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Thursday, Jan 26, 2023
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Community Banks Thriving With Big Banks in Turmoil

Despite the impression that the entire banking industry is in turmoil, community banks are growing, making money and expanding markets.

“We’re actually growing our market share during this downturn,” said Michael Perry, chief executive at San Diego Trust Bank. “We have the liquidity and the capital, and we’re not besieged by problem loans.”

Perry cited the opening of a branch office in Encinitas in October. In less than six months, the office has attracted $25 million in deposits and picked up numerous business loan customers, well above an average for a new office, he said.

“As the big banks scale back and eliminate or show no desire to stay in certain types of lending, we’re benefiting from that,” Perry said.

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Larry Hartwig, chief executive at Escondido-based California Community Bank, said because most local banks don’t make residential loans, they avoided problems associated with the subprime lending crisis.

Those loans were made to borrowers without down payments and at low interest rates. The rates have adjusted upwards as the original “teaser” rates expire.

The big banks have been forced to write down billions of dollars in the value of these loans, and as a result, they suffered heavy losses starting last year.

Meanwhile, California Community’s new branch office in Escondido brings the total to three. The bank also hired three experienced loan officers last year, as he saw an opportunity to build the bank’s market, Hartwig said.

The bank is opening a fourth branch in Encinitas in June.

For the quarter ended March 31, California Community Bank had $121.6 million in its loan portfolio, an increase of 27 percent from the prior year’s first quarter.

Opportunity

“Turmoil in a market always is an opportunity,” said Paul Rodeno, chief executive at Security Business Bank of San Diego. The six-year-old bank grew its loan portfolio 24 percent during the year to $160 million. Practically all of those loans were made to small and midsized businesses.

However, Security Business Bank doesn’t make residential or construction loans; its core areas of business are lines of credit and loans to purchase owner-

occupied property, Rodeno said.

Like his competitors, Rodeno said the bulk of his new borrowers come from regional or national banks, which cut staffing in response to shrinking profits or losses.

Housing Bubble Burst

Thanks to the housing bubble that burst last year, more banks are dealing with huge numbers of problem loans, including those borrowers that pay late or not at all. However, many community banks are reporting few or zero problems on their balance sheets.

“We had one loan that was 30 days delinquent, but other than that, we have no problem loans,” Perry said.

Vince Siciliano, chief executive at 1st Pacific Bank of California in San Diego, said the bank is growing its portfolio of commercial loans while reducing its exposure to riskier construction and land development loans.

As of the end of March, the bank had $342 million in its loan portfolio, or 22 percent above what it held in the first quarter of 2007 when it had $280 million in loans.

Last year, 1st Pacific Bank expanded its market with the acquisition of Landmark National Bank in La Jolla, and opened a new branch in downtown, bringing its total branches in the county to eight.

Siciliano said that while residential borrowers are seeing tougher scrutiny, there’s plenty of money available to creditworthy customers and for feasible projects.

“Speculative lending is gone, and lending to weak borrowers, that is those with problem credit histories or insufficient assets, is gone,” he said.

Higher Loan Volume

Yet not every local community bank showed higher loan volumes.

Discovery Bank in San Marcos reported net loans of $160 million at the end of March, down from $170 million for the like period in 2007.

Frank Mercardante, Discovery’s chief executive officer, said the bank was being far more cautious in light of the devaluations affecting the local real estate market.

“Like everyone else, we’ve tightened our credit standards,” he said.

On the positive side, Celtic Capital Corp., an asset-based lender that is a subsidiary of Discovery Bank’s parent company, was on track to have a record year both for its outstanding loans and earnings, he said.

Celtic Capital, based in Santa Monica, lends money to higher-risk businesses that don’t qualify for a commercial bank loan. The loans generally charge higher interest rates and require more oversight, with some businesses requiring daily monitoring of operations, Mercardante said.

The tighter lending environment has caused some community banks to insist that new borrowers transfer all of their banking business, including all of their deposits, to the new lender.

“We will not bank companies without taking all their deposits as well,” said Rodeno of Security Business Bank.

The arrangement generally leads to the borrowers using the new bank for other financial services, and paying the fees that accompany those services.

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