By Chris H. Sieroty

Contributing Writer

A steady stream of financial institutions nationwide have collapsed over the past year as a result of the country’s economic crisis and millions of dollars in soured real estate loans. As of Oct. 2, the Federal Deposit Insurance Corp. had taken over 98 banks both large and small across the country.

That figure compares with 26 banks seized last year and just three in 2007, according to statistics compiled by the FDIC. In Inland Southern California, four community and business banks — 1st Centennial, PFF Bank & Trust, Temecula Valley Bank and Vineyard Bank — have been shuttered since November 2008, and analysts expect additional small and midsized financial institutions to be taken over by the federal agency before the two-county region’s economy begins to recover late next year.

“California banks have probably been hit harder than banks in most other states due to the decline in the real estate market,” said Beth Mills, vice president of communications with the Sacramento-based California Bankers Association. “Additional banks being seized by the Federal Deposit Insurance Corporation is inevitable. It’s going to be a tough environment over the next year to year and a half.”

Mills said despite the adverse economic conditions, the majority of community and business banks in the Inland Empire “are well-capitalized and have enough capital to withstand the downturn.”

In total, the four Inland Southern California community banks seized by the FDIC cost the federal agency $1.897 billion. But those financial institutions that remain have been looking to take advantage of the fallout to increase their market share and total assets, according to several bank presidents interviewed by The Business Press.

“The recession wiped out a lot of the competition,” said Gary Votapka, president and chief executive officer of Temecula-based Mission Oaks National Bank. “I’m not happy about that. It’s not the way you’d like to increase your market share.”

Votapka said Mission Oaks has seen a fair amount of new business since Temecula Valley Bank was seized by regulators on July 17 and was taken over by First Citizens Bank of Raleigh, N.C. He explained that many of their new clients wanted to continue doing business with a smaller, independent business bank.

Ralph Wiita, president and chief executive officer of Golden State Bank in Upland, agreed, saying they’ve had a good opportunity to increase market share, particularly following the collapse of PFF Bank & Trust and Vineyard Bank.

“Our opportunity to increase our market share lies with attracting customers who want to work with a community bank and not a large financial institution like the banks that have taken over several local banks,” Wiita said. “We also have a one-on-one marketing effort. We have been calling offices and soliciting business, while following up on referrals and participating in networking opportunities with social organizations, chambers of commerce and rotary clubs.”

For the second quarter, Mission Oaks National Bank reported a net loss of $3.84 million, or 85 cents per share, compared with net earnings of $158,000, or 4 cents per share, for the same period a year earlier. In the first six months of 2009, Mission Oaks lost $6.39 million, or $1.42 per share, compared with net income after taxes of $461,000, or 10 cents a share, in the corresponding 2008 period.

Results from the second quarter and year-to-date of 2009 are exclusive of any credit for income taxes while the results from the second quarter and year-to-date of 2008 included tax provisions of $80,000 and $261,000, respectively, the company said in a regulatory filing with the U.S. Securities and Exchange Commission.

The earnings decline was primarily attributed to increased contributions to loan loss reserves, which totaled $3.61 million in the second quarter and $5.97 million year-to-date. That compares with provisions for loan losses of $534,000 in the same quarter and $786,000 in the year-to-date results a year ago, the company said.

Votapka said second-quarter results were impacted by a $3 million write-down on a secured real estate loan that became “impaired” during the quarter.

As of June 30, the company had total assets of $218 million, up $6.8 million, or 3.2 percent, over what was reported a year ago. Total deposits in the second quarter were $182.3 million, a 13.8 percent growth from the same period a year earlier.

He said the bank remains well-capitalized under regulatory guidelines. Mission Oaks National Banks has $25.5 million in equity capital, according to the FDIC.

“The biggest issue for our bank and banks in the Inland Empire is the devaluation of real estate holdings and the effect it’s having on our balance sheets and earnings,” Wiita said.

Golden State Bank has $160 million in assets and operates two branches in Upland and Brea. The collapse in real estate values has caused the company to swing from a profit of $600,000 in 2007 to a loss of $9.2 million from January 2008 through June, he said.

“The bank is padding its capital fund internally,” he said. “Our losses are all related to our real estate portfolio. We don’t see any more losses and our (third quarter) earnings are much improved.” Golden State Bank was scheduled to release its third-quarter earnings on Oct. 19.

Wiita stressed that the company’s “core operating earnings are profitable and have been profitable all along.”

The bank, which was founded in 2003, has a diverse loan portfolio with about one-third small-business loans; one-third commercial, office, industrial and real estate construction loans; and one-third real estate business loans. He said real estate business loans were dominated by specialty loans to fast-food restaurants, convenience stores and gas stations, all businesses that tend to do well in recessions.

Wiita said Golden State Bank has been more selective in making loans because the risk exposure is “bigger” in a recession.

“One of the challenges in this economy is to maintain higher reserves and capital level,” said Kevin Farrenkopf, president and chief executive of the Bank of Hemet. “Our goal has been to increase our capital reserve level, which we did through earnings. As of June 30, we had earnings of $3 million for the first six months of the fiscal year.”

The bank has $37.8 million in total capital, according to the FDIC. Based in Hemet, the bank has six branches and focuses on lending to small businesses and income-producing real estate.

Farrenkopf said the bank opened a permanent branch in Beaumont in September but will likely not expand this year or in 2010.

“We’ve been there for over a year, but we just recently opened a new, permanent branch,” he said. “Our company was originally attracted to Beaumont because there were no other community banks in the area. We also thought in was an underbanked area.”

Both Wiita and Votapka said that Golden State Bank and Mission Oaks, respectively, have no plans to expand their companies through opening of new branches.

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