Banks Putting More Into Loan Loss Reserves as Economy Slows

With the economy slowing, more Banks are reporting problems in their loan portfolios.

Last week, 1st Pacific Bank of California said nonperforming assets as of Sept. 30 were $6.3 million, up from $4.7 million in June, and from zero in last year’s third quarter. The bank said when comparing the two most recent quarters, the rise in problem loans was proportional to the bank’s increased size, which got larger when it acquired Landmark National Bank and its $71 million loans portfolio in July.

Pacific Trust Bank, based in Chula Vista, reported total nonperforming loans Sept. 30 of about $13 million, or 1.64 percent of its total assets, including one non-accrual loan for $10 million.

Even historically clean Regents Bank reported a problem loan in the second quarter, a $1-million plus construction loan that the bank had put into foreclosure to get repaid. The borrower misjudged the condominium market, and couldn’t sell the units, said CEO Dan Yates.

Regents recently sold the property, a six-unit project in North Park, and recouped 95 percent of what was owed.

“This was the first real significant loan problem that we had since we opened the bank six years ago,” Yates said. “As of today, we have no other problems on our books.”

Yates said he doesn’t anticipate further deterioration in his bank’s portfolio, which is concentrated in commercial real estate loans for owner-occupied businesses.

The subprime mortgage crisis roiled world credit markets and forced write-downs at many mega-Banks. Most community banks steered clear of this lending category. Their problems are related to the decline in the residential real estate market and a tightening of credit, which make it more difficult for borrowers to get loans.

For example, Pacific Trust Bank’s $10-million problem loan was made with two other lenders for a resort project in Northern California.

Apparently, things went sour, “and the financial viability of the project was uncertain,” according to the bank’s third-quarter report.

Pacific Trust CEO Hans Ganz said the bank put aside $731,000 in loan loss reserves in the last quarter to bring the reserves balance for that loan alone to $1.5 million. As of now, the loan has been downgraded to “doubtful,” from “impaired.” The next step is “loss,” when the bank begins foreclosure proceedings.

Problem loans are never pretty, but they go with the territory in lending money. Some folks will be deadbeats. And if you don’t have problems, you’re likely losing business, say bankers.

But many espouse the Yates’ philosophy he said he’d trade growth and profits for not having bad loans.

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1st Pacific Bank Earnings Decline:

Because of expenses related to its acquisition of Landmark National Bank, 1st Pacific Bank of California reported net income of $685,000 in its third quarter, down 22 percent from the 2006 third quarter.

For the nine months, 1st Pacific’s net income was $2 million, down from $2.4 million for the like period of 2006.

CEO Vince Siciliano said the bank incurred $293,000 on integration costs for Landmark National and its two offices in La Jolla and Solana Beach, plus expenses connected to relocating of three offices to new spaces. Salaries and benefits increased by nearly $600,000 because the bank added 20 new permanent employees and seven temporary ones to its payrolls.

As for problem loans, the bank had but two as of Sept. 30, one for $4.7 million on a residential housing project, and a construction loan for $683,000, which was paid in October.

As of Sept. 30, 1st Pacific had total assets of $421 million and total loans of $350 million, with most of the growth coming from Landmark’s assets.

Siciliano sees the local real estate market continuing to slow through at least most of next year.

“Job generation has been fairly weak in San Diego, and as long as there’s a net out-migration of people, demand for housing is reduced, and therefore, prices will be soft,” he said.

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San Diego Trust Avoids Problems:

Opened in October 2003, San Diego Trust continues to proudly tout its record of having zero delinquent loans or problem credits, but CEO Mike Perry says that deserves explanation.

“We haven’t grown quite as quickly as some other banks, and when you give up growth, you don’t have as many problems,” Perry said.

San Diego Trust continues to make profits, but because the bank began paying taxes this year, those profits aren’t as big as last year.

For the third quarter, it had net income of $200,000, compared to last year’s third quarter (which wasn’t taxed) of $282,000.

The bank didn’t pay taxes last year because of benefits used from earlier years when it lost money due to startup expenses.

Total assets as of Sept. 30 were $99 million, up 18 percent; total loans were $70 million, up 7 percent; and total deposits were $84 million, up 18 percent.

Another decision that helped the bank escape problems was pulling back on certain types of real estate lending as the market overheated, Perry said.

He sees the local and regional markets continuing to deteriorate, and points to adjustable mortgage resets in April and May that could bring even worse problems.

“Just how long (the deterioration lasts) is anyone’s guess right now,” he said.

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BofI Holding Names New CEO:

BofI Holding Inc., parent of the Bank of Internet USA, named Gregory Garrabrants as its new CEO last month, replacing founding CEO Gary Lewis Evans, who retains his titles of president and chief operating officer.

Chairman Jerry Englert said the bank’s search committee found a “creative and decisive leader with the right experience to lead our company into its next phase of growth.”

Evans declined to comment on the change, and the reasons behind it, citing securities regulations and the fact that the bank was close to releasing its quarterly financial results.

Before taking his new post, Garrabrants was senior vice president of IndyMac Bancorp Inc., the nation’s seventh largest thrift, which is based in Pasadena and has $30 billion in assets.

Prior to that he was with Goldman, Sachs