Mark your calendars, bank watchers. Aug. 20 could be a big day for Ventura-based commercial real estate lender Affinity Bank.

That’s the day the bank will have to show state and federal regulators that it’s either raised a lot of money, shed a lot of troubled loans or come up with some other way to boost its ratio of freed-up money to total loans. It’s the first deadline set out in a cease and desist order the bank received in April from the Federal Deposit Insurance Corp. and the California Department of Financial Institutions demanding that Affinity Bank increase its capital ratios.

The bank – which has nearly 70 percent of its loans tied up in commercial real estate and has not seen a profit since 2007 – needs to raise about $45 million, cut its loan portfolio by more than $500 million or find some combination to get to the ratio federal state regulators are looking for.

David Stepp, senior vice president and director of marketing for Affinity Bank, said $18.4 million in loans have been sold since March 31 and another $30 million to $32 million are slated to go as part of a branch sale in Irvine that’s pending regulatory approval. But Stepp said all options remain on the table — including a merger.

“We’re looking for a capital infusion,” Stepp told the Business Times. “We’re really not eliminating any opportunity until we’ve had a chance to study it. We’re trying to find the best way to raise the capital without negatively impacting our customers. We want to make sure we have enough capital to keep things running in the normal course of business.”

Affinity’s hunt for capital comes amid a summer of cliffhangers in the tri-county banking sector. Bank of Santa Barbara was sold to a group of investors, Ventura County Business Bank is raising capital and Pacific Capital Bancorp, the region’s largest area-owned bank, has retained an investment bank to help evaluate its options after missing a voluntary capital target and suspending payments on federal bailout money.
 

Affinity Bank officials say they’re working the issue from both sides by selling a branch in Irvine, selling loans and reaching out to potential investors. They say the most likely options are an acquisition by a private equity firm looking for a bank or joining forces with another bank.

“Today, with the cost of capital being so high, a bank acquisition looks attractive to [some private equity firms],” said David Stepp, senior vice president and director of marketing for Affinity Bank. “There are several interested parties who are looking at whether having a bank is a good option for them to help them lend money.”

Stepp continued: “Naturally, another bank would also be a good fit. We have a strong network of branches, especially in Ventura County. If we could find another bank to join forces with, that would be great as well.”
Stepp said that it’s mostly likely the bank will find one investor that will put up all the necessary capital. He said customers will see “very little, if any” change as the bank solves its capital problem.

“It really would depend on what the resulting institution would be called, but I wouldn’t expect the customer to notice anything,” Stepp said. “Maybe the name on their checks, but even that is up in the air at this point. From a capital standpoint, it’s really about finding the right investor.”

In their order, state and federal regulators told Affinity Bank that its tier one capital must be 8 percent of its total assets by Aug. 20. As of March 31, the most recent date figures are available for, the bank had a long way to go: It had tier one capital of $55.7 million and average assets of about $1.2 billion for a ratio of about 4.4 percent.

To hit the 8 percent mark, Affinity Bank needs to come up with about $45 million, reduce its loan portfolio to about $697 million or some combination of the two. The FDIC said the bank couldn’t dip into its allowance for loan losses to come up with the money.

FDIC spokesman David Barr said he couldn’t go into details of what might happen if Affinity Bank doesn’t meet its Aug. 20 deadline to have a tier one capital ratio of 8 percent. The order also says that Affinity Bank has 30 days after Aug. 20 to get its tier one ratio up to 9 percent and then 30 more days to get it to 10 percent.

“It would be pure speculation to discuss what will happen if deadlines are not met,” Barr said. “All I can say is that we work closely with banks that are under supervisory actions.”

Barr also said he couldn’t provide any updates on the enforcement order but confirmed that it remains in place.

“When we are comfortable that all conditions have been met and the bank is back on track, we will terminate the order,” Barr said in an e-mail to the Business Times.

For his part, Stepp said he doesn’t know what will happen Aug. 20.

“I see a lot of banks that didn’t get to where they needed to by when they needed to, but nothing happened at that date,” Stepp said. “While the date’s in the order, I don’t know that it’s a hard date.”

Affinity Bank has not seen a profit since the end of 2007, when it posted a net income of $238,000 on assets of about $1.17 billion, according to filings with federal regulators.
The losses started trickling in during 2008 and exploded as the year went on with a $38.2 million net loss on $1.22 billion in assets at year’s end. Affinity Bank marked a $3.8 million loss at the end of the first quarter this year.

The FDIC’s order charges Affinity Bank with “operating with a large volume of poor quality loans” and “operating with a large concentration of commercial real estate loans.” According the bank’s most recent filings with regulators, about 70 percent of its $1.2 billion in loans were in either real estate or commercial loans, with $867 million in real estate loans alone.

About 5.5 percent – or roughly $70 million – of the bank’s loans were past due at March 31, according to Affinity Bank’s filings. Of the worst loans – those more than 90 days past due – the big problem was in commercial real estate.

Construction and land development loans accounted for 27 percent of those non-current loans, with multi-unit residential construction accounting for another 28 percent and 24 percent accounted for by other construction projects, according to the bank’s filings.

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