Bob Borgman, president of First National Bank, believes there’s market enough for 27 commercial banks here, but ‘if there’s a bank for sale we’re always interested in talking to them.’ (photo/lambertphoto.com)

Like a typical San Diego weather report, 2005 was generally balmy and mild for local community banks. The wave of de novo entries has subsided, with only one newcomer, Coronado First Bank, which opened in October.

On the M&A front, Legacy Bank merged with Landmark National Bank; Rancho Bernardo Community Bank was acquired by Escondido’s Community National Bank.

Of the 32 FDIC-insured, community-based banks in San Diego, almost a dozen posted a Return on Assets (ROA) better than 1.0 percent as of Dec. 31, 2005. First Pacific Bank of California was close at 0.98 percent, and extra credit should be awarded to San Diego Trust Bank for scoring a 0.93 percent ROA while still a de novo.

The highest ROA belonged to tiny Armed Forces Bank of California with a 2.24, and finishing a strong second was First National Bank of North County with a 2.15. Both posted healthy increases over their 2004 results.

First National Bank, the bigger one, was a close third with a 2.14 ROA, improving from 1.85 last year. Rounding out the top five were Downtown’s Security Business Bank with a 1.91 ROA in its first appearance among the established banks since moving off the de novo list; and Escondido’s Community National Bank at 1.77.

Last year’s ROA champ, San Diego National Bank, retreated a bit from a 1.88 rating to a still stellar 1.50 and number eight on the chart. Last year’s show horse, Imperial Capital Bank, slid from a 1.78 to 1.03 and into 11th place. Carlsbad’s Southwest Community Bank, approaching $1 billion in assets, repeated its usual Top Ten performance, but bumped its ROA to 1.47 from 1.22 a year earlier.

Looking beyond 2005’s sunny statistics, however, bankers say there are ominous clouds on the horizon. Competition is driving a price war for deals and may be causing some corner cutting on underwriting criteria. Rising interest rates are squeezing margins. Throw in the inevitable real estate correction and pass the antacids.

"There’s an awful lot of money chasing not so many deals, so it’s really tough," says Robert Hahn, president of the First National Bank of North County. "A year ago there were three banks or credit unions chasing a given loan — now there are seven or eight. There’s a price war going on and there are some underwriting issues going on as well. A year from now, if interest rates keep going up, I think you’re going to see some portfolios under stress."

(Hahn attributed a hefty rise in his bank’s return on equity (ROE) 28 percent as follows: “Our holding company took a $1.7 million dividend out; basically the dividend goes to our holding company and comes out of our capital base so the capital base is smaller, and the return on equity percentage is larger.”)

Hahn isn’t just crying wolf.

“Absolutely, some folks are getting very aggressive on underwriting,” says Mike Perry, president of San Diego Trust Bank. “If (a loan) should be secured, they’re doing it unsecured. Some people are trying to make it on volume, and that can be tricky.”

Perry says local banks are looking at a new landscape. “It’s a different marketplace than it was a couple of years ago,” he says. “Interest rates have risen 16 times in the last two years, the cost of funds is increasing, the number of quality lenders continues to shrink, and the rock ‘n’ roll days of 20 percent appreciation on real estate are behind us.”

The condo boom, Perry says, brought speculators into the market with predictable consequences. “People were buying two or three to flip them and make a quick buck,” he explains. “Anytime it’s too easy to make money there’s a reason, and the reason is coming full circle now. We couldn’t keep going at the breakneck pace we were and not expect the market to calm down a little bit.”

Lenders are, however, finding creative ways to deal with the interest squeeze. Bruce Ives, president of de novo Coronado First Bank, says he’d rather put liquidity in rising Fed funds than questionable loans. Ives says competition is tough, but he’s banking on loyalty from well-heeled Coronado residents to take the edge off. “There are no other community banks on the island and Coronado tends to support their hometown anything,” he says.

Having zoomed to north of $400 million in assets in two and a half years, Gary Cady, president of Torrey Pines Bank, says he’s ready for a breather in the real estate sector. “We have tightened our underwriting requirements and our (underwriting) standards are slightly more conservative than they were a year ago,” Cady observes. “It’s more of a market anticipation, making sure we’re prepared for adjustments in real estate values.”

Torrey Pines is part of Robert Sarver’s Western Alliance Bancorporation. The Las Vegas-headquartered holding company will be in good shape if there’s M&A action in the West, having raised $85 million in its June 2005 IPO.

‘I think we’re over-banked,’ says Robert Horsman, president of San Diego National Bank. ‘As the economy tightens and rates go up you’re going to see banks with stress in their (loan) portfolios.’ (photo/lambertphoto.com)

Which leads to the annual speculation about whether San Diego can support north of 30 locally operated banks.

“Most banks are doing pretty well,” Cady says. “There’s a $35 billion marketplace in San Diego for deposits, so there’s lots of room. If a bank has a niche they can serve well, there’s plenty of opportunity.”

Opportunity also might come via acquisition. For example, Bob Borgman, president of First National Bank, believes there’s market enough for 27 commercial banks here, but “if there’s a bank for sale we’re always interested in talking to them.”

“I think we’re over-banked,” says Robert Horsman, president of San Diego National Bank. “As the economy tightens and rates go up you’re going to see banks with stress in their (loan) portfolios. I recall the ’80s and there was a reckoning that took place in portfolios.”

But any reckoning is likely a while away. Reminded of the adage about not being late until you actually arrive, Horsman chuckles. “There will be some arriving, maybe in ’07.”