Most locally based banks are quick to tell you they’re not the type of lenders or investment banks that created the financial crisis.
But that doesn’t mean they’re immune to the financial sector’s troubles.
The county’s homegrown banks are small and simple,they make up less than 5% of the $70 billion in deposits here.
But their businesses, free of complicated bond strategies, risky mortgages and ex-cessive debt, have held up well during the financial crisis.
To many, local banks’ model of raising money from deposits and then lending to businesses has been validated by the failure of home mortgage lenders and Wall Street investment banks that bought mortgages packaged as bonds.
“Wall Street is out of money,” said Ray Dellerba, chief executive of Costa Mesa-based Pacific Mercantile Bank. “That leaves community banks with cash in a good place.”
Survivors
Most local banks are expected to come out stronger from the crisis, joining larger counterparts such as Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. as survivors.
But the hard part still could be to come.
Some fear fourth-quarter numbers will tell a new story for local banks as some loans made for construction projects and commercial real estate go bad.
Profits at most local banks already have been hit by fewer loans being made and more cash having to be set aside for potential loan losses.
Banks stand to be tested by a worsening economy and the prospect of the financial crisis spreading beyond home mortgages.
Those with cash-rich balance sheets stand to pull through. Others could have to raise money or seek to be acquired.
Bank Lending
Banks themselves could be part of the problem. They’ve been reluctant to lend to each other out of fear of more losses.
That’s despite the Federal Reserve lowering its overnight lending rate for banks to 1%, down from 4.5% a year ago.
Pacific Mercantile, the largest locally based bank by assets at $1.1 billion, used to make and sell home mortgages to larger banks for revenue.
But it quit that business in 2005 after executives became nervous over the softer underwriting guidelines mortgage buyers wanted, Dellerba said.
The buyers said they would accept more lenient loans, which would have put risk on Pacific Mercantile’s books until it sold them, he said.
The loans it sold to banks such as Pasadena-based IndyMac Federal Bank, which was taken over by the government after it failed a few months ago, represented about a third of its business at one point.
Mortgages from 2005 and before now make up less than 10% of Pacific Mercan-tile’s $797 million in loans.
In the aftermath of the credit and real estate bubbles, Dellerba said he is confident Pacific Mercantile will get by on its business lending.
It hasn’t changed it’s underwriting on business loans in the nine years, he said, and he feels confident that it won’t have problems.
“In the past six months there’s been a lot of concern over the health of every bank,” said David Blankenhorn, chief executive of Newport Beach-based American Secur-ity Bank.
American Security Bank, the third largest locally based bank with $463 million in assets as of June 30, has about 70% of its loans in real estate, most of it commercial.
In the third quarter, American Security Bank saw $2.3 million in losses on two homebuilding loans it made in the Inland Empire. But Blankenhorn said he’s not expecting more.
Like most local banks, American Security Bank built cash reserves to handle losses.
Costa Mesa-based Commercial Bank of California has boosted cash reserves to protect itself against real estate loans that have become more risky as appraisal values have dropped.
About 60% of Commercial Bank of California’s loans are in real estate, with the rest made to businesses.
Properties the bank made loans for used to be appraised once a year, Chief Executive K.P. “Bala” Balkrishna said. Now they are valued twice a year as land and real estate prices fall, he said.
“It’s a challenge many banks have,” Balkrishna said.
Smaller banks have a chance to lure business while bigger banks are busy with recent acquisitions, according to Balkrishna.
The megabuy-outs, if all go through, will create a dominant trio across the country made up of Bank of America with the addition of Merrill Lynch & Co., Wells Fargo with its buy of Wachovia Corp., and JPMorgan Chase with its takeover of Washington Mutual Inc.
“They may not be very aggressive, which could open the door for others,” Balkrishna said.
Many feel the bank combinations will have a bigger impact on retail banking than commercial banking, which relies more on longstanding relationships.
Mortgage Move
Tustin-based Sunwest Bank, which has $303 million in assets as of June 30, sees the collapse of the mortgage businesses as a chance to enter the market.
Mortgages are expected to make up 20% of its loans next year as it enters the market for the first time, said Glenn Gray, the bank’s president and chief executive.
But Sunwest isn’t going in blind. It requires borrowers to put down 20% or higher down payments and have steady jobs. Most of the loans have been for houses valued at $1 million or more.
There was some concern if customers would accept full document loans, Gray said. But they’ve understood, he said.
In 2006, Sunwest got out of making loans to homebuilders. It has held onto its 20-year niche serving homeowners associations.
Gray said he remains leery of many commercial real estate loans, especially for mixed-use projects that include struggling retail shops.
“It was the low-hanging fruit,” he said.
The good news is that deposits are rising as many see local banks as a safer alternative to the troubled big banks.
Large deposit bases are seen as essential for bankers as it has become harder to borrow money to make new loans.
But deposit growth could be harder to come by as banks aggressively try to raise them.
Wall Street’s problems led to an increase in deposits for Pacific Premier Bank in Costa Mesa, according to Chief Executive Steve Gardner. The bank is the county’s second largest based here with $713 million in assets as of June 30.
New customers have helped it grow deposits to $420 million for the third quarter, up from $386 million a year earlier, he said.
Growing deposits for Newport Beach’s California Republic Bank, which opened for business last year, have come mostly from some of its wealthy customers.
The bank set a record for initial capital in the state with $52 million and caters to wealthy investors and companies that have $5 million to $200 million revenue.
The government insures most of what it invests in, according to Vice Chairman John DeCero. It has no home loans on its books, he said.
