Two more local banks are feeling the pain from the rising numbers of problem loans.

Discovery Bancorp reported holding nearly 6 percent in problem loans as of June 30. Discovery said July 25 that it sold its headquarters building in San Marcos and is leasing back the space from the new owner, Windsor Projects, to increase its liquidity and capital base.

Meanwhile, San Diego-based Imperial Capital Bank, with about 3.4 percent of its assets classified as nonperforming, signed a "memorandum of understanding" Aug. 8 with its regulators to make certain changes to operations following a recent bank examination.

Most banks attempt to keep their problem loans below 1 percent of total assets.

Discovery's sale of its 27,000-square-foot building for $8.4 million gave the community bank a pretax gain of $2 million, which the bank will use for new loans and to improve its liquidity, says Chief Executive Officer Frank Mercardante.

"We would have done this in the best of times or the worst of times. It's done all the time," he said.

Nonperforming Loans

For its second-quarter report, Discovery Bank, which has about $194 million in assets, reported holding $10 million in nonperforming loans - those in arrears by 90 days or more.

When combined with problem assets at a separate finance unit, Discovery Bancorp, the holding company for the bank and a separate finance company, reported problem loans of $11.2 million. Discovery's ratio of problem assets to total assets was 5.8 percent, compared with $12.2 million, or 6.2 percent, in problem assets at the end of the first quarter.

The nonperforming loans were land development and business loans, and most were backed by real estate, says Mercardante, who took over as CEO in December.

To protect itself in case the problem loans default, Discovery Bancorp put an additional $2 million into its reserve balance, bringing the total to about $4.7 million.

Because of the increased reserves, Discovery Bancorp took a $1.2 million net loss in the second quarter and reported a net loss of $1.1 million for the first half.

Mercardante said the bank is considering other strategies to improve its capital position, even though it is still considered a "well-capitalized" institution with 9.47 percent in Tier 1 capital.

"This is all about being proactive," said Mercardante, who has more than 40 years of experience in the banking industry.

Regulators Take Action

Imperial Capital, one of the area's largest lenders with about $4.1 billion in assets, revealed that it agreed to a memorandum of understanding with the Federal Deposit Insurance Corp. and the California Department of Financial Institutions.

The bank referred to the memorandum as "an informal supervisory agreement," and calls for Imperial Capital to take certain steps, including reducing its classified assets, to improve its underwriting and administrative functions in connection to lending, while reducing its reliance on volatile funding sources.

The bank's top two executives were out of town last week and unavailable for comment.

Some local bankers say an MOU is not as severe as a formal cease and desist order or consent decree, but it is not something that any bank wants to receive.

"It's the first step that regulators generally take with a bank to take corrective actions," said Gary Cady, chief executive at Torrey Pines Bank, based in Carmel Valley.

A unit of much larger Western Alliance Bancorporation of Las Vegas, Torrey Pines Bank reported holding about $608,000 in problem loans on June 30, or 0.08 percent of its assets.

Because of the current economy, regulators are "clearly tightening their scrutiny of situations," Cady said.

"This is a more difficult situation now, so there are more banks having to make corrections," Cady added.

Copyright San Diego Business Journal Aug 25, 2008

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