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Lending for real estate drives increase in state's bank growth

California banks surged 11.8 percent between the first quarters of 2013 and 2014 -- the third-highest growth rate in the nation -- fueled by increases in real estate and construction loans, according to the latest report by the Federal Reserve Bank.

The Fed branch reported that lending to commercial real estate projects was particularly robust in Southern California and the San Francisco Bay Area, but added that business lending grew only slightly and remained relatively weak throughout the Western region.

"Some contacts observed a stronger uptick in loan demand from smaller businesses … (but) the availability of commercial credit largely remained limited to the highest-quality borrowers," the Fed said in a report in mid-July. "Lenders are competing vigorously on rates and terms for such borrowers."

In the meantime, banks are improving their financial positions, including by ridding their portfolios of problem loans. Seventy-eight percent of California banks are now in satisfactory condition or better, compared with 61 percent a year ago and just 43 percent during the depths of the recession in 2010, according to the Fed.

Of the 30 San Diego County financial institutions evaluated by Bauer Financial, a bank rating service in Florida, 16 were ranked as "superior" five-star institutions, and 13 received "excellent" four-star ratings.

The only exception was Neighborhood National Bank, a federally backed institution that specializes in loans to low-income communities.

But profit margins have been hurt by the narrowing margins in net interest rates. California banks averaged a relatively low 0.73 percent return on average assets in the first quarter, unchanged from the same period the previous year.

At San Diego's California Bank & Trust, for instance, the net interest margin -- the difference between the interest payments a bank receives from borrowers and the interest it pays to lenders -- shrank from 4.67 percent in the first quarter of 2013 to 4.43 percent in the first quarter of 2014. That was reflected in a decline of net interest income from $115 million in the first quarter of 2013 to $110 million in the first quarter of 2014. And that helped push its return on average tangible assets from 1.24 percent in the first quarter of 2013 to 1.07 percent in the same period this year.

In San Diego County, according to the latest data from the state Department of Financial Institutions, the institutions with the highest return on assets during the first quarter included:

*Seacoast Commerce Bank, 2.32 percent

* San Diego Metropolitan Credit Union, 2.12 percent

* Home Bank of California, 1.99 percent

* North Island Financial Credit Union, 1.62 percent

* San Diego County Credit Union, 1.45 percent

* Balboa Thrift & Loan Association, 1.19 percent

* California Coast Credit Union, 1.15 percent

Even though banks have been improving their lending, the narrow interest margins mean that they are still putting a higher-than-normal percentage of their money into short-term investments rather than lending activity.

In the first quarter, short-term investment made up 12 percent of the asset portfolios in California banks, compared with the national average of 9 percent.

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