Banking Industry Sees ’85 as Good Year : Lower Interest Rates Fueled Borrowing

As the real estate market goes, so goes the banking industry in Orange County.

And in 1985, that meant things went well. In fact, in 1985 Orange County banks on the whole had their best year since 1982. Lower interest rates fueled an upswing in both real estate and commercial borrowing last year and helped most of the troubled banks in the county return to profitability.

A few banks are still struggling, though, and at least two are in serious trouble, consultants said. Valencia Bank in Santa Ana was seized by regulators in February, making it the eighth Orange County-based bank to fail since 1982 because of sizable losses on real estate.

Still, for the first time since 1982, more local banks posted profits than losses at the end of the year.

Net income for the county’s 29 independent banks that showed profits last year hit $19.6 million, a 62.5% increase over the $12.1 million in net income generated by 20 profitable banks a year earlier.

Losses Show Improvement

Total losses posted by the remaining 15 independent banks last year were $11.3 million, a 47.4% improvement over the previous year when the majority of the local banks--24--ended up with a collective $21.5 million in red ink.

These are just a few of the findings gleaned from the year-end results of all 44 commercial banks based in Orange County.

Other findings include:

- Ten banks posted annual profits last year after losing money in 1984. Only one bank that showed a profit in 1984 lost money last year.

- Fifteen banks posted higher profits last year than in the previous year. Only four banks posted lower profits.

- Losses at eight of the county’s banks in 1985 were less than the same banks’ losses the year before.

Despite the generally upbeat results, “there are probably a dozen banks in the county operating under some kind of order issued by (state and federal) regulators,” said Gerry Findley, a Brea consultant for financial institutions who publishes the Findley Reports on California Banks. The orders require anything from improving minor operating matters to forcing banks to raise more capital.

But for most banks, the results in 1985 were encouraging.

“El Camino, Eldorado, CommerceBank, Orange City, American Interstate, Pacific National . . . are all turn-arounds, showing much better performances,” Findley said.

‘Feel Good’ About Industry

“We feel pretty good about the independent banking industry. We wish it were in better condition, but we feel good about the improvements taking place in the financial structures and operating performances,” he said.

In one critical measure of a bank’s soundness, the capital-to-assets ratio, only four banks last year fell below the 6% minimum required by federal regulators. In 1984, six banks fell below the ratio and 12 were under the 6% mark at the end of 1983. The ratio measures a bank’s capital, or net worth, as a percentage of its total assets.

Often banks are forced by regulators to raise additional capital through the sale of stock. But perhaps the easiest way to improve that ratio is to reduce assets. And last year, 10 area banks chose to reduce their assets.

Overall, though, the county’s banks increased total assets 37.5% to $3.4 billion from $2.5 billion.

Banks used other techniques, besides cutting back on assets, to improve their health and earnings. Many banks cut payrolls and other operating costs, some initiated new marketing plans to build up consumer deposits and loans, and starting in late 1984, 34% of the banks changed top management personnel. Many banks also devalued their real estate and loan portfolios to position themselves for big gains this year.

Statistics, of course, can sometimes be misleading.

CommerceBank, for instance, ended the year with a capital-to-asset ratio of 5.8%. But the otherwise healthy bank typically gets a huge influx of deposits on the last few days of the year, which waters down the year-end ratio. Last year, title and escrow companies pumped about $25 million into the bank in the final days of December.

Change in Computations

But federal regulators--who monitor banks’ capital-to-asset ratios--know when slumps below the minimum ratio are temporary. Additionally, the regulators now have begun using an average annual asset figure rather than the Dec. 31 total. That formula would give CommerceBank a 6.9% ratio for 1985.

In another case, Mission Viejo National Bank was the second-biggest loser last year, but the bank has been operating profitably since November and turned in a $75,000 profit for the first quarter that ended March 31. Jack R. Barnes, president and chief executive of the bank, projects an annual profit this year of $500,000 to $1.5 million, which would mark one of the bigger turn-arounds in the last few years.

And the two banks with the most assets and highest net incomes in 1985 are not full-service banks like the rest of the county’s institutions. International Central Bank & Trust Corp. in Irvine does not make any loans, and Avco National Bank in Irvine no longer takes deposits.

The bank posting the worst annual balance sheet, Valencia, was closed Feb. 7 of this year by state and federal regulators after posting $10.4 million in losses over three years. In 1985, regulators shut down two banks--Capistrano National Bank in Santa Ana and South Coast Bank in Costa Mesa.

Real Estate Problems

All three failures underscored the havoc that real estate lending wreaked on financial institutions in the early 1980s.

The three banks had invested heavily in loans on real estate that turned out to be over-appraised. While the booming inflation and interest rates of the late 1970s and early 1980s covered many mistakes, the banks took heavy losses in writing down the value of their loans to reflect the lower real estate values when the market went bust .

“It’s hard to keep remembering the dynamics of Orange County. It is one of the major real estate markets in the country,” said Salvatore Serrantino, a Santa Monica-based consultant to financial institutions.

Even if banks say they are not real estate-oriented, said banking lawyer Kenneth Ziskin of Los Angeles, the customers are. And their financial statements, which banks rely on when making loans, “were based on the value of real estate they owned,” Ziskin said.

Orange County’s economy is heavily dependent on the real estate market, and the cycle for real estate is swinging back, said Los Angeles banking lawyer Thomas D. Phelps.

“Many people are saying this is a good time to get back in,” Phelps said. Banks have depreciated their loan appraisals and the properties they have foreclosed on, and the construction business has lower interest rates to spur building, he said.

Devaluations Helpful

The devaluations mean that banks can build up their real estate loan portfolios more safely than before, said Ed Carpenter, a Newport Beach financial institutions consultant, .

At the Bank of Yorba Linda, the only bank to post a loss last year after reporting profits in 1984, the red ink came after a new management team reviewed the loan portfolio “and wrote off a significant number of problem loans,” said Walter Hannen, president and chief executive.

“With the economy improving, we thought we should have a clean portfolio to move ahead this year,” he said. “Besides, we hope to collect a significant amount of the problem loans” during the current year.

Of Orange County’s 44 independent banks, 23 are state-chartered and the rest have federal charters. State-chartered banks in Orange County account for only 7% of the 285 state banks throughout California, but the dozen county-based state banks that posted losses last year made up 20% of the money-losing state-chartered banks.

“One thing that may, and I emphasize may, be different about Orange County banking is that Orange County may have been over-banked in comparison to a lot of other areas in the state,” said Phelps. “Forty-four banks is a pretty impressive figure. That’s a whole lot of competition and it sounds like a formula for disaster. That may be one reason why losses are so much greater there.”

Much Growth Since 1979

The county is home to nearly 10% of the 449 state and national banks in California, and more than three-quarters of that growth has come since 1979 when the real estate market was booming. Of the banks still in existence at the end of 1985, only 10 were opened before 1979. The oldest banks--El Camino and Eldorado--opened in 1970. The only years in which no new banks were opened in the county were 1974, 1978 and 1985.

“Orange County is a microcosm of independent banking statewide,” said consultant Carpenter. “On a per-capita basis, there are more banks here than anywhere else in the state with the possible exception of Santa Clara County.”

Santa Clara County banking is fueled by the high-technology companies in Silicon Valley, he said, while Orange County banking relies primarily on real estate and high technology.

What may turn out to be a surprise this year is the return of all banks to more retail banking, said Los Angeles banking lawyer Harvey H. Rosen.

“More of my clients want to talk about retail banking, but with less emphasis on brick and mortar and more on the efficient offering of services,” Rosen said. The reason for the move, he said, is that other areas are getting too competitive to be profitable, and “good commercial credit is getting tougher to get.”

Rosen, like other consultants and banking lawyers, does not believe 1986 will be “any better or worse” than 1985, but he does see more banks becoming healthy again as the real estate market swings back.

“I think we’ve got another two or three years left in this cycle,” he said. ORANGE COUNTY BANK SCOREBOARD

in millions in millions in thousands Loan Loss Cap.- Bank Assets Deposits Reserve ’85 ’84 ’85 ’84 ’85 ’84 Avco National 355.1 218.8 0 200.1 8,985 5,008 Internat’l Central Bank & Trust 340.1 128.5 111.3 94.3 0 0 CommerceBank 186.1 128.4 171.6 117.0 1,593 1,050 Eldorado 173.5 171.6 154.0 152.6 1,321 1,145 Bank of Newport 169.1 164.0 137.7 130.6 1,109 1,074 Sunwest 148.4 155.4 134.6 137.7 3,046 1,655 Landmark 115.9 91.5 103.5 80.5 722 580 Valencia* 103.4 139.1 99.2 127.2 1,610 2,015 National Bank of Southern Calif. 97.2 70.6 86.5 61.5 883 760 Orange National 95.8 84.5 87.5 77.2 440 400 Citizens of C.M. 95.3 84.9 84.9 75.5 703 601 Liberty National 95.0 81.5 78.4 69.1 610 600 El Camino 94.3 89.1 83.5 80.3 788 775 Security Pacific State Bank 90.5 46.9 44.1 15.1 363 329 Monarch 86.1 88.1 78.4 80.4 748 681 Pioneer 84.6 47.9 78.6 41.9 540 333 Marine National 59.3 58.2 51.8 50.5 378 512 Pacific Inland 57.9 29.6 48.1 20.3 1,817 150 Orange City 57.6 59.6 53.2 55.6 743 855 Pacific National 57.1 52.4 52.3 48.5 459 722 American Interstate 56.2 62.1 50.6 55.7 505 653 Huntington National 55.8 43.8 51.1 39.9 360 380 Corporate National 54.8 46.8 49.5 42.4 415 292 American Commerce National 49.0 18.2 44.8 15.2 462 71 Frontier Bank N.A. 46.5 36.2 40.4 29.6 330 173 Bank of San Clem. 45.3 54.5 42.4 49.0 421 1,241 Bank of Yorba Linda 43.2 31.8 39.7 29.3 905 171 Bank of Orange Cty 41.1 50.7 37.0 46.6 300 400 New City 39.8 24.3 35.2 20.9 301 100 California City N.A. 39.4 34.4 34.3 29.7 829 263 Bank of Westminster 34.7 28.5 31.2 25.3 182 185 Laguna Bank N.A. 29.6 26.8 26.8 24.2 339 266 Mariners Bank N.A. 27.3 22.9 24.8 20.1 190 128 First American Bank & Trust Co., N.A. 27.0 27.4 25.1 24.7 300 267 Dana Niguel N.A. 26.6 22.5 23.2 19.8 200 262 Mission Viejo Nat’l 24.7 35.7 22.7 32.8 509 298 Bank of Anaheim N.A. 24.0 9.7 20.3 7.0 175 18 Founders National 23.9 17.7 20.5 14.2 93 93 Grand National 23.9 22.1 20.3 18.8 463 576 Pacific Regency 20.5 17.8 18.4 14.8 260 121 Saddleback National 16.6 16.0 15.7 14.1 323 87 United American 16.5 10.8 14.1 8.7 86 26 Far Western 13.8 20.9 12.8 18.4 235 400 Mission Valley N.A. 10.8 10.3 9.2 7.9 72 64

in thousands in percentages Assets Bank Net Inc. Ratio** ’85 ’84 ’85 ’84 Avco National 2,860 2,517 6.7 6.8 Internat’l Central Bank & Trust 3,195 1,346 6.3 7.9 CommerceBank 1,100 1,020 5.8 7.3 Eldorado 1,495 527 7.8 7.4 Bank of Newport -232 -1,018 9.3 9.6 Sunwest 0 -1,099 7.8 6.6 Landmark 1,104 901 8.8 9.7 Valencia* -2,763 -5,700 0.6 2.8 National Bank of Southern Calif. 857 451 7.2 8.5 Orange National 930 756 7.7 7.7 Citizens of C.M. 966 766 8.7 8.5 Liberty National 535 531 7.5 7.7 El Camino 1,332 871 9.0 8.2 Security Pacific State Bank 952 -349 34.4 11.3 Monarch 24 -775 7.0 7.0 Pioneer 452 480 6.8 10.7 Marine National 31 -732 9.4 10.2 Pacific Inland -1,295 -431 15.6 29.5 Orange City -649 -1,419 6.5 4.8 Pacific National 330 -464 7.7 6.9 American Interstate 164 102 7.7 7.1 Huntington National 435 101 7.1 8.2 Corporate National 364 544 7.9 8.2 American Commerce National 201 -73 7.0 15.6 Frontier Bank N.A. 713 532 11.0 12.4 Bank of San Clem. -879 -753 4.9 7.2 Bank of Yorba Linda -301 76 6.1 6.8 Bank of Orange Cty 225 -2,000 9.2 7.1 New City 501 -97 10.0 13.5 California City N.A. -353 -19 12.0 13.1 Bank of Westminster 87 132 8.3 9.7 Laguna Bank N.A. 127 125 8.8 8.9 Mariners Bank N.A. 286 206 8.3 8.6 First American Bank & Trust Co., N.A. -419 -601 6.6 7.9 Dana Niguel N.A. 80 -220 8.6 10.2 Mission Viejo Nat’l -1,570 -1,189 6.1 6.1 Bank of Anaheim N.A. -229 -652 10.2 25.9 Founders National 7 148 13.5 18.3 Grand National 302 -1,386 12.8 12.9 Pacific Regency -757 -773 9.5 16.3 Saddleback National -966 -663 3.2 9.3 United American -128 -130 12.2 19.1 Far Western -655 -783 6.2 5.8 Mission Valley N.A. -151 -147 14.5 16.7

* Valencia Bank was declared insolvent and seized by regulators on February 7, 1986

Using December 31, 1985 Assets

Orange County’s Independent Banks The Profit and Loss Picture, 1985 vs 1984

Increased Profits (15)

Decreased Profits (4)

Profit After Losses (10)

Decreased Losses (8)

Increased Losses (6)

Loss After Profit (1)

Where Orange County’s Independent Banks Keep Their Assets

LOANS SECURITIES CASH * 1985 63.2% 24.4% 7.6% 4.8% 1984 66.1% 19.2% 8.4% 6.3% 1983 60.9% 23.0% 9.3% 6.8%

* Bank premises, equipment, receivables and real estate obtained by foreclosure.