Regents Bank CEO Dan Yates says most community banks have limited branch networks. (photo/alandeckerphoto.com)

Banks exist to make profitable loans, but deposits are the big pool of money from which loans can be made. With competition for deposits and loans at an all-time high, banks are increasingly competing for business by raising the interest paid on deposits, carefully resisting raising loan rates, improving service, employing savvy loan officers and advertising to reach their markets.

The Federal Deposit Insurance Corp. recently issued its ranking of 69 banks in San Diego County, up from 67 in 2005. Heard of the Fort Sill National Bank or the State Bank of India? They’re here, as are the biggest banks, of course, Bank of America, Wells Fargo, Washington Mutual and Union Bank among them. There are also about 30 locally headquartered banks, a dozen or so of which sprouted in the last seven years.

They are a testament to San Diego’s economic strength and desirability as a lending market. WaMu is offering free everything to customers in its expansion drive here, and North Carolina’s Wachovia Bank recently announced a number of branch closings back east so they can expand their presence in Southern California.

The sheer number of choices may be a challenge to lenders, but borrowers have rarely had it better. Depositors maintained about $47.26 billion of deposits in San Diego area banks’ 583 offices at June 30, a 1.5 percent increase over about $46.56 billion in 566 offices in 2005, a sign that the economy continues to expand, though modestly. Bank deposits increased 105 percent in the last decade from $23.05 billion in 1996.

The big banks continue to dominate the landscape, as market leader Bank of America manages about 17.02 percent of market share, Wells Fargo 16.06 percent, WaMu 15.3 percent and Union about 9.8 percent.

Most bankers follow the leader. It might not seem like much, but Bank of America has been in market-share decline for two years in San Diego. At June 30, 2004, BofA enjoyed 18.20 percent market share with $7.975 billion in San Diego deposits. Deposits grew to $8.471 billion by mid-2005 but its share of the market slipped to 18.19 percent. Deposits and market share slipped to $8.043 billion and 17.02 percent by the middle of last year.

The beneficiary of BofA’s softness appears to be Wells Fargo, which has grown from third place at $6.6 billion and 15.23 percent of the market in ’04 to second place with $7.5 billion and 16.06 percent of the market. Washington Mutual slipped from second place in ’04 to third place last year with $7.24 billion and 15.33 percent of the market.

Union Bank has been in fourth place throughout, but its deposits shrank from $5.1 billion in 2004 to $4.6 billion in mid-2006, while market share slipped from 11.67 percent to 9.8 percent.

That leaves the remaining 65 banks with roughly 42 percent of market share, and here leading local business banks such as San Diego National Bank with more than $2.05 billion in local deposits, California Bank & Trust with $2.57 billion in San Diego deposits, and First National Bank, now part of Southern California regional Pacific Western, figure prominently.

Typically, even the most successful local commercial banks, which aren’t necessarily trying to attract the same crowd as BofA, may garner less than 1 percent of San Diego’s market share. But within their niche they can show significant growth. Take Torrey Pines Bank, for example, which increased market share by only 0.21 percent from 2005 to 2006, but that represented deposit growth of more than $100 million, equivalent to about 23 percent of what BofA lost in the same market in the same year.

It gets interesting, even intriguing for a banker, when you get down to San Diego’s neighborhoods. In the Central Business District, Downtown San Diego’s 92101 ZIP code, the FDIC counts 18 banks in an area roughly three square miles, the highest concentration of lenders in the entire region. Banks with Downtown offices figure prominently among those with a higher than 1 percent return on assets (ROA), including First National Bank (with 2.08 ROA), San Diego Trust Bank (1.58), California Bank & Trust (1.56), San Diego National Bank (1.29), Imperial Capital Bank (1.04) and Torrey Pines Bank (1.02).

Regents Bank was on the bubble with a still-healthy 0.97 percent ROA while it muscled its way into the Downtown market, growing from $62.4 million in Downtown deposits with 1.01 percent of the Downtown market at mid-year 2004 to $86.2 million and 1.64 percent of the market by the middle of last year. That’s 38 percent growth in CBD deposits and 64 percent growth in market share, an impressive gain for Regents or for any community bank.

While No. 4 regionally, Union Bank is No. 1 in the Central Business District. Union Bank successfully straddles both the consumer and small-business lending niches, maintaining $1.29 billion in deposits or 24.5 percent of market share Downtown at June 30. But just because it’s No. 1 doesn’t mean it’s not feeling the heat. Two years ago, its Downtown market share was 27.25 percent with $1.67 billion in deposits. Shrinkage of some $380 million in one zip code in 24 months is not a little thing.

Banks operating in 92101 reported to the FDIC $5.27 billion in total Downtown deposits at June 30, up from $2.23 billion in 1996.

‘We see no direct correlation between the housing slowdown and small business,’ says Joe Benoit, San Diego market president for Union Bank. (photo/alandeckerphoto.com)

“We think we’re coming up against some pretty tough competition for deposits,” says Joe Benoit, Union’s new San Diego market president, succeeding Ron Kendrick who retired after decades at the local helm. “Everyone’s looking for deposits and so the competition is based on interest rates. A few years ago, depositors were fairly content with breaking even, but now idle money can get 4 percent and upwards, so leaving money in noninterest-bearing accounts is no longer an alternative.”

Though economists’ eyes are fixed on the housing market, Benoit says he expects the business-to-business economy to remain strong no matter what happens to the residential sector. “We see no direct correlation between the housing slowdown and small business,” Benoit says. “The B2B segment is made up of a cross section of wholesalers, manufacturers and distributors who are not tied to the housing market.”

Benoit says Union Bank will continue to invest in its robust branch network, which numbers 61 offices in San Diego County and 279 offices altogether.

“We would like to look at a half dozen new branches in the San Diego market in the next 12 to 25 months,” Benoit explains, “as part of a fairly aggressive fill-in strategy.”

Among Downtown’s headquartered banks, Security Business Bank continues to show steady growth, reaching $150 million in assets in four years since its inception. At Sept. 30, Security’s deposits reached $116 million, an increase of 23 percent over the same period in 2005, while its loans shot up to about $123 million, a 44 percent increase over 2005.

Paul Rodeno, Security Business Bank’s CEO, is banking on commercial real estate to enhance Security’s 2007 profits. (photo/alandeckerphoto.com)

Like Union, Security wants to expand its branch network. “Our new Carlsbad office achieved profitability in September after only nine months of operation,” says CEO Paul Rodeno. “We’re real happy with that, and we may try it again in ’07.”

Though Rodeno says he’s noticed an uptick in delinquencies, he says the bank’s diversified portfolio will insulate it from a real estate downturn, since “we do very little residential.” For ’07, cautious optimism is in order. “We think it’s not going to be as robust as ’06, but we still think there are opportunities, and most of our clients are still seeing pretty good volume,” he explains. “Commercial real estate still seems to be pretty strong, and we think it will be good for us (this) year.”

Beyond Downtown, there are several spheres of influence in the San Diego banking scene, none more important than ZIP code 92037 in La Jolla. The FDIC lists 22 banks with 31 offices in the 92037, with deposits of about $3.2 billion as of June 30.

La Jolla’s Regents Bank had about $77.3 million in its La Jolla headquarters office of its roughly $135 million total deposits at June 30. Regents CEO Dan Yates says most community banks have limited branch networks, so where a community bank’s clients are located and where their deposits are domiciled are not always a strong correlation.

“With the convenience of courier services and newer technologies, our clients can make deposits without ever leaving their places of business,” Yates explains. “As a result, the physical location of our bank branches has almost become a nonfactor. In looking at the deposits that are domiciled at our bank’s headquarters office in La Jolla, the vast majority of our La Jolla deposits are related to clients that have businesses outside of the La Jolla area.”

Yates also says there are signs that San Diego is overbanked, but when and where any consolidation occurs will depend on a raft of factors beyond the local business climate as well as the high cost of banking talent.