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Tuesday, Jun 25, 2024

Wave of Small Bank Sales Creates Expectations

Speculation was rife last week about another local bank being sold when shares of San Diego-based Security Business Bancorp jumped from $8.40 to $11 in a day, propelled by a much higher volume.

The sudden rise in the lightly traded micro cap stock, traded under SBBC on the OTC Bulletin Board, prompted several bankers to say Security was being purchased, likely by one of several larger, out-of-town banks or private equity groups that have been scouring the area’s smaller banks in recent years.

“I have no knowledge about this, but it wouldn’t surprise me to find that at the end of the day there is a transaction,” said Rick Levenson, president of Western Financial Corp., a San Diego-based investment firm specializing in community banks including SBB.

Yet the fact is Security isn’t talking to buyers and there are no plans to do so, said Chief Executive Officer Paul Rodeno, who organized the bank and helped open its doors in 2002.

“Don’t believe the rumors. The bank is not for sale,” Rodeno said.

He said he had no idea of why the bank’s stock shot up due to nine trades, but is glad it did. “We hope it goes higher,” he said.


Though the speculation wasn’t true, the sale wouldn’t surprise several other bankers who have recently struck deals to sell their banks to much larger and better capitalized entities.

Larry Hartwig, chief executive at California Community Bank in Escondido, said smaller community banks such as his ($240 million in assets) are having a much tougher time making profits in a squeezed interest rate environment, coupled with a tepid demand for business loans.

“We have less leverage, and our margins are less, and now we have Dodd-Frank coming at us with higher compliance costs,” Hartwig said, referring to the federal banking reform law passed in 2010 that affects all banks.

California Community is in the process of being acquired by a subsidiary of Grandpoint Capital, a Los Angeles-based bank holding company. The subsidiary is Regents Bank, which completed its sale to Grandpoint Capital last month, and announced at the same time it would begin buying Cal Community.

Dan Yates, chief executive at Regents Bank, said the main drivers for selling his bank are the same shared by many smaller lenders, namely much tighter interest rate margins; a much tougher time finding good loan customers; and increased regulatory oversight.

“It’s like a perfect storm that’s hit us,” Yates said.

Most San Diego and Southern California banks are limited by bank regulations in the amount of commercial real estate loans they can hold, he said. As a result, they are trying to make other types of loans, namely to small businesses and consumers.

Yet, the bigger banks can undercut the pricing on consumer loans such as those for cars or credit cards, and small businesses generally have all the credit they need, and aren’t borrowing much, Yates said.

He also said added regulatory scrutiny and complying with new rules will increase costs for all banks. The result is dimmer prospects for growing to a size where a bank can expect to generate regular profits, Yates and other bankers said.

Generally banks need to grow to at least $500 million in assets before the economies of scale kick in and it can generate consistent profits, many bankers say.

In tandem with smaller banks dealing with higher costs and compressed profit margins is the rise of regional banking groups that are looking to buy banks, either those that are troubled or those looking for an exit.

Among the more active are AmericanWest Bancorp, based in Spokane, Wash., which acquired San Diego-based Sunrise Bank in 2010; Opus Bank, based in Irvine, which has been buying banks in California and Washington state; First PacTrust Bancorp, formerly based in Chula Vista but relocating to Irvine after it completes the purchase of two Los Angeles area banks; and the aforementioned Grandpoint Capital that purchased banks in California and Arizona.

“There are a lot of guys out there with a lot of capital,” Rodeno said.

For the moment, Security is not in play but that doesn’t mean it will never be, he said.

If an offer to buy the bank is sufficiently strong and seems to make sense, Rodeno said he has a fiduciary responsibility to carefully review it, and take it to his shareholders.


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