Commerce Bank Thrives on SBA Loans : Finance: Bank reports record earnings as it capitalizes on Small Business Administration lending activity.

In the late 1970s and early 1980s, it seemed that new San Diego County banks were being chartered every week. A decade ago, there were 40-plus independent local banks.

But deregulation coupled with the problems of the financial services industry during the 1980s exacted a heavy toll. After a spate of mergers and failures, only a couple of dozen local banks remain.

One of the battle-hardened survivors is Bank of Commerce, a smallish (current assets: $132.5 million) five-branch bank founded in October, 1975, that has found a profitable niche in making Small Business Administration-guaranteed loans. SBA loans now account for 50% of the bank’s loan originations.

Like most other banks, Bank of Commerce had its share of troubles during the go-go 1980s. It nearly ran aground making loans secured by second trust deeds and by purchasing packages of auto loans.

Also similar to other banks, it failed to foresee the extent and force of the effects of banking deregulation championed by the Reagan Administration, and the entirely new competitive climate that it created.

But Bank of Commerce had what would prove to be a trump card with its growing expertise in making SBA loans, a program by which the government guarantees up to 90% of loans made to credit-worthy businesses, many of them minority owned.

Until recent years, many banks shunned the loans because it seemed to confer on them the status of “lender of last resort,” Bank of Commerce President Peter Davis said Monday. The loans were seen to have a government-sponsored “social purpose,” Davis said, and therefore unlikely to be profitable.

But Bank of Commerce’s performance is giving the lie to that assumption. On Monday, the bank reported a first-half profit of $1,244,000, up 25% from the profit of $996,000 it logged for the same six months in 1991. As an annualized return or profit on total assets, the net income represents an average return on assets of 1.9%, comfortably above the industry norm.

Bank of Commerce does not retain the SBA loans in its portfolio but sells them in packages to investors in the secondary market.

Bank of Commerce’s typical SBA borrower is a small business looking to buy its own plant or office. So, more than 95% of all the SBA loans that Bank of Commerce makes are secured by first mortgages on real estate owned by the borrower.

But the bank also reported Monday a jump in its non-performing loans to $3.9 million, or 2.9% of total assets, up from $1.54 million, or 1.1% of assets, as of June 30, 1991. The bank also said it was shrinking its assets to improve its capital, which for regulatory purposes is measured as a ratio of assets. But Davis maintains that his bank is not in any serious long-term trouble.

Despite the glitch, Davis, 52, believes his bank has come through its trials intact and in good shape for the 1990s.

Davis joined Bank of Commerce in 1976, the year after it was founded, and was made president two years later. A Coronado resident who attended West Point for two years, Davis worked at Bank of America for 12 years before joining the community bank.

It was as a loan officer at BofA that Davis made his first SBA loan. He liked SBA loans because the small businesses that applied for them were typically growing, successful and good credit risks. Also, the loan limits typically were higher, and borrowers got up to 25 years to repay them.

One of the reasons most lenders stayed away from making the SBA loans was the paperwork involved in the SBA’s loan review and approval process. Now Bank of Commerce, as a “preferred SBA lender,” has the authority to approve loans itself. The SBA’s involvement now consists only in regular audits of Bank of Commerce’s portfolio.

Bank of Commerce is now the leading SBA lender in the county, and the second largest in the United States after Mechanics Bank of Orange County.