San Diego National Bank’s takeover sad, but not surprising

San Diego banking experts were sad about the takeover of San Diego National Bank by the Federal Deposit Insurance Corp last Friday, but they were not surprised.

“It’s a sad day for San Diego to lose a good corporate citizen,” said Dan Yates, president of Regents Bank, a community bank in La Jolla.

“It’s very clear they had a major investment at the holding company level in Freddie Mac and Fannie Mae, and they were not able to survive the capital investment impact of that.”

The FDIC last Friday shut down SDNB, which was absorbed by U.S. Bank to insure customer’s deposits. SDNB, a subsidiary of FBOP Corp of Oak Park, Ill., had 28 branches in San Diego. The parent company had $800 million invested in Fannie Mae and Freddie Mac stock, which were written off in the mortgage meltdown.

“It’s always disappointing to see a community bank disappear,” said David Ely, finance professor at San Diego State University. “But you do have a large number of institutions to serve the area. I don’t see it as having a major impact.”

One year’s decline

The banking industry had known for several months of SDNB’s shaky position, said SDSU’s Ely.

According to an FDIC directory report, SDNB’s “core capital ratio” - which measures a bank’s percentage of good assets to bad - deteriorated significantly from 9.84 percent from June 30, 2008, to 1.69 percent by the same date this year.

A bank must have at least 4 percent core capital ratio to be considered sufficient, said Ely.

“It is a disappointment” that the bank was not able to recapitalize to sustain the business, he said.

Hard lessons

The hard lesson is that government-backed agencies are subject to as much risk as other businesses, said experts.

“The lesson may be you have to be cautious about what you invest in, even in government-sponsored enterprise,” said SDSU’s Ely.

In the political climate of the early 2000s, the government encouraged the banking industry nationwide to invest in Fannie Mae and Freddie Mac stocks, noted Yates. Most bankers considered the housing giants to be quasi-government agencies, and therefore “prudent” investments, he said.

However, that view has now changed. “A federal agency is not the same as investing in the federal government - meaning U.S. treasuries or funds,” said Yates. “You have to look very closely at those passive investments and prevent (investing) a significant percentage of your capital in one security.”

The exact percentage depends on the risk level of any particular investment, he said. But no one thought of Freddie or Fannie as risky.

Banking community

Yates noted that San Diego National Bank was a strong member of the community, involved in many charities in San Diego.

“It’s a loss for the community to see a positive group of business leaders exit the scene. I have a great deal of respect to (SDNB chief executive officer) Robert Horseman,” said Yates. “It’s hard to be critical of this type of loss.”

Depositors

But the affect to the bank’s customers are minimal, due to FDIC insurance up to $250,000, said Ely. “Even though a bank may not exist, people don’t have to worry about the safety of their deposits… the service will continue.”

Helen Kaiao Chang is SDNN’s contributing business editor. Follow her on Twitter @HelenChang.

Tags: dan yates, david ely, fannie mae, fbop corp, fdic, freddie mac, regents bank, robert horseman, San Diego National Bank, sdnb, SDNN, SDSU

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