Financial Forecast Offers Cautious Projection for 2010

Copyright 2009 ProQuest Information and LearningAll Rights ReservedCopyright 2009 San Diego Business Journal San Diego Business Journal

December 21, 2009 Monday

SECTION: Pg. 3 Vol. 30 No. 51 ISSN: 8750-6890

ACC-NO: 14024

LENGTH: 854 words

HEADLINE: Financial Forecast Offers Cautious Projection for 2010

BYLINE: Allen, Mike

ABSTRACT

According to a midyear report from the California Department of Financial Institutions of the 215 banks it regulates, the group had an aggregate net loss of $990 million for the first six months, more than double the $407 million in aggregate net losses by 216 state-chartered banks for the first half of 2008. FULL TEXT

The tumult in the financial markets that began in late 2008 subsided this year on the capital markets side, but many lenders are still dealing with a plethora of bad loans, and remain very conservative in extending new credit.

“It’s a mixed bag that we’ve got as far as the local community banks in San Diego,” said Mike Perry, chief executive at San Diego Trust Bank.

“There’s been a few failures (two as of Dec. 15), some that are on their last legs, some are muddling along, and a handful are doing reasonably well.”

Bankers Offer Cautious Outlook

Testifying to the severity of the recession, a total of 133 commercial banks nationally were seized this year by federal regulators as of mid-December. These included two in the San Diego region: Temecula Valley Bank (with seven offices in the county) and San Diego National Bank.

The latter lender traced its problems to its parent company, Chicago-based FBOP Corp., investing heavily into the stock of Fannie Mae and Freddie Mac. That stock was rendered worthless when the federal government took over both mortgage giants in 2008.

But SDNB, which had $3.4 billion in assets and 28 offices when it was seized and sold to U.S. Bank, also held millions of problem loans tied to construction and land development projects that defaulted as the real estate bubble exploded, beginning in 2007.

Temecula Valley Bank also had heavy concentrations of construction loans and federally guaranteed small-business loans that went into default as the economy slid into recession. TVB was sold in a government assisted deal to First Citizens Bank, based in North Carolina.

Despite reports that housing prices were stabilizing and technical data indicating slight growth trends in housing markets on a national basis, many local bankers continued to offer a very cautious outlook for 2010.

Stronger Regulatory Oversight

“The worst is yet to come,” said Hans Ganz, CEO at Pacific Trust Bank, who cited ongoing problems in the commercial real estate markets that will result in more red ink and more bank failures.

Ganz said lenders whose loan portfolios are carrying high concentrations of loans backed by commercial real estate will have a rough year.

Ganz says criticism that banks are hoarding cash, and aren’t providing credit to qualified borrowers is unjustified.

In reaction to the steep rise in defaults, regulators have become far more stringent with banks, leading bankers to do whatever they can to increase their capital ratios, the measurement of a bank’s relative safety.

“You can’t increase your balance sheet (by lending) while at the same time increasing your net worth (capital) unless your bank is generating huge profits and nobody in the banking industry is generating huge profits,” Ganz said.

Indeed, bank net losses are growing. According to a midyear report from the California Department of Financial Institutions of the 215 banks it regulates, the group had an aggregate net loss of $990 million for the first six months, more than double the $407 million in aggregate net losses by 216 state-chartered banks for the first half of 2008.

Despite a massive $700 billion bailout of the banking industry aimed at propping up the industry and helping to keep the spigot of credit flowing into the slumping economy, most banks have tightened their credit underwriting standards to comply with a much tougher regulatory approach.

Tepid Demand For Small-Business Loans

The myriad of bank regulatory agencies have become very strict about compliance with rules, and aren’t inclined to be forgiving if they uncover problems, says Frank Mercardante, a former chief executive at several community banks who spent 42 years in the industry.

“Right now, banks are afraid to lend,” Mercardante said. “Banks are trying to preserve their liquidity because they don’t know when the next shoe is going to drop.”

While President Barack Obama exhorts banks to do their part to help the economic recovery by providing loans to small businesses, the fact is that loan demand is fairly tepid, many local bankers say.

“We’d love to deploy funds in credit-worthy financing arrangements, but the demand for credit from small-business owners has really shrunk over the past few years,” said San Diego Trust Bank’s Perry.

With more bank portfolios sagging under the weight of defaulting loans, expect more banks to bite the dust in 2010, as well as further consolidations among smaller and midsized banks.

Larry Hartwig, chief executive at California Community Bank, said the Federal Deposit Insurance Corp. recently identified some 550 banks as “troubled,” without naming them, but figuring out the problem banks isn’t that difficult. He expects more of these to fail next year.

“Clearly, we’ll see more enforcement activity by regulators, and we may see stepped-up bank failures,” he said.

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