The county's business banks are hunkering down.
After dodging the mortgage meltdown that started in 2007 and crippled many larger competitors, the county's smaller banks now are finding it harder to make money as the recession takes its toll.
The market for business loans,a key source of revenue and profits for local banks,has been hit by less demand and a scarcity of "ideal" borrowers.
Profiting from deposits also has gotten harder, with bank investments earning less than 1% amid historically low interest rates. A few years ago, banks were earning about 5% on their money.
"We continue to believe 2009 will be more of a challenge than 2008," said Ivo Tjan, chief executive of CommerceWest Bank NA in Irvine.
That has some banks looking to grow through consolidation.
CommerceWest, with $236 million in assets as of March 31, is buying San Marcos-based Discovery Bancorp, which has $170 million in assets.
The $10 million deal, expected to close in the third quarter, stands to move CommerceWest from the No. 10 spot among the largest locally based banks into the top five.
Like others, CommerceWest is wrestling with the downturn's impact on lending. The bank caters to businesses with yearly sales of $3 million to $100 million.
Tjan said he's telling his borrowers to be defensive and cut expenses before they get into trouble.
Tjan also said he wants his customers to conserve cash to be ready when the economy turns, rath-er than burn through it trying to generate business.
Most borrowers already are in defensive mode, according to bankers who say there are fewer businesses to lend to.
"Loan demand from quality borrowers has been weak," said David Blankenhorn, chief executive of American Security Bank in Newport Beach.
First-quarter results for American Security, which doesn't publicly report financials, were down from a year earlier as it made fewer loans, Blankenhorn said.
The bank, with $455 million in assets as of Dec. 31, saw a minor uptick in problems with existing loans, he said.
The crippled commercial real estate market is a threat for some banks, including Pacific Premier Bancorp Inc. in Costa Mesa, the county's second largest homegrown bank with $737 million in assets as of March 31.
"The commercial real estate market throughout the nation and California in particular is beginning to be negatively affected by the economy," Chief Executive Steven Gardner said in a recent earnings statement.
About 30% of Pacific Premier's assets are tied to office, warehouse and retail buildings. Pacific Premier said it's been conservative in making real estate loans.
Its average loan is $1.1 million and represents 60% of the value of the buildings, according to Gardner.
Many commercial real estate loans banks made three to five years ago are set to renew this year. They could become problems as valuations for buildings have come down, according to some industry watchers.
Another crimp on profits: Banks are setting aside more of their earnings as reserves against future losses from loans going bad.
Pacific Premier's provision for loan losses was $1.2 million for the first quarter, compared to $183,000 a year earlier.
Actual loan losses for the bank in the quarter were $645,000.
American Security plans to continue setting aside profits to protect against potential loan losses until "we see some daylight in the economy," Blankenhorn said.
CommerceWest set aside an extra $1.2 million for potential loan losses in the first quarter, bringing its total reserve to more than $4 million.
Meanwhile, some bankers see room to grow.
"We're seeing more opportunity to loan now because many have stopped lending," said John DeCero, vice chairman of Newport Beach-based California Republic Bank.
DeCero said his bank doesn't have problems with loans, largely because it opened for business in late 2007, sidestepping many issues that arose from the lending boom.
The bank, with about $170 million in assets at the end of last year, wants to become one of the top five largest local banks, which would require at least $400 million in assets.