53.7 F
San Diego
Thursday, Mar 28, 2024
-Advertisement-

Banking Climate Change

More community banks were eliminated from the local and national banking landscape, driven by a sluggish economic recovery causing weak loan demand, and higher costs related to regulatory compliance.

The number of local banks in San Diego County declined to 13 as of August, down from 17 about a year ago. In mid-2007, just as the recession was taking hold, the region was home to about 30 banks; in 1985 there were 50 banks and savings and loans based here.

Since November 2012, there have been four bank sales and one merger in San Diego. Nearly all the sellers said the prospect of slow growth, reduced returns and higher regulatory expenses combined to push them toward selling.

Community banks, generally locally based lenders of less than $1 billion in assets, are finding it harder to compete with much larger national and regional banks because the community banks’ margin for making a profit is much smaller, community bankers said.

“Most community banks need at least a 4 percent net interest margin to provide sufficient returns to their shareholders,” said Rick Sanborn, chief executive of Seacoast Commerce Bank in Rancho Bernardo. “That means they can make a small business loan at 4.5 to 5 percent. … But what if a competitor like U.S. Bank is making that same loan at 3.75 percent? A borrower is going to come to us and tell us to match it, and that’s not possible.”

Smaller banks usually pride themselves by providing a higher degree of service to their customers, but in this still tepid recovery, many customers are far more focused on cutting their costs and getting the lowest possible rate, Sanborn said.

“It’s hard to compete with the big banks on basic bread-and-butter products,” he said.

The recent sales in San Diego reflect what’s occurring nationally as smaller banks with less than $300 million in assets were sold to banks with more than $2 billion in assets. Most of the deals involved buyers that obtained big infusions of private equity funding and were aggressively courting smaller banks to gain a stronger presence in a particular market.

For AmericanWest Bank, based in Spokane, Wash., buying Security Business Bank of San Diego made perfect sense. It acquired similar-sized Sunrise Bank in 2011 and was looking to add to its local footprint.

Another buyer expanding into San Diego, Grandpoint Capital of Los Angeles, liked what it saw in California Community Bank, based in Escondido. It had bought Regents Bank, based in La Jolla, in 2012, and eventually rolled CCB into Regents after it completed its purchase in November.

Each of the buyers at the time had more than $2 billion in assets and loads of capital reserves to make cash purchases.

Some Megabanks Take a Timeout

Notably absent from the acquirers in recent years were the nation’s megabanks such as JPMorgan Chase & Co. (NYSE: JMP), Wells Fargo & Co. (NYSE: WFC) and Bank of America Corp. (NYSE: BAC). All these entities were divesting themselves of branches and focused on getting their own houses in order, several bankers said.

“A lot of the big banks are still digesting what they acquired during the recession,” said Larry Hartwig, former CEO of California Community Bank.

A 30-year plus veteran banker, Hartwig said that as federal regulators began rolling out new rules mandated by the Bank Reform Act of 2010 — better known as Dodd-Frank for the two key Washington legislators involved in the law’s creation — it became clear that his bank’s profits would continue to shrink.

For example, the new law required all banks to implement an electronic reporting system on transactions greater than $10,000 as mandated by the federal Bank Secrecy Act. Complying with that requirement alone cost CCB about $70,000 in computer upgrades, Hartwig said.

Regulating Aggressively

The bank’s lawyer told Hartwig while 78 new rules have been rolled out, the lawyer estimated that number should double in the coming years.

Regulators are taking an aggressive approach implementing the new Dodd-Frank rules and using a “one-size-fits-all approach” that forces small banks to do the same things as the largest banks, Hartwig said.

He noted that even though higher capital standards have yet to take effect, regulators were pressuring all banks to keep higher reserves on their books. Because of the unwritten higher capital rules, banks were further restricted in how much they could lend, he said.

The solution for the smaller banks was to raise more capital, but given the regulatory constraints, that was much harder to do, especially given the far more lucrative investment opportunities available in other industries, Hartwig said.

Community Banks Will Evolve

While everyone interviewed for this article said the consolidation of the banking industry will continue, they also asserted that community banks weren’t about to vanish.

“There’s still some life left for community banks,” said David Ely, a finance professor at San Diego State University. “As long as they have loyal customer base, they can do quite well.”

Gary Evans, a former chief executive at four banks, said there are always customers who prefer doing business at institutions where they talk with their bankers face to face.

“In the long run, the community banks will evolve into two different models, one where they’ll have a particular niche or be a private bank, and another group of Internet banks that will provide services on a value and efficiency proposition,” Evans said.

As the universe of available banks contracts — most of the problem banks have already been eliminated — the prices community banks command will increase, bankers said.

“As the economy has stabilized, problem banks have stabilized as well, and [bank] boards are less willing to sell at substantial discounts,” Sanborn said.

Just about two years ago, acquirers were paying an average of book value or the tangible equity for a bank, but that’s improved to 1.3 to 1.7 times a bank’s tangible equity, Sanborn said.

Regarding Seacoast, Sanborn said the bank’s not for sale and hasn’t been approached by a possible buyer. But if a buyer should present a case to provide shareholders with a much higher return, that could trigger a deal, he said.

Economic conditions will play in major role in determining the number of future bank sales, but the number of community banks is certain to decrease, bankers said.

“The longer the economy drags along and loan demand continues to be soft, there’s going to be further consolidation,” said Rick Levenson, president of Western Financial Corp., a San Diego based investment bank specializing in community banks.

Hartwig said unless a bank has at least $600 million in assets, it’ll be difficult to survive.

“Over the next 24 months, the number [of community banks] will get less,” he said. “They just can’t handle the overhead.”

-Advertisement-

Featured Articles

-Advertisement-
-Advertisement-

Related Articles

-Advertisement-
-Advertisement-
-Advertisement-