The outlook for banks brightened recently as the inverted yield curve that plagued the industry for more than a year flattened in recent months. The shift in long and short term yields gives banks some breathing room and relieves some of the pressure on margins. “The current banking climate has improved a bit because the yield curve has at least flattened out,” said Scott Anderson, vice president and senior economist for Wells Fargo & Co. “The more inverted the curve, the harder it is for banks to earn money in their net interest margin.” An inverted yield curve occurs when the interest on short term credit is higher than the yields on long term debt. Banks typically borrow using short term credit and lend for longer terms. So if short term rates increase at a higher pace, it costs them more to borrow than they make on what they lend. After becoming progressively inverted through 2006 and much of 2007, the curve began to flatten in June. Some say that inverted yield curves are a precursor to recession. Others consider them a natural part of the economic cycle. Either way, “it’s gotten increasingly painful as the inversion continued,” Anderson said. “The more prolonged the inversion and the deeper the inversion the more difficult for banks to attain profitability. With that said, things have gotten better.” For the local banks in the San Fernando Valley region, the challenges of the recent year have been fewer, in part because many of them concentrate their lending in the real estate area, which has been very active. At the same time, many of the area’s local banks are still relative startups that can be expected to report net losses in the early years. Those banks are all seeing large increases in their assets and deposits. At California United Bank, assets increased 71 percent in the first quarter to $199.8 million and deposits rose 84.5 percent to $138 million. Bank of Santa Clarita saw its assets increase 36.1 percent in the first quarter to $118.4 million and deposits rose 46.9 percent to $98.1 million. And at Western Commercial Bank, assets nearly tripled to $53.1 million and deposits spiked to $42.5 million from $1.5 million in the comparable period a year ago. Some established banks have continued to report strong results, despite the problems of the past year. For the second quarter of 2007, First Commerce Bancorp reported net income rose 32 percent to $932,000, compared to net income of $706,000 for the second quarter of 2006. First Commerce attributed its performance to strong loan demand and the bank’s business development program while noting that “new deposits were difficult to attract due to strong competition,” said Jack Feldman, president and CEO of Encino-based First Commerce Bancorp. Mission Valley Bank in Sun Valley reported deposits grew 14 percent to $144.8 million from $126.8 million in the first quarter of 2006. Assets rose 18 percent to $183.3 million. But the bank’s net income declined in the period to $257,000 from $284,000 in the same period a year ago. First Private Bank and Trust reported assets grew 18.7 percent to $558.8 million in the first quarter and deposits rose 21.6 percent to $466.8 million. The bank’s first quarter net income is not available, but at parent, Boston Private Financial Holdings Inc., earnings for the period were relatively flat compared to the year ago period. The bank reported net income was up 2.4 percent to $13.1 million in the quarter, although the results included a recent acquisition. On a same affiliate basis, Boston Private’s net decreased 5.8 percent. The results at Mission Valley and Boston Private are perhaps more typical of small and regional banks in the recent past, economists say. Unlike larger banks, which can offset lower margins by boosting fees and business in other areas money management, brokerage and the like smaller banks typically do not have the same range of services. But even those banks that have relied on real estate lending for growth may find they are in for tougher times going forward, economists say. “Historically the commercial market lags the residential market by a year or two,” Anderson said. Anderson expects the commercial lending market to remain steady this year, but he is less certain about 2008.