A run-up in the number of homegrown banks this decade has made for a more competitive market,with startups feeling most of the heat.
Downbeat forecasts for the sector should make things even tougher. And the conditions could be ripe for a buyout or two, according to some local bank executives.
“I wouldn’t even be surprised if we saw a failure,” said Steve Gardner, president of Pacific Premier Bank in Costa Mesa.
During the past three years at least 15 banks have sprung up in the county, inspired mostly by a belief that there was a market for them.
Still, local banks make up only 2% of the county’s market compared to the 85% that major banks control, according to Ed Carpenter, chief executive of Carpenter & Co. in Irvine, a banking consultant.
Carpenter disagrees that there will be buyouts. People rarely sell when market conditions are bad, but rather when their bank has achieved an attractive valuation, he said.
“Fire sales are unlikely,” Carpenter said.
But if market conditions get really bad, there could be a repeat of the early ’90s when at least three banks sputtered from bad real estate loans and were sold, he said.
Tighter Lending
Lending standards at many banks have tightened in the wake of economic uncertainty brought on by a slowing housing market and the subprime mortgage crash.
For local banks the situation is minor given their lack of exposure to problems in the securitized market of Wall Street.
A pullback in lending means lower earnings. For banks just starting out, their path to profitability could take longer than the typical two-year road out of the red.
Banks that have depended on generating a lot of fees from their loans could be most affected, while banks that hold on to their loans to earn interest will be more stable.
A lot of banks have also loaded up on commercial real estate in the past few years, which by some peoples’ standards have made them riskier.
Regulators in particular have heightened their interest in monitoring banks’ financial statements for troubled areas.
But what most banks really struggle with is competition to grow their deposits.
Getting to profitability has taken a little longer than expected for Pacific Coast National Bank in San Clemente.
Pacific Coast lost about $1.8 million for the 12 months ended June 30, more than anyone else in the county.
The bank has more than $72 million in assets, making it the 19th largest in the county. Its return on assets was down almost 6% for the year.
“It’s a difficult thing to see,” said Michael Hahn, president and chief operating officer of the bank.
The bank expects to break even next year, Hahn said, with the delay attributed to it opening two offices as well as accounting fees.
With an initial investment of almost $20 million, Pacific Coast believes it is in good shape to survive a down market.
About 65% of its lending is for commercial real estate, with another 15% for construction.
Building its deposit base has been a challenge, as it has for everyone else in the county, Hahn said.
To attract money Pacific Coast is offering more competitive money market rates.
The bank has also increased its fee revenue by adding a middleman who acts as a broker to clients, Hahn said.
Another sign of a tough market: banks that have failed to open.
After receiving approval from regulators, Access Business Bank was set to open its office in the Irvine Spectrum area.
The bank never opened its doors, with many believing it couldn’t come up with seed funding.
No one from the bank could be reached for comment.
In an interview last spring, the bank’s Chief Executive Tom Byington said he felt there was a strong market for lending to small and midsize professional firms.
At that time the bank was about halfway to gathering its $20 million in capital it needed to launch.
Byington, who came from Colorado, brought with him more than 35 years in banking experience. Access was the third bank he led as chief executive.
Some have speculated that relatively unknown management from outside the area is especially challenged in starting a new bank.
Targeting Hispanics
One of the newest banks in the market is Santa Ana Business Bank, which opened in Santa Ana in early October.
The bank feels good about its position of starting from scratch, according to its chief development officer, Oscar Novelo.
Santa Ana Business Bank caters to small and midsize businesses.
Though the bank says it wants to work with all types of businesses in Santa Ana, its clients are most likely to come from the Hispanic community, a huge market in Santa Ana and Orange County.
Most of the bank’s 280 shareholders are Hispanic. The bank raised about $12 million in capital to launch.
Santa Ana Business Bank’s plan is to target the top 500 businesses in Santa Ana.
Novelo thinks its bilingual staff will go a long way toward establishing close relationships with customers that big banks won’t be able to match.
“We want to play a leadership role in the Hispanic community,” Novelo said.
Santa Ana Business Bank’s chief executive, Larry Frampton, formerly headed up First American Bank in Rosemead.
First American was sold in 2005 to First Community Bancorp in San Diego for $62 million.
So far Santa Ana Business Bank has been opening accounts everyday, thanks largely to signs that can be read along the Santa Ana (I-5) Freeway, according to Novelo.
The bank plans to make loans on everything but homes.
