no danger of collapsing.

“I see some solid economic growth, and don’t think the sky is falling,” said Larry Hartwig, president of California Community Bank in Escondido. “We still have a solid business base here despite the pullback in construction. There’s still building going on, and home sales going on, albeit at a much slower pace than we had before.”


A Community Slowdown

The formation of new community banks here also slowed in the last two years. There was one in 2005 and two in 2006.

The two launched last year were San Diego Private Bank in La Jolla, a niche lender catering to wealthy clients, and Embarcadero Bank, located in downtown San Diego.

For evidence that San Diego County remains a hot spot of bank startups, just look at the record $21 million raised by Embarcadero Bank within a few weeks.

However, finding experienced bankers to run new banks was an entirely different matter.

“There’s plenty of capital, but there’s not plenty of people,” Siciliano said.

Still, the rumor mill and bankers say at least three groups are looking at opening new banks this year.

“I’ve had discussions with two to three various groups interested in starting a bank in San Diego,” said Rick Levenson, senior vice president of Western Financial Corp., a local banking consultant.

What may give the aspiring bankers hope is the never-ending trend of bigger banks buying up smaller ones, usually at a nice profit to early investors.

On the mortgage banking side, the market noticeably contracted and more delinquencies popped up, but San Diego-based Accredited Home Lenders, the biggest local mortgage bank, reported that total originations as of the end of the third quarter were about the same as the like period of 2005, or nearly $12 billion.

Accredited CEO James Konrath said the main business for the lender, sub-prime loans to higher risk borrowers, was showing increased delinquencies, and an industry shakeout that began last year should continue, leaving only the stronger companies.

Konrath said despite a clear rise in problem loans and uncertainty where interest rates were heading, he wasn’t too worried about 2007.

“We’re not real bullish, but (the economy) is solid and we’re not seeing anything on the horizon that says otherwise.”

Although most lenders enjoyed improved earnings reports and growing, there were exceptions. A few, such as Silvergate Bank, were shrinking in assets.


Battling Credit Unions

The La Jolla-based bank arranged to sell itself to Wescom Credit Union of Pasadena in a deal that would have broken new ground, a credit union buying a bank. However, a pending similar transaction, Wal-Mart Stores Inc.’s purchase of a similar bank in Utah, caused federal regulators to impose a six-month freeze on such deals to provide Congress time to revise rules governing such institutions.

Because of the delay, the Silvergate transaction fell apart.

Banks and credit unions continued a long-standing feud as the latter group diversified operations and lending practices. Banking trade groups took aim at the expanded business lending of credit unions as going beyond what their original charters permitted.

Credit unions in California responded with a campaign of their own to publicize their advantages, and benefits from having them around.

In the meantime, some of the area’s largest lenders ranked by assets are credit unions, including San Diego County Credit Union, with more than $3 billion in assets, and Mission Federal Credit Union, with more than $2.5 billion.

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