In an announcement more eagerly anticipated — in some corner offices — than the Oscars themselves, San Diego Metropolitan proudly presents its annual Ranking Banking 2003, the RBs, formerly known as the Best & Worst Banks because the B&Ws sounded too black and white.

And there’s nothing black and white about ranking banking, despite the fine tabulations of our very own PriceWaterhouseCoopers, the respected Sheshunoff Information Services of Dallas.

Any award ceremony worth its envelopes has a controversy, and we’re not going to make your eyes glaze over by wondering whether or not our nominees should parade down a red carpet during military action.

No, this is a real controversy that calls into question the very foundation of the RBs — the numbers — specifically, the return on assets, a durable measure of bank profitability. Back in its day, tabulating the B&Ws was a relatively simple inquiry requiring one to run a finger down a column of ROAs, rank ’em and take that to the bank.

And this process is still good for mature banks. For the record, the leading San Diego bank for the year ended Dec. 31, 2002, winner of the Golden RB 2003 Award — envelope, please — is San Diego National Bank with the healthiest return on assets of 2.02 percent, the only bank to surpass 2 percent. Let’s see, do the math: 2.02 percent of $1,823,876,000 comes to more than $35.2 million in profit.

Honorable mentions are awarded to National City-based Neighborhood National Bank with an impressive 1.53 ROA, La Jolla-based Imperial Capital Bank with 1.42 and a brand-new commercial bank charter, and Carmel Valley-based California Bank & Trust with 1.40. CB&T again takes the Big RB Award for molding the remains of Grossmont, Sumitomo and Robert Sarver into San Diego’s largest locally based bank.

For the complete rundown, see the accompanying chart.

Meanwhile, back to the controversy, which resulted from last year’s inclusion of money-losing de novos in the same list with established banks’ real ROA. With roughly a dozen new banks springing up in San Diego County over the last two years or about to open, the executives of these de novos (banks 3 years old and younger) wince at seeing their babies listed in the perennial second tier of franchises, like the Padres. The problem for de novos is, no matter how pedigreed and seasoned their executive leadership, they’re pretty much bound to lose money in the first three years, or until they reach what some observers call the “magic number” of $100 million in assets.

That’s because their overhead — real estate, salaries, marketing, cost of funds — is relatively fixed and can be higher than an older banks’ overhead. The older bank has income from the interest on a more seasoned loan portfolio.

Banks sing sweetly to prospective borrowers about the “lowest interest rates in a generation,” but they swallow hard when they see how those skinny rates pinch their bottom lines. Older banks have the advantage with loans on the books that were made when rates were higher; de novos are under pressure to build assets in a hurry in a less “interest-ing” environment.

“The standard for success is 1 to 1.15 ROA, but banks with less than $100 million in assets find it very difficult to get there because there’s a certain amount of overhead that’s required to carry the back office,” says Cuyamaca Bank CEO Bruce Ives. “You have to generate sufficient scale to offset that overhead.

“De novo banks are pushing as hard as they can to grow as fast as they can to get to that $100 million,” Ives says. “The difficulty is they’re leveraging themselves in an extremely … challenging rate environment with prime rate at 4.25 percent. Their primary revenue generator is the net interest margin. To generate a net interest margin above 5 percent is very difficult when you’re starting with a prime rate of 4.25 percent. The reason we’ve been able to maintain 5.25 percent to 5.5 percent is that we have a loan base that was established back in a higher rate environment years ago.”

And this pushing and racing increases the chance that asset quality will slip?

“Absolutely right,” Ives says.

So ranking established banks by ROA on the same list with new banks, which almost by definition can have no positive ROA, is simply unfair and is now banned in San Diego. The new lists separate them. Established banks are ranked by ROA. De novos are simply listed by age.

How To Rank A New Bank

It’s difficult to come up with measurements that would reward de novo banks early on because they’re just revving their engines, although Regents Bank CEO Dan Yates says there are indicators. The problem is every time one of these indicators is held up to examination, it wilts.

Take asset growth. Banks coming out of the gate should have an idea who their initial customers might be and those posting 50 to 100 percent asset growth have called on established connections. “But the list (of new customers from old connections) gets smaller and smaller,” Yates says. “After you’ve been through your low hanging fruit, then you’re back to ‘blocking and tackling’… cold calling, referrals and advertising.”

Or … “Take the bank that starts in January vs. one that starts in late December,” he says. “The one that starts in January is going to have a larger loss. You would need to extrapolate what (the one that opened in December) looks like for a whole year, the (estimated) losses after three, six, nine months” in order to compare it more fairly with the older new bank.

Gaining deposits is a positive, except “about half of those clients will never borrow money,” Yates says. So deposits aren’t much more than a liability until the de novo bank can turn them into loans, which are assets to the bank.

De novos have one advantage over established banks, at least theoretically: no bad loans. And because they need to guard the initial stake of their startup investors (just in case bad realities get in the way of good theory), de novos will maintain higher capital ratios than established banks and will set aside 1.25 to 1.4 percent of their total loan portfolios as loan-loss reserves, even though no bad loans are expected. “Most banks will be conservative in the early years,” Yates says.

It is almost as if the de novo bank can’t be understood by resorting only to numbers, although this is true of all banks. Each is a story. For example, Regents opened two days after Sept. 11, 2001. That was bad enough, but “we did not anticipate the series of rate cuts before and after we opened the bank,” Yates says. “That puts a burden on the bank to overcome those very thin margins.”

With rates at a 40-year low, even the most experienced lenders would be green in such an environment. “Not many people opening banks have been in banking 40 years,” Yates says.

Another measure of a bank’s merit is the so-called CAMEL rating, generated by a bank’s regulatory body (Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, or state Department of Financial Institutions). The CAMEL rating is an acronym for capital adequacy, asset quality, management expertise, earnings and liquidity.

Directors and senior management are permitted to see their bank’s CAMEL rating, but are not supposed to disclose it to the public, or more to the point, investors.

Who’s Winning?

Which brings up one of the real points of rating banks: what’s the payoff for investors and when do they get it?

“It’s my partial view that investors read things like Sheshunoff ratings to find out who’s winning,” says Ed Carpenter, chief executive officer of the Irvine-based investment bank Carpenter & Co.

Banks in formation come to Carpenter & Co. to raise capital, get help with licensing, and if all goes well, find a buyer after an average 11 years in business with assets north of $200 million. It’s what Carpenter calls “cradle to grave service.”

It may be difficult to figure out which of the de novos is de loveliest, but it’s not too tough to figure out why banks are sprouting up like wildflowers after a wet winter in Borrego.

Carpenter says, there are fewer than two dozen locally owned and operated banks in San Diego County, even with the de novos. Over the last decade, bank deposits have increased 27 percent, the number of businesses is up 26 percent, employment is up 25 percent, and the number of banks is down 50 percent.

“San Diego had 40 banks in 1985,” Carpenter says. “There are (fewer) today, even though the population has doubled.”

So there’s room for more? Hey, if you’ve managed a bank before, can raise $10 million or so among your friends, can steer clear of regulatory issues, and add assets of $20 million or so annually for 10 years, you can have a $200 million bank and get in the running to be acquired.