Numbers Appear Strong Through First Half of Year

Correction:

In the Aug. 8 Finance column in the

San Diego Business Journal,

an item on Temecula Valley Bank contained incorrect data.

Through the halfway point of 2005, profits at most local commercial banks are rising along with the size of their loan portfolios, but growth alone doesn’t always ensure expanding profits.

For savings banks that are mostly making home loans, the flattening of the yield curve on long-term interest rates has dampened spreads, or net interest margins. That has also cut these lenders’ profits.

Pacific Trust Bank, a Chula Vista-based savings bank with nine offices in San Diego County, reported third-quarter profits of $1.1 million compared with $1.4 million in the same period of 2004. For the six months ended June 30, First Pacific Bank had net income of $2.2 million compared with $2.6 million in the prior year’s first half.

Chief Executive Officer Hans Ganz said because his bank’s business is mainly in fixed-rate, mortgage loans tied to the benchmark 10-year Treasury bond interest rate, his profit margins have declined in recent months.

“The short-term rates are going up, and the long-term rates are actually going down,” Ganz said. “The margins on our products have shrunk due to the fact that the yield curve has been flattening.”

For the first half of 2005, Pacific Trust’s net interest margin, the difference between what it pays on deposits for its money and what it charges on its loans, was an average of 2.85 percent. For the same period of 2004, the average net interest margin was 3.26 percent.

Forty-one basis points may not sound like much, but when applied to a loan portfolio of more than $650 million, it is.

Unlike most commercial banks, which generally link their business loans to the prime interest rate (now at 6.25 percent), savings banks charge interest rates on mortgage loans based on the 10-year Treasury bond that has been recently trading at 4.2 percent. That’s down from late last year, when it was 4.3 percent.

Longer bond rates have been declining for most of the year, causing some heartburn for all bankers , not just those making home loans, said Gary Lewis Evans, the chief executive of the Bank of Internet USA, a savings bank based in Carmel Valley.

“I don’t know if I’ve ever seen the margins this tight,” Evans said. “It’s caused pressure on all banks.”

Although commercial banks are somewhat protected from the flatter yield curve on business loans, when it comes to investing funds, they are also dealing with decreased yields on shorter-term and intermediate-term bonds. And because of the reduced rates, many banks have backed away all together.

Paul Rodeno, the president of Security Business Bank of San Diego, said for the most part, his bank has stopped putting money into long-term bonds. The risk of losing money on longer-term bond investments isn’t worth the minimal gains on rates, Rodeno said.

Instead, Security Business is investing almost exclusively in Federal Reserve overnight funds that yield just 3.25 percent, the benchmark Fed funds rate.

For the second quarter, Security Business Bank, which opened in September 2002, reported net income of $1.2 million compared with a net loss of $56,000 in last year’s second quarter. For the six months, the bank’s net income was $1.4 million, compared with a net loss of $199,000.

Helping boost the bank’s earnings was a tax credit of $901,000 it took for previous losses. As of June 30, total assets at the bank were $105.7 million, compared with $72 million in the like period of 2004. Total loans were $81 million, up from $46 million, and total deposits were $83 million, up from $56 million.

Rodeno said the bank’s Carmel Valley office generated some $15 million in loans and an equal amount in deposits since opening in October and achieved profitability six months ahead of schedule. The bank plans to open a third office in Carlsbad by year-end, he said.

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Baranowski Joins Southwest Bank:

Fred Baranowski, who left the banking industry to head up the Downtown San Diego Partnership, a neighborhood advocacy group, and later, United Way of San Diego County, has come full circle, taking a job at Southwest Community Bank.

Baranowski was named executive vice president and regional manager for the Encinitas-based bank, which has eight full-service offices and about $600 million in assets.

Before being named president of the Downtown San Diego Partnership in 2000, Baranowski spent 26 years as a banker, mostly with Bank of America in San Diego.

In 2002, he was named president and chief executive for the local United Way chapter, taking over the job vacated by Jerry Sanders, now one of two candidates for San Diego mayor.

During his time with BofA, Baranowski also served as a member of one of two citizens task forces to study a new baseball park in Downtown. He also held board positions with the San Diego Symphony, the San Diego Rotary Club, the San Diego Convention & Visitors Bureau, the San Diego Regional Economic Development Corp., and Non-Profit Management Solutions.

In its second quarter, Southwest Community reported net income of $3.6 million, compared with $1.3 million for the same period of 2004. For the six months, net income was $5.1 million, compared with $2.4 million in the like period of 2004.

Total loans grew 42 percent to $301 million from the prior year’s halfway point, while total deposits were $551 million, up 44 percent.

The bank said its sale of its subsidiary data processing unit garnered a net profit of $1.55 million, down from an originally reported $1.8 million gain due to various accounting issues. The bank sold the unit to Open Solutions Inc. for $9 million in a deal arranged in June.

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Accredited Profits Up 15 Percent:

Accredited Home Lenders Holding Co., a San Diego-based company specializing in sub-prime home loans, reported net income of $39.6 million for the second quarter, up 15 percent from the comparable period of 2004.

The company said it generated record loan originations during the quarter of $4.1 billion, up 23 percent from the second quarter of 2004. As of June 30, it held $8.2 billion in mortgages, up 54 percent from a year earlier.

For the six months, Accredited reported net income of $70.8 million, up 24.8 percent from the prior year’s first half.

The company forecasted net profits on a per-share basis of $1.85 for its third quarter that ends Sept. 30, and increased guidance for the entire year to a range on a per-share basis between $6.90 and $7.05.

All this good news boosted shares of Accredited, traded on Nasdaq under the ticker LEND, by 59 cents on Aug. 2 to $48.10. The stock fell $1.32 the following day.

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Regents Profits And Assets Rise:

La Jolla-based Regents Bank reported net income for the six months of $630,000, up 24.5 percent from the first half of 2004. As of June 30, total assets were $180 million, up 22 percent from the like period of last year, while total loans grew 11 percent to $124 million.

Founded in 2001, the single-office Regents said operating profits for the first six months exceeded $1 million, a fourfold increase from the same period of 2004.

The bank said it has no past due loans or loan losses.

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Profits Up In Temecula:

Temecula Valley Bancorp reported net income of $3.9 million for its second quarter, up 49 percent from the like period of 2004.

For the six months, net income was $6.9 million, up 33 percent from the like period of 2004.

Chief Executive Steve Wacknitz said he was pleased with the results, especially since the bank had to increase its provision for loan loss allowance to $1.6 million, compared with $750,000 at the end of June 2004.

The reserves were raised in sync with the loan portfolio, growing by 40 percent to $628.2 million, but also because of an expansion of problem loans.

Temecula Valley’s nonperforming assets as of June 30 were $9.7 million, including real estate owned of $1.4 million, compared with June 30, 2004, when it listed $7.7 million in total nonperforming assets.

The ratio of nonperformers to total gross assets was 1.35 percent. Not counting government guarantees with Small Business Administration loans, the ratio was only 0.45 percent.

Temecula Valley’s total assets increased 37 percent over the year to $724.2 million, while total deposits grew 42 percent to $643.7 million.

Shareholder equity grew to $50.4 million as of June 30, up from $36.9 million a year earlier. That capital provided a tier one ratio of 9.54 percent, down from 9.78 percent last year, but still well above the 6 percent minimum for a well-capitalized bank.

In late July, Temecula Valley’s stock began trading on the Nasdaq exchange under the ticker TMCV. Having a presence on Nasdaq will give the company better access to capital markets, the visibility to attract more investors and increase liquidity for current shareholders, Wacknitz said.

Temecula Valley operates nine full-service offices in the region and has loan production offices in eight states besides California.

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Small Change:

Trust Administration Services, a Carlsbad investment consulting firm, said it has helped 60 startup community banks in San Diego and Southern California raise necessary capital. Community Bancorp said it joined the new Russell Microcap Index. Mission Oaks National Bank was ranked the second-most profitable bank in California among the 48 banks that opened their doors since 2000, by the Findley Reports, an Anaheim-based banking consulting firm.

Send any local finance news to Mike Allen at mallen@sdbj.com. He can be reached at (858) 277-6359.