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Discovery Bancorp Shedding Pieces to Bump Capital Reserves

Saddled with an increasing number of problem loans and losing money, San Marcos-based Discovery Bancorp is selling off parts of the business to boost capital reserves.

On Nov. 26, the company said it arranged the sale of Celtic Capital, its Santa Monica commercial finance unit, for an undisclosed price to an undisclosed buyer. It’s also closing a Los Angeles office.

In July, Discovery sold the building it occupies for a pretax gain of $2 million.

Those moves, along with selling more loans, should improve its already robust tier one core capital ratio, which stood at 9.44 percent as of Sept. 30. This is better than the 9.27 percent for the same quarter of 2007.

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To be considered well capitalized, a bank must have at least 5 percent in core capital.

Escalating losses from problem loans are forcing the boost in reserves.

As of Sept. 30, nonperforming assets were $11.6 million, or 8.39 percent of assets. That compared with 1.71 percent in problem loans for the third quarter of 2007.

“I won’t minimize the (problem asset) ratio. It’s high,” said CEO Frank Mercardante. “But we’re also shrinking our assets and strengthening our capital.”

A former bank regulator, Mercardante is keenly aware of the importance of having a strong capital base, and he says he is doing whatever it takes to boost his capital.

Meanwhile, Discovery continues to lose money. For the third quarter, the net loss was $685,000, and for the nine months, it lost $1.8 million.

Mercardante says details of Celtic Capital sales would be revealed in the fourth quarter; the buyer is an East Coast private equity group.

Purchased in 2005, Celtic makes loans to borrowers unable to qualify under more stringent underwriting requirements. The lender also charged higher interest, which should have increased margins.

Mercardante says Celtic was profitable, but not as much as he expected.

Discovery continues to shrink. As of Sept. 30, it held $182 million in assets, compared with $194 million at the end of the second quarter, and $206 million in September 2007. Once the Celtic deal closes, it will drop an additional $25 million.


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Cal Bank & Trust Still Makes Profit:
Despite a tripling of problem assets, the region’s largest local lender, California Bank & Trust, with $10.5 billion in assets, continues to be profitable, achieving 1 percent return on assets through the third quarter.

For the nine months, CB & T; had net income of $73.7 million, down about 39 percent from the first three quarters of 2007, according to its latest call report filed with the Federal Deposit Insurance Corp.

Assets past due 90 days and foreclosed real estate at Sept. 30 stood at $10.9 million, up from $3.8 million in the like period of last year.

The problem assets were higher than last year’s third quarter, when these made up only 0.63 percent of total assets, but at 1.35 percent, a level deemed acceptable by local Division President Tory Nixon.

Unlike some competitors, CB & T; continues to grow, particularly in San Diego, where it made 233 new loans for $56 million in the third quarter, Nixon says.

“It’s spread out all over from owner/user real estate, and term financing for a variety of industries,” he said.

For the nine months, CB & T; increased its San Diego loan portfolio by $90 million, Nixon says.

On a total bank level, loans stood at $7.8 billion at the end of the third quarter compared with $7.7 billion in the prior year. Total deposits were $8.3 billion, up from $8 billion.

In San Diego, total deposits increased by $100 million, thanks to a marketing campaign and a flight to quality by customers of other distressed banks, Nixon says.

CB & T;’s core capital remained above the well capitalized threshold, at 7.37 percent, and better than the prior year’s third-quarter ratio of 7.13 percent.

CB & T; is a subsidiary of Zions Bancorporation, which is based in Salt Lake City and has $54 billion in assets.

In another sign business is sailing smoothly at CB & T;, Nixon says he’s expanded his local staff by 20 hires, bringing the total to 372. “We’re always looking to add solid commercial bankers to bring new relationships to the bank,” he said.

In other news, CB & T; received an outstanding rating for its community reinvestment activities following a recently completed examination by the FDIC.


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Small Change:
Security Business Bank of San Diego relocated its Carlsbad office to a larger facility at 5901 Priestly Drive California Bank & Trust is moving its Rancho Bernardo office this week to 16796 Bernardo Center Drive from 11717 Bernardo Plaza Court. The branch is managed by Neil Fritts Coronado First Bank named L. William Huck, managing director of Stone & Youngberg, its new chairman, replacing Thomas C. Stickel, the bank’s founder, who remains on the board.


Send any news of 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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