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Banks See Some Asset Growth, Lessened Loss; Half Profitable

Download the 2010 OC COMMERCIAL BANKS List (pdf)

The largest banks based in Orange County saw moderate growth in assets for the 12 months through June as the industry continues to search for healthy borrowers amid tight lending conditions.

The 25 largest OC-based banks grew assets nearly 4% to $8.4 billion for the 12 months through June from a year earlier, according to this week’s Business Journal list.

The list ranks OC-based banks by assets, including loans, cash and investments such as real estate and stocks.

Financial information for banks on the list comes from the Federal Deposit Insurance Corp.

The banks added about $300 million in assets from a year earlier. Acquisitions and investor financing led the surge.

The increase in assets comes as local banks, which mostly serve businesses, work to strengthen balance sheets and compete with big banks that have far greater lending power.

The locally based banks, which accounted for 11% of the $74 billion in deposits in the county as of June 30, compete with large national banks that dominate the market here, as well as midsize regional banks.

Fourteen banks on the list increased assets, while 11 saw drops.

Profits were just as mixed, evidence that many banks still have to clean their balance sheets of bad commercial real estate loans that larger rivals already have written off.

Thirteen banks posted a profit for the six months through June, a sign the worst likely is over and a recovery is in the works.

Twelve banks lost money as lower loan demand and fewer creditworthy businesses continue to pose challenges for lenders.

Local banks primarily make money through interest and fees along with business, real estate and other loans.

Low interest rates continue to dampen earnings with banks making less on loans.

The entire group lost about $1.6 million for the six months through June, an improvement from $20 million lost a year earlier.

Stringent regulatory requirements led banks to set aside more cash to cover potential loan losses. Higher fees paid to the FDIC for its bailout fund also hampered bottom lines.

The banks reported a lower return on assets. The average was a negative 0.3%, which was better than the 1.7% decline a year earlier.

The banks employ 1,116 people here, up 14% from a year earlier. The uptick supports a larger trend of professional and financial services hiring in the county in the past 12 months.

Core Capital Ratio

Core capital or leverage ratios, which measure the cushion banks have against bad loans, came in at an average of more than 11%, which is considered healthy by regulators.

The county’s largest homegrown bank, Pacific Mercantile Bank in Costa Mesa, saw a 4.8% drop in assets to $1.1 billion as of June 30.

The bank has spent the better part of a year ridding itself of bad loans tied to real estate and foreclosed properties.

“I think the worst of it is over,” Pacific Mercantile Chief Executive Ray Dellerba said.

Consent Order

Earlier this year, Pacific Mercantile’s parent company agreed to a consent order with federal and state regulators to reduce problem loans and assets while strengthening capital reserves.

Pacific Mercantile’s loans were down nearly 5% to $775 million as of June 30.

The bank approves about 1 in every 25 loans today, down from 1 in 7 before the recession, according to Dellerba.

Deposits rose more than 4% to $978 million as of June 30.

The bank lost $10.2 million for the six months through June, the most of any on the list. That total skewed income figures for the entire group, which was profitable without Pacific Mercantile in the mix.

Pacific Mercantile was hit with FDIC insurance premiums eclipsing $4 million because of its portfolio of nonperforming assets, mostly loans 90 days or more past due.

The bank’s number of bad loans is gradually decreasing, according to Dellerba.

“We’ve taken the majority of hits we’re going to take,” he said.

The bank sold more than $8 million in foreclosed properties in the third quarter and expects to double that this quarter, Dellerba said.

Pacific Mercantile lost $125,000 in the recently ended quarter, down from a $3.8 million loss a year earlier. It expects to turn a profit in the fourth quarter, according to Dellerba.

“That’s the sign of a turnaround,” he said.

The bank has the lowest core capital ratio on the list at 6.75% as of June 30. Pacific Mercantile has a risk-based capital ratio—a broader measure—of 11%, which is considered well capitalized.

Centennial

No. 2 Fountain Valley-based Centennial Bank also saw assets drop. They fell 6.3% to $811.7 million for the 12 months through June.

The bank, which lends to business, apartment owners and others, was issued a cease-and-desist order from the FDIC in February to shore up its management team, improve its capital position and reduce risk exposure.

Centennial doubled its profit from a year ago to $2.4 million for the six months through June.

Acquisitions helped No. 4 Tustin-based Sunwest Bank grow assets 41% to $659.3 million, the biggest gain by percentage and actual dollars on the list.

Sunwest acquired three failed banks last year. One of those acquisitions was Pacific Coast National Bank of San Clemente, which ranked No. 19 on last year’s list.

For the six months through June, Sunwest posted the highest profit of any bank on the list at $4.8 million. Sunwest’s profit was up 224% from a year earlier.

The bank avoided speculative real estate and construction lending during the 2000s boom, which put Sunwest in a position to pick up some pieces of the wreckage.

The bank, which boosted loans 53% to $323.6 million as of June 30, has written off only a handful of bad loans this year.

California Republic

No. 9 California Republic Bank jumped nine spots on the list, the biggest gain. The Newport Beach-based bank grew assets 73% to $321.7 million.

“We have a 100% clean portfolio,” Vice Chairman John DeCero said. “That’s why we’ve been growing as well as we have. We haven’t been distracted by workouts or bad loans.”

The bank has yet to see an underperforming loan or late payment, DeCero said.

California Republic Bank President Jon Wilcox said he credits the bank’s numbers to hiring industry veterans who have long business ties in OC.

“This is the culmination of years of hard work,” he said.

The bank posted its first quarterly profit in the second quarter since opening its doors in 2007 and followed that with a $2 million profit in the third quarter.

It’s common for new banks to lose money in the first few years as expenses outpace revenue. Without a lot of loans and clients, banks can’t earn money through interest and fees.

California Republic raised $52 million in 2007 before getting regulatory approval.

The one newcomer to the list is No. 12 Opus Bank, which has its on-the-books headquarters in Redondo Beach but is run from Irvine.

The Business Journal opted to include Opus on the list since Chief Executive Stephen Gordon and others run the bank from here.

Gordon led a recent $460 million investor refinancing for Opus, which had been known as Bay Cities National Bank.

He said he hopes to grow the bank to 75 branches across California, up from five now, all in the South Bay area of Los Angeles County.

Opus had assets of $273.1 million as of June 30.

First Vietnamese American Bank in Westminster, which ranked No. 24 last year, didn’t make this year’s list.

The bank, which opened with fanfare in 2005 as the first bank to specifically target Vietnamese-Americans and their businesses in Little Saigon, is under fire from regulators.

The California’s Department of Financial Institutions in July approved the sale of First Vietnamese to Charles and Michael Lhuillier, brothers who run one of the largest pawn shop and jewelry operations in the Philippines.

The FDIC, which has declared First Vietnamese critically undercapitalized, still needs to approve the acquisition.

Download the 2010 OC COMMERCIAL BANKS List (pdf)

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