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FDIC Sends Cease and Desist Order to Discovery Bank

San Marcos-based Discovery Bank held 10.6 percent of its assets in capital as of Dec. 31, meeting the 10 percent minimum to be called well-capitalized. But it still couldn’t avoid getting hit with a cease and desist order from the Federal Deposit Insurance Corp., which was announced Jan. 27.

CEO Frank Mercardante said despite steps he’s taken to correct problems, “They’re still penalizing us for past practices.”

Discovery has agreed to follow the cease and desist order, which calls for a number of corrective measures, including maintaining a minimum 10 percent of Tier 1 leverage capital for at least 12 months of profitability; maintaining adequate loan loss reserves; developing a detailed plan to reduce problem assets; and reducing real estate related loan concentrations.

Of prime concern is the bank’s $11.7 million portfolio of problem assets, including nearly $2 million in foreclosed real estate. It makes up 6.8 percent of total assets, one of the biggest problem loan ratios of any commercial lender in the county.

Discovery held $12.5 million in problem assets at the end of 2007, and $12.2 million at the end of September, so conditions appear to be improving.

The problem loans result from poor decisions made in 2006 and 2007 when the bank joined a syndication of loans with other lenders.

As of Dec. 31, $7 million of its bad loans were connected to the unnamed syn & #173;di & #173;cation outside the state, Mercardante says.

While not unusual for community banks to join forces to make larger loans, the bank would certainly want to look at this again, given the relatively small piece and lack of control, says Mercardante, who took over in January 2008.

Does this mean Discovery is on the FDIC’s “troubled bank” list?

Mercardante says he didn’t ask, but asserts that the bank is in no danger of failing.

Besides having more than adequate capital, it also has plenty of liquidity, he says.

Mercardante appears a good candidate to turn things around. A 42-year industry veteran, he’s been the chief executive at several banks, and did a stint in the late 1980s with Resolution Trust Corp., heading up a failed savings and loan after the federal government seized it.

“I’ve been through this soup before,” he said.

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Security Business Reports Loan Growth: Some banks may be hoarding cash, but not at Security Business Bancorp, where total loans were up 17.7 percent in 2008.

The downtown San Diego lender reported a net loss of $40,000 in the fourth quarter and $600,000 for 2008. The loss resulted from ill-timed investment in preferred stock of Fannie Mae, which the federal government seized in September.

Excluding that loss, the bank reported operating profits of $676,000 compared with a net profit of $1.6 million in 2007.

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Coronado First Grows: Three-year-old Coronado First Bank reported a net loss of $534,000 for 2008 compared with a net loss of $602,000 for 2007.

CEO Bruce Ives says the loss was a direct result of compressed net interest margins caused by the cut in interest rates. In turn, the bank made less on its loans. Had the net interest margin been above 5 percent as it was a year earlier, the bank would have been profitable, he says.

Total assets at the single-office bank grew to $72 million, up 23 percent, while total deposits were up to $58 million, also up 23 percent.

At the end of the year, core capital stood at $11 million, giving it a leverage ratio of 15.24 percent, well above the well-capitalized number. As for nonperforming assets, it was zero as of the end of 2008.

“We are growing in a prudent and consistent fashion with a continued emphasis on asset quality,” Ives said.

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PacWest Bancorp Takes Paper Loss: Because it wrote off the good will accumulated from acquisitions earlier this decade, PacWest Bancorp reported a net loss for 2008 of $728 million, compared with a net profit of $90.3 million in 2007. The $4.5 billion banking company wrote off $761.7 million in good will last year.

The net loss doesn’t affect PacWest’s capital or liquidity. Tier 1 leverage capital at Dec. 31 stood at 10.43 percent, giving the bank more than twice the amount needed to be considered well-capitalized.

Pacific Western Bank, the main subsidiary of PacWest, reported loan growth during the year of $28 million to $3.92 billion. Total deposits rose to $3.47 billion from $3.24 billion.

Problem assets grew to $104.8 million, including $41.3 million in real estate owned. That made up 2.6 percent of total loans, compared with December 2007, when the bank reported holding $25.2 million or 0.63 percent of total loans.

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Small Change: Seacoast Commerce Bank in Chula Vista reported a net loss for 2008 of $1.6 million, compared with a net loss of $3.6 million in 2007. Total assets increased 21 percent to $81 million, while loans grew 5 percent to $61 million. Problem assets declined 13 percent to $1.8 million. Seacoast boosted its capital levels through a $4 million private placement in October and $1.8 million from the U.S. Treasury’s asset relief program Following the closure of 1st Centennial Bank on Jan. 23, its office in Escondido is now in the hands of First California Bank, based in Westlake Village. The failed Redlands bank had about $800 million in assets The Federal Reserve Board named 10 new members to its Consumer Advisory Council last month, including San Diegan Jim Park, president of the Asian Real Estate Association of America California Coast Credit Union says that since it implemented an auto loan modification program, it’s helped 600 members. Most loan payments were reduced by $100 to half the current payment by extending the term of the loan.

Send news about local financial services companies to Mike Allen via e-mail at mallen@sdbj.com.

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