Sunrise Bank’s Randy Cundiff says competition is fierce among community banks, especially for deposits. (photo/alandeckerphoto.com)

San Diego’s community banks are a lot like the Padres. Good pitching and sound defense with a minimum of mistakes keep them in the winning column more often than not, but it remains to be seen if sufficient power can overcome improving competition.

Paper-thin margins, a shortage of bankers who know the territory, a struggle for deposits, and an uncertain economy are among the factors keeping bankers on their toes. Even so, a dozen of 23 established community banks have posted a return on assets of about 1.0 or better for the most recently completed year, a good indication of a well run institution.

Just take a look at the chart on page 48. The tiny Armed Forces Bank of California, with about $18 million in assets, led the pack with an ROA of 3.66 as of Dec. 31, 2006. New regional powerhouse Pacific Western National Bank, headquartered Downtown, posted a 2.67 ROA and grew its asset base more than 166 percent, including its acquisitions of First National Bank (not to be confused with First National Bank of North County) and Escondido-based Community National Bank, to more than $5.5 billion and 44 offices stretching north from Los Angeles east to the Inland Empire and south to San Diego.

Stellar Newcomers

San Diego National Bank and California Bank & Trust turned in their usual stellar performances, but popping up to fifth place is a newcomer to the ranks of established banks, San Diego Trust Bank with an ROA of 1.47 percent. Rounding out the top performers were Sunrise Bank (1.28 ROA), First National Bank of North County (1.24), 1st Pacific Bank of California (1.11), Regents Bank (1.09), Imperial Capital Bank (1.02) and Bank of Escondido (1.02). This year’s “round ’em off ” winner is Downtown’s Security Business Bank (0.98).

Although new banks keep surfacing — Downtown’s Embarcadero Bank opened in December with a healthy $21 million in startup capital — consolidation continues. In addition to the Pacific Western expansion, 1st Pacific purchased Landmark Bank, which had previously absorbed Legacy Bank. The 1st Pacific deal ends the chapter of banks descended from La Jolla’s venerable Scripps Bank’s investors.

San Diego’s community banks have done a better job of insulating themselves from credit quality trouble than their forebears did during the last real estate downturn in the 1990s by mostly staying clear of the residential real estate market. Banks also are long-term investment plays, so it is doubtful there will be a rush to cash in, and many of San Diego’s top performers do not yet have the footprint or asset size to fetch a large premium.

“I think we’re going through another consolidation cycle,” says Randy Cundiff, president of Sunrise Bank in La Jolla. “We’re operating in a very competitive environment with a thinning talent pool and the cost of living makes for a finite resource of qualified credit people.”

Cundiff has the relative luxury of surveying the field as president of a bank backed by a bigger holding company — Lansing, Mich.-based Capitol Bancorp, with more than 50 locally operated banks across the U.S. and an asset base of $4.25 billion. Other Capitol banks in San Diego include Bank of Escondido and the de novo Point Loma Community Bank (see sidebar). Together, the trio accounts for about $200 million in local assets.

Cundiff says non-interest income is key to community banks, and points to success Capitol Bancorp has had with its residential mortgage division, an equipment leasing division, and an SBA division that sells loans on the secondary market and generates fee income.

“There’s a bloodbath in the market now for deposits,” he adds.

Cundiff says his bank has managed to keep its margin at an acceptable 5 percent. Its ROA is 1.28 percent.

Another Performance Measurement

Some bankers question whether ROA should be the definitive measure of bank performance, since investors are more likely to have their interest piqued by a bank’s return on equity, or net income divided by shareholder equity.

The Findley Reports (findley-reports.com) uses a formula that includes return on equity to rank California banks. According to Findley’s latest rankings, San Diego’s Super Premier Performing commercial banks include California Bank and Trust, Regents Bank, San Diego National Bank, and Home Bank of California (technically an S-Corp); next tier Premier Performers include 1st Pacific, San Diego Trust and Torrey Pines Bank.

Dan Yates, president of Regents Bank, suggests that ROE may be more important to a bank focused on growth, where ROA may be more important to an institution focused on profit.

“There’s a balance going on,” Yates says. “Today when we have an opportunity to book a loan with a thin margin, which would not be good for our ROA, there are times when we will pass on that (loan) when we can’t get a reasonable return. That’s the art of managing your ratios. There are times you’re going to give up on growing asset size and focus on a loan’s contribution to earnings and profitability.”

Yates says loan demand remains strong, and Regents, approaching $300 million in assets, might be open to expansion.

“We haven’t hired a search firm,” Yates says, “but if a rainmaker or a team of bankers became available I would take a hard look.” East County intrigues Yates but he says he hasn’t gone beyond putting out some feelers there.

While some commercial banks can insulate themselves from the uncertainty of the general economy by picking more profitable loans, others serving a middle market clientele focus on the unemployment rate. “That’s our important number,” says Bob McGill, president of Neighborhood National Bank with about $103 million in assets. “Our challenge is to accelerate growth, and we’re positioned to do that.”

McGill says Neighborhood’s average loans have grown from about $250,000 a few years ago to an average size of about $1 million. These are businesses such as markets and car washes that serve urban residents. “Most of our loan portfolio goes into commercial business loans, and we haven’t been overly concentrated in real estate, so we can grow safely,” he adds.

With his Carlsbad office profitable, Paul Rodeno of Security Business Bank has set his sights on the I-15 corridor. (photo/alandeckerphoto.com)

McGill will do it without Bob Adkins, who until recently had been president of the bank. McGill, who now holds both the CEO and president’s jobs, says Adkins left to join a bank in formation. McGill has hired a recruiter to search for Adkins’ replacement, but “we have talent in-house, and we might leave things the way they are.”

But a shrinking bottom line concerns most San Diego bankers. “Pricing is extremely competitive,” says Paul Rodeno, president of Downtown’s Security Business Bank. Citing fixed-rate financing “in the sixes,” Rodeno figures that with a cost of funds in the 5 percent-plus range, “there’s not a lot of margin there.”

Even so, with Security’s Carlsbad office now profitable, Rodeno says he’d like to be in the Interstate 15 corridor.

The prevailing attitude among San Diego bankers is optimism with caveats. As Yates says, “We’re not pleased with pricing, but you won’t lose money making good loans.”