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Local Bankers And Shareholders Prosper in 2004

Considering the strong financial performance for most San Diego community banks last year, it’s a wonder not more of them were launched in recent years.

Undeterred by a spike in interest rates, most local banks saw loan portfolios and net profits climb by double-digit margins in 2004.

While such rapid growth for a new bank isn’t unusual, even some established local lenders reported record profits and growth results.

“It’s definitely a reflection of the economy. The economy is very good in the area where we’re operating,” said Mike Perdue, the chief executive officer at Community National Bank in Escondido. “New people are moving into San Diego all the time, and interest rates are still low.”

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For 2004, Community National reported net income rose 42 percent to $8.3 million; loans jumped 35 percent to $540 million; and total assets rose 35 percent to $641 million, all records for the 20-year-old bank.

Community National’s growth was helped by the acquisition of Santee-based Cuyamaca Bank, with $115 million in assets.

But the largest driver was a hefty jump in new loans, about $100 million more than it did in 2003. For the year, the bank added $420.6 million in new loans.

A big portion of the new loans to businesses to either purchase or expand existing facilities made for five- to 10-year terms, called “mini-perms,” Perdue said.

The bulk of Community National’s business borrowers generate revenues between $5 million and $50 million annually. “With our $10 million lending limit, we can compete with the bigger banks, and give customers the kind of service they come to expect from community banks.”

Community National’s profits drove the bank’s return on average equity, or ROE, to 18.84 percent. ROE, a key performance benchmark for banks, is the ratio of net profits divided by shareholders equity. An ROE above 10 percent is considered good, and 15 percent is exceptional.

Topping off its nice returns, the bank’s board doubled its cash dividend from 5 cents to 10 cents per share for the first quarter. Traded on the Nasdaq as CMBC, Community National shares rose 53 percent last year, and closed Feb. 2 at $30.75.

Though the bank reported $4 million in nonperforming loans, up from $961,000 at the end of 2003, that amount was but 0.74 percent of its gross loans.


Strong Returns

Returns were also positive for a number of recently opened banks. Security Business Bank of San Diego, which opened in late 2002, was basking in the glow of its first year of profitability, showing net income for 2004 of $41,000 compared with a net loss of $1.6 million in 2003. For the fourth quarter, net earnings were $193,000, compared with a net loss of $410,000 in the previous year’s fourth quarter.

Total assets rose 77 percent to $92 million, while loans rose 93 percent to $65.3 million. The bank also completed a capital raising of $8.9 million to aid its growth spurt and opened its first branch last year in Carmel Valley.

Chief Executive Officer Paul Rodeno said the bank anticipates expanding again this year into East County or North County.

California Community Bank, which is based in Escondido and has an office in Vista, has been growing at a nice clip since opening in August 2003. It reported total assets of $52.3 million as the end of 2004, up 137 percent from the prior year.

Loans and deposits both grew by 262 percent to $37 million and $43 million, respectively.

Chief Executive Officer Larry Hartwig said the net loss for all of 2004 was $1.5 million, about what he expected, and profitability isn’t that far off.

San Diego Trust Bank, another fairly new bank that opened in Bankers Hill in October 2003, said it might have broken some record , although that sort of thing might be difficult to verify , in reaching profitability within its first year. It reported net income of $23,000 for the fourth quarter.

For the full year, the bank reported a net loss of $921,000, partially caused by setting aside $393,000 for reserves, despite the fact that it did not report any delinquencies or nonperforming loans.

Total assets at San Diego Trust more than doubled to $53 million, while loans grew tenfold to $34.3 million.

CEO Mike Perry said the bank’s growth and performance are following a well-defined game plan. Results haven’t been missed by investors who drove up the stock price from its initial $10 to $27.50 as of Jan. 28.

Southwest Community Bancorp in Encinitas reported a second straight year when net profits exceeded 60 percent. For 2004, it had net income of $4.74 million, 62 percent better than it made in the prior year.

Southwest broke through the $500 million barrier in assets, finishing the year with $533 million, up 57 percent from 2003, while total loans jumped 50 percent to $284 million.


Serving Small Business

Chief executive Frank Mercardante said the bank wasn’t doing anything much different than it had in previous years, and has adhered to its strategy of serving small-business customers.

“Small businesses as a whole are doing quite well in Southern California and we’re just trying to respond to those opportunities,” he said.

The bank added about $310 million in new loans last year, including some $60 million in new construction loans, $53 million in commercial real estate loans, and more than $42 million in Small Business Administration loans, Mercardante said.

Profits at Southwest propelled its ROE for the year to 17.6 percent, up from 16.9 percent in 2003.

Nonperforming assets also grew to $1.8 million, but that was only 0.62 percent of the total loan portfolio, compared with the end of 2003, when problem assets made up 0.58 percent of total loans. Extracting the government-guaranteed portion in SBA-backed loans, Southwest’s problem assets totaled $666,000 or 0.23 percent of total loans.

Temecula Valley Bank saw its net profits soar for 2004 by 35 percent to $10.6 million, but it had to set aside more than $1 million for loan loss reserves because of a big spike in problem loans.

For the full year, loans past due more than 90 days rose from $7.2 million to $12.1 million, which increased its problem loans ratio to the total loans to 2.28 percent, from 1.99 percent at the end of 2003.

Fortunately for Temecula Valley, the bulk of its bad loans are nearly all government guaranteed by the federal Small Business Administration. When the guaranteed portion is factored in, problem loans total $3.7 million, or 0.69 percent of total loans.

The bank also charged off $1,066,600 in bad loans, up from $431,562 in charged-off credits at the end of 2003.

Temecula Valley is one of the largest SBA lenders in the nation with 12 loan production offices. Mercardante said, considering the volume Temecula Valley was doing, the number of bad loans isn’t surprising.

“You’re bound to have more problem loans the more you fund, but on a ratio basis, they’re not out of line.”

Yet another local banker, when told of the size of the nonperforming portfolio, said, “If that happened to us, I’d have the chief credit officer hanging by his short hairs.”

Temecula Valley grew its loan portfolio by 47 percent to $530 million, while total assets jumped 41 percent to $606.8 million.

Thanks to its net profits and exercising of stock options, shareholders’ equity rose to $42.9 million, up from $29.7 million in the prior year. Traded on the over-the-counter bulletin board under the symbol TMCV, it appreciated 31.5 percent over the year to $17.75. It traded Feb. 2 at $17.95.

First Pacific Bank of California, which opened in late 2000, reported net income for 2004 of $1.2 million, compared with net income of $1.7 million for the prior year, when the bank was taking tax benefits from past losses.

Based in La Jolla, the bank saw assets grow to $210 million, up 45 percent from 2003, and loans grow 56 percent to $189 million.

Chief Executive Officer Vince Siciliano said the bank picked up more than 200 new business customers last year as it pursued the same strategy since it opened.

“Our growth proves that our promise, to build long-term relationships that create significant results for our clients, is working,” he said.

The growth trend of regional banks was even evident at one institution that had been mired in legal and regulatory problems.

San Diego Community Bank, formerly called First International Bank and based in Chula Vista, racked up a 140 percent increase in net income for 2004, nearly doubled its total loans to $58.1 million and boosted its shareholders’ equity by more than $7 million to $11.2 million.

The latter action, done through a private stock offering last year, diluted the bank’s ownership of its controversial former director and local developer, Roque De La Fuente, who had resisted earlier efforts to sell a majority stake in the bank and bring in outside investors.

For all of 2004, the bank added $54.6 million in new loans, more than double the $24.5 million in loans added in 2003.

“This has probably been, considering everything that’s happened, the best year in the bank’s 24-year history,” said Chief Executive Officer Tom King, who joined the bank in 2001.

King said his bank didn’t see any slowdown in business from a rise in short-term interest rates by the Federal Reserve Bank.

“If anything, that helped our earnings because the spread got higher,” said King, referring to the difference between what a bank charges its borrowers and what it pays in deposits.

King doesn’t anticipate the same kind of growth this year.

“We started so low and that’s why the rate of growth was high,” he said.

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