Problems with its loan portfolio cut into second-quarter profits at Monterey Bay Bancorp of Watsonville, Calif., the banking company said.

Net income at the $472 million-asset bank fell 38% from the same period a year earlier, to $554,000. Monterey blamed much of the earnings hit on a jump in substandard loans, which forced it to raise its loan-loss reserves 287% from last year, to $775,000.

Loans classified as substandard rose 29.5% from the first quarter, to $10.1 million.

Chief executive officer C. Edward Holden attributed the loan problems to its ongoing transition from a savings and loan to a commercial bank.

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