Mike Perdue

Like their customers, the San Diego region’s roughly 30 community banks have been for the most part horrified onlookers to the chain of events from subprime to secondary market to liquidity crisis to credit crunch to possible recession pile-up that’s tying up economic traffic all over the country. Technically speaking, a recession is defined as two consecutive quarters of that most economic oxymoron — negative growth. But with a new definition splashing across screens — it “feels like a recession” — neither forecasters, consumers nor lenders seem cheered by technicalities.

A recent survey of economists for the National Association for Business Economics found a bare majority — 51 percent — thought national economic growth in the first half of the year would measure between zero and 1 percent, a rate akin to the fourth quarter’s 0.6 percent.

From a San Diego perspective, “job generation is down to just about zero,” reports Vince Siciliano, CEO of 1st Pacific Bank. “The economy is basically stuck in real estate and other sectors, sales are soft to down. You add in the cost of gasoline, and San Diego is in a soft place right now,” he says.

“We’re seeing the domino effect of what happened to real estate throughout the economy now,” says Peter Q. Davis, former mayoral candidate and CEO of the Bank of Commerce.

If so, San Diego’s community banks continue to resist any outward signs of stress, and show nothing approaching the S&L meltdowns of the early 1990s. Merger and acquisition activity over the last two years is attributable to strategic opportunity rather than fire sale. The region continues to add community banks, including soon-to-be de novos Chula Vista’s Vibra Bank, National City’s Gateway Pacific Bank and the Doug Manchester-headed bank, slated to open in La Jolla.

Banks with regulatory concerns such as the re-launched Ramona National Bank — now First Business Bank — generally had issues before the latest downturn. Finally, the turn-of-the-century group of banks such as Regents Bank, 1st Pacific Bank, San Diego Trust Bank and Security Business Bank have used the favorable trade winds and ease of gathering capital over the last five years to their advantage and are now likely strong enough to withstand the current headwinds.

Highline Data figures show that, through Dec. 31 of 2007, half a dozen local commercial banks reached a 1 percent return on assets, generally considered the mark of a well run bank. They are the diminutive Armed Forces Bank with an ROA of 2.77 on more than $20 million in assets; Pacific Western National Bank, the San Diego-headquartered Southern California powerhouse with 62 branches that stretches from here to Los Angeles and through the Inland Empire with a 2.02 ROA and more than $5 billion in assets; Regents Bank, with a 1.23 ROA on almost $300 million in assets; San Diego National Bank, with a 1.12 ROA on about $2.5 billion in assets; California Bank & Trust, like Pacific Western a mega-community bank with about 100 offices, and a 1.05 ROA on more than $10 billion in assets; and Security Business Bank, whose 0.98 ROA on about $185 million in assets we’ll round off to 1, just like we did last year.

Thrifts and “other thans” beating the mark include Home Bank of California (2.87), Rancho Santa Fe Thrift and Loan (2.43) and La Jolla Federal Savings Bank (1.87) (see accompanying chart).

This performance is a swift retreat from Dec. 31 of 2006 when a dozen commercial banks secured a 1 ROA. Dropouts from this year’s best performers included San Diego Trust, Sunrise Bank, First National Bank of North County — absorbed by Inland Empire National Bank — 1st Pacific Bank (which last year bought Landmark National Bank), perennial performer Imperial Capital Bank and the Bank of Escondido.

Of the thrifts, Chula Vista’s Balboa T&LA fell from the ranks of the 1 ROA performance with 0.49 ROA in the most recent year.

Graduating from the de novo to the established bank list was Point Loma Community Bank, the boater’s bank on Rosecrans, which will celebrate its fourth anniversary in August and has reached more than $55 million. Point Loma, like Sunrise and the Bank of Escondido, is part of Capitol Bancorp Ltd., based in Lansing, Mich.

Given the current environment, local bankers have mixed feelings about the announced crop of new banks, and about whether the market will support more than 30 local banks competing for business loans with each other, about two dozen out-of-town banks, and a growing number of well-heeled credit unions.

“Of the new banks, those trains left the station a couple of years ago during better times,” Siciliano says. “Manchester’s decision to go into banking stands outside of economic trends. He can capitalize and be patient. In general, there seems to be this calculus where people believe that if they can contribute to a bank at $10 a share, they’re worth two times book the month after they open. You may lose a couple bucks while starting up, but that still leaves you at $16 a share. There’s this ‘can’t lose’ mentality about starting a bank which is far from the truth at this point.”

Davis says from his experience as a CEO and director, investors are not looking for immediate returns, although the current market might test their reserve of patience, if not capital. “Most banks are formed out of ego and prestige,” he explains, “and maybe a desire to learn about banking. The investors are typically bucks up from their own businesses, and are interested because they’ve had interaction with banks. So they don’t have a sense of urgency about making money, but losing money hurts the ego. They think 20 years from now it’ll be a nice return (on the investment).”

Davis says the FDIC could cause trouble. Beaten up in the media for allowing the current situation to develop, Davis says, regulators “seem to be on a mission. They’re going to be more vindictive. They’re going to hold directors personally and financially responsible for losses. The game is ratcheting up a little, if you will.”

While the economy started slowing last year, several local banks grew their asset base by 20 percent or more. Siciliano says 1st Pacific’s 30 percent increase is due to the $75 million in assets it picked up from its purchase of Landmark.

Another bank bucking the trend and doing so profitably is Downtown’s Security Business Bank, which grew 22 percent over the year. President Paul Rodeno says he agrees with the Fed’s relatively upbeat assessment of commercial activity in its most recent Beige Book report.

“In contrast to the residential sector, construction activity and sales in the commercial and industrial sectors have been at high levels,” noted the Fed in a first quarter report.

“We were happy with the year, and most of our banking relationships are weathering the storm pretty well,” Rodeno says. “These are accounts receivable and other types of financing across a wide range of industries. One recent client is a manufacturer of light bulbs. They sell to the wholesale market and to office buildings, and they’re nationwide. So I’d say (firms in the) business-to-business trade are doing well.”

One bank with a particular kind of growing pain is Pacific Western, which, because of a change in accounting rules, had to write down goodwill — i.e., the difference between what the acquired bank’s shares were worth and what the acquiring bank paid — which was once able to be written down over a long period and now has to be accounted for as realized. This led to a first quarter loss of about $270 million, compared to net income of $28.5 million last year.

President Mike Perdue called the write-down a “non-cash charge,” that doesn’t “impact the strength of the bank, or cash operating earnings, or capital ratios. It simply takes some goodwill off the books.”

Enthusiasm for a second half rebound also is in short supply, but Siciliano says the presidential election could provide the boost of a fresh start. “The election could generate a new vitality, a new spirit, optimism,” he says, “that might cause people to become more enthused about the future and stimulate consumption.”