Bank failures are expected to keep rising nationwide. But, after a handful of local failures last year, not everyone’s convinced the same will hold true in Orange County.
Banks are one of the types of businesses Thomas Courtney, a Newport Beach-based investment banker who runs Courtney Group, likes to buy for wealthy and institutional investors.
One of the bank measures he said he watches is something called the Texas ratio. The figure compares a bank’s bad loans to how much its shareholders would be owed if it failed. Indebted properties controlled by the bank are part of the equation.
At the start of the fourth quarter, some 282 U.S. banks had Texas ratios at alarming levels, according to estimates compiled by Courtney and his staff.
Fourteen of those banks are in California. None are in OC. Surrounding counties had several.
“This year still has the potential of being a lot like 2009,” said Glenn Gray, chief executive at Tustin-based Sunwest Bank, which acquired three failed banks last year. “We’re keeping our eyes open and looking at opportunities not just locally but throughout the Southwest and around the San Francisco Bay Area.”
Smaller lenders—especially savings and loans—still have a lot of construction and real estate loans on their books, said Raymond Dellerba, chief executive at Pacific Mercantile Bank in Costa Mesa, the largest bank based in the county.
“Profit margins for banks as a whole are the thinnest I’ve seen in my 39 years in the business,” he said. “Some of the thrifts might have to merge with a bigger bank just to survive.”
Any deals in the coming year are likely to come from midsize players, according to Greg Presson, senior managing partner in Newport Beach for Los Angeles-based investment bank B. Riley & Co.
“At this point, the stronger mid-tier banks are probably working on some new initiatives to improve their long-term positions in the marketplace,” he said.
Presson put Sunwest—the third-largest bank here by assets—at the top of that list. So does Gary Findley, an Anaheim-based banking analyst and consultant. He also points to Costa Mesa-based Pacific Premier Bank, the second-largest bank here by assets.
Pacific Premier’s chief executive, Steven Gardner, has expressed interest in expanding through deals.
But it’s unlikely local banks will be anxious to make moves in coming quarters unless deals are backed by the Federal Deposit Insurance Corp., according to Findley.
“In those deals, banks are getting assets at a discounted price as well as federal guarantees,” he said. “Without that sort of ability to protect their backsides, banks just aren’t going to have the capacity to do many more deals at the capital levels regulators are requiring these days.”
Executives at the national banks that have made deals in the past 18 months said they’re focusing on internal growth.
Those include San Francisco-based Wells Fargo & Co., Charlotte, N.C.-based Bank of America Corp. and New York’s JPMorgan Chase & Co.
U.S. Bank, part of Minneapolis-based U.S. Bancorp, is focused on growing on its own after four deals in the past two years, including the takeover of Newport Beach-based Downey Financial Corp.’s failed savings and loan.
“After our moves over the past 18 months in this market, we’d hesitate to take on anything new that’s too large,” said Sean Foley, U.S. Bank’s regional president in Southern California. “But we’re definitely still looking for opportunities to grow in Orange County and Southern California.”
Even if the consolidation in the past two years has peaked, Presson said he believes local banks will continue to be pressured to combine.
“In every industry, capacity becomes too substantial for a certain market,” he said. “Does Orange County still have too many banks?”
The classic overcapacity dilemma seen in other industries “is certainly becoming a factor in the local banking market,” Presson said.
“One thing is certain,” he said. “There are definitely some banks operating today that won’t be around in coming years.”
