ORANGE COUNTY BANKS BOUNCE BACK : Combined Income Pushes State’s Net to Tops in Nation

Going against the industry’s trend, Orange County’s 40 independent banks posted a combined net income for 1986 more than six times higher than the previous year’s profits.

Their overall performance helped California’s banks collectively post the biggest increase in income--53%--of any other state’s banks, according to figures compiled by Alex Sheshunoff of Austin, Tex., an industry data analyst. Nationwide, total bank profits last year dropped 2.55%--the first national downturn in 25 years.

Bankers and industry consultants expect healthy returns again this year in Orange County as some banks--from larger ones like CommerceBank and Eldorado to smaller ones like Mission Viejo National--posted record net incomes during the first quarter of 1987.

But this year’s results are not expected to show such huge percentage increases.

The reason for the big percentage hikes in 1986, Sheshunoff pointed out, is that area banks performed so poorly the prior year. Net income for all 40 Orange County banks, for instance, jumped to $4.59 million last year from only $745,000 in 1985, according to statistics banks reported to regulators.

Still, during the past year the county’s banks outperformed banks statewide and nationwide in critical areas such as reducing non-performing loans--a key indicator of a bank’s future health. Such bad loans--those that are 90 days’ delinquent or in default--were cut 10.2% countywide but rose 3.9% statewide and 10.3% nationwide.

“In general, the banking industry in Orange County is doing good,” said Gerry Findley, a Brea-based financial institutions consultant who publishes the annual Findley Reports on California Banks.

“A lot of banks made a lot of strides in shoring up their ability to sustain their businesses last year,” Findley said. “It was what we would call a year in which they took a much tighter hand on controls.”

Gains in Other Areas

Overall, the county’s banks posted strong gains in other areas. Total assets grew 20.8%, total deposits increased 21.1%, total loans rose 16% and critical but hard-to-get capital jumped 18%.

Both Sheshunoff and Findley cautioned that banks in the county and the state are still recovering from the beating they took in the early 1980s when the real estate market fell apart and interest rates skyrocketed, boosting the cost of funds while revenues remained flat.

And while the results overall were positive last year, individual performances of the 40 area banks varied widely.

- Twenty banks chalked up profits last year and in 1985, although five reported lower profits last year than they did in the previous year.

- Seven banks turned in profits last year after losing money in 1985.

- Six banks lost money last year after posting profits the previous year.

- Seven banks were in red ink last year and in 1985. And four lost more money than they did in 1985.

Statewide, 24.8% of the 458 California-based banks reported losses last year, and 32.9% showed drops in earnings, Sheshunoff said. He also noted that while banks in California posted the greatest improvement in net income during 1986, their combined return on assets, a major indicator of profitability, was just 0.23% last year--the seventh worst return on assets among the 50 states and the District of Columbia.

The mixed indicators of financial health leave some county bankers cautiously optimistic.

“All of us went through a big adjustment period with (the 1982) deregulation of banking,” said David Stein, chairman of PNB Financial Group, the holding company for Pacific National Bank in Newport Beach.

Change in Approach

“We had to change our approach. Banking is a much more dynamic, exciting and vibrant industry now,” said Stein, whose company tentatively agreed Thursday to acquire Bank of Orange County.

One of the deans of county banking, J.B. Crowell, believes that the health of Orange County’s independent banks “is as strong as it has been in the last five years,” an understatement considering how far the banks have come in pulling themselves out of the real estate-interest rate debacle.

Last year, two county banks--Valencia in Santa Ana and Saddleback National in Laguna Hills--were among the record 138 banks seized nationwide and closed by federal regulators. In addition, Orange Coast Thrift & Loan in Los Alamitos, which, like banks, was also insured by the Federal Deposit Insurance Corp., was seized and declared insolvent last year.

In the past five years, 10 Orange County banks have failed.

The FDIC is predicting that 200 or more banks will fail this year. In the first four months, regulators closed 74 banks, 80% more than the 41 banks it had closed in the same period last year.

Only two banks in California, including New City Bank in Orange, have been closed so far this year. Its assets were transferred to a newly chartered institution, Colonial Bank, in Santa Ana.

The biggest increase in the number of troubled banks is in Texas, Oklahoma, Louisiana and Colorado, said Allen Whitney, an FDIC spokesman. Texas, the worst hit state, saw 17 of its banks closed in the first three months alone, far ahead of last year’s pace when 26 banks were closed during the entire year.

“That tells us we’re continuing to be faced with serious problems in the agricultural economy and in the energy economy,” he said.

Unlike the insurance fund for savings and loans, the FDIC fund remains healthy. Last year, Whitney said, reserves grew by about $288 million, ending the year at $18.2 billion. If 200 or more banks are closed this year, he said, the fund may remain flat or suffer a “modest reduction.”

Biggest Success Story

Probably the biggest success story in Orange County has been the turnaround of Mission Viejo National Bank, which was second only to Valencia Bank, as the worst performing county bank in 1985. In that year its assets and deposits fell 30%, and the bank had a net loss of nearly $1.6 million.

With hard-nosed, workaholic Jack Barnes cracking the whip as president last year, the bank pared overhead costs--primarily salaries and benefits, introduced bonus incentives and wound up last year doubling its assets, deposits and loans and posting nearly $1.3 million in net income, the fourth best in the county.

“Here was a bank everybody thought was going belly up, and now they’re outperforming everybody else,” said Findley, who was one of the paid consultants advising Barnes.

Spurred by lower interest rates, Mission Viejo National has relied on mortgage banking, or selling loans to others, to boost its income. Mortgage banking, typically more popular with savings and loans, has helped many troubled institutions post profits while they work themselves out of bad loans on their books. It has also provided a rare measure of cooperation in the industry.

Mission Viejo National has set up a mortgage lending operation in the lobby of the Brea branch of Citizens Bank of Costa Mesa.

“We only do what we know how to do, and we don’t have the expertise in mortgage banking,” said Robert Ucciferri, executive vice president of Citizens Bank. “We had extra space in Brea--Mission Viejo (National Bank) is no competition with us up there--and they pay us rent and send us referral business.”

Sees Need for Cooperation

Findley believes that smaller banks need that kind of cooperative spirit to compete more effectively with the giants of the industry, especially the East Coast banks that will be allowed by state law to enter the California market in 1991.

Mortgage banking also has become so popular that the traditionally healthy CommerceBank in Newport Beach last week launched its own mortgage lending division, its first purely consumer operation.

CommerceBank has become the largest full-service bank in the county mainly by catering to small and medium-size businesses, which accounted for 46% of its loan portfolio last year. The bank’s addition of a consumer-oriented department signals the long-expected effort by independent banks to compete for retail customers.

Another reason CommerceBank launched a retail operation, said Clyde H. Gossert, the bank’s president, was because it found itself in the same boat as many other conservative operations coming out of the recession--overly liquid and under-loaned.

In other words, it had taken in a lot of deposits, $219.3 million at the end of the year, but had not been able to turn them into asset-earning loans, which stood at $119.4 million. Its ratio of loans to deposits was 54.4%, far below the 70% to 75% most banks like to have.

“Many of our (business) customers remained liquid, so they had no need to borrow money,” Gossert said, noting that the reluctance of businesses to borrow will likely continue this year, especially as interest rates rise.

Rising interest rates, in fact, will test the banking industry once again, said Craig Collette, president and chief executive officer of Landmark Bank in La Habra.

He said Orange County banks in particular earned much of their income last year in areas that are slow this year or won’t recur again--real estate construction lending, bond investments and recoveries on loans that previously had been charged off.

“It’s going to be a tough year to make a profit,” Collette said.

Profits are what bankers believe are needed to spur independent bank stocks out of the lethargy that has gripped them on Wall Street throughout much of the 1980s.

Stock values also are expected to be boosted by the prospect of local banks merging with each other and, in 1991, with East Coast institutions.

Bankers and industry consultants are predicting that Orange County will start developing its own major banks, mainly through local mergers, and that the number of banks will be cut in half in the next few years. Stein, of PNB Financial Group, said his company set out to acquire Bank of Orange County in order to expand its market, capital and asset base. With its increased size, the bank could make larger loans, officials said.

Earlier this year, three healthy banks Orange County banks--National Bank of Southern California, Corporate National Bank and El Camino Bank--reached tentative agreement on a three-way merger that would have produced the county’s largest bank with more than $288 million in assets.

But the agreement fell apart as the parties failed to reconcile a number of details, especially the roles that top management in each of the banks would play in the combined bank.

While none of the three banks plan to pursue any other three-way merger, each has said it will continue looking for another bank to buy. But they will be competing with at least half a dozen other local banks that also are shopping for merger partners.

TOPS -- ASSETS in millions of dollars CommerceBank $236.6 Eldorado $187.2 Bank of Newport $184.3 Sunwest $160.2 Landmark $156.1

TOPS -- NET INCOME in thousands of dollars Eldorado $1,869 Security Pac. State $1,497 El Camino $1,400 Mission Viejo Nat’l $1,277 CommerceBank $1,257

BOTTOM 5 -- ASSETS in millions of dollars Mission Valley, N.A. -- $14.0 United American -- $20.2 Pacific Regency -- $22.8 First Amer. Cap., N.A. -- $23.1 New City -- $26.7

BOTTOM 5 -- NET INCOME in thousands of dollars New City -- $-3,509 Monarch Bank -- $-2,636 Bank of Newport -- $-1,296 List American -- $-1,161 Sunwest -- $-1,120 ORANGE COUNTY BANK SCOREBOARD

ASSETS DEPOSITS (millions) (millions) ’86 ’85 ’86 ’85 CommerceBank 236.6 186.1 219.3 171.6 Eldorado 187.2 173.5 163.6 154.0 Bank of Newport 184.3 169.1 153.5 137.7 Sunwest 160.2 144.1 137.4 134.7 Landmark 156.1 115.9 141.0 103.5 Citizens Bank of C.M. 139.6 95.3 127.7 84.9 Nat Bank of SoCal 131.2 97.2 118.9 86.5 Orange National 131.0 95.8 121.6 87.5 Liberty National 113.1 92.0 104.9 78.4 Security Pac. State 111.1 90.5 49.4 44.1 El Camino 106.1 94.4 94.8 83.5 Pioneer 98.9 84.6 91.4 78.6 Pacific Inland 81.9 57.9 71.4 48.1 Far Western 80.6 13.8 63.0 12.8 List American* 70.9 57.3 65.7 53.2 Amer Commerce Nat’l 70.6 49.0 65.1 44.8 Huntington National 65.9 55.9 59.7 51.1 Monarch Bank 65.5 86.1 61.4 78.4 Pacific National 64.9 57.1 59.1 52.3 Marine National 61.9 59.3 55.3 51.8 American Interstate 59.9 56.2 52.9 50.7 Frontier, N.A.** 57.5 46.5 50.4 40.4 Corporate National 53.2 54.8 47.4 49.5 Mission Viejo Nat’l 50.6 24.8 46.2 22.7 Bank of Westminster 49.5 34.7 45.0 31.2 California City, N.A. 45.4 39.1 40.0 34.3 Bank of San Clemente 43.6 45.1 41.5 42.4 Bank of O.C. 41.2 41.1 37.5 37.0 Mariners, N.A. 37.9 27.3 35.2 24.8 Dana Niguel, N.A. 36.1 26.6 33.1 23.2 Bank of Yorba Linda 34.9 41.6 32.7 39.7 Bank of Anaheim, N.A. 33.0 24.0 30.0 20.3 Founders National 31.2 23.9 28.2 20.5 Grand National 29.4 23.9 25.6 20.3 Laguna, N.A. 27.1 29.6 24.9 26.8 New City*** 26.7 39.8 25.8 35.2 First Amer. Cap., N.A. 23.1 27.1 21.4 25.1 Pacific Regency 22.8 20.5 21.0 18.4 United American 20.2 16.5 18.1 14.1 Mission Valley, N.A. 14.0 10.8 12.3 9.2 TOTALS 3,054.9 2,528.8 2,693.4 2,223.3

LOANS NET INCOME (millions) (thousands) ’86 ’85 ’86 ’85 CommerceBank 119.4 101.0 1,257 1,100 Eldorado 121.1 107.9 1,869 1,495 Bank of Newport 118.4 117.9 -1,296 -232 Sunwest 118.2 102.2 -1,120 -4,382 Landmark 94.9 66.7 1,171 1,104 Citizens Bank of C.M. 76.4 66.5 1,098 966 Nat Bank of SoCal 87.4 68.3 1,001 857 Orange National 77.2 60.2 982 930 Liberty National 67.6 56.8 274 535 Security Pac. State 81.9 69.6 1,497 952 El Camino 61.4 59.9 1,400 1,332 Pioneer 64.1 55.9 539 452 Pacific Inland 48.3 36.7 735 -1,295 Far Western 60.4 10.1 332 -655 List American* 43.2 35.7 -1,161 -760 Amer Commerce Nat’l 50.5 35.3 576 201 Huntington National 41.8 38.9 391 435 Monarch Bank 54.5 73.9 -2,636 24 Pacific National 43.3 34.4 550 330 Marine National 42.1 38.3 46 31 American Interstate 40.0 39.0 -370 164 Frontier, N.A.** 27.0 22.8 592 688 Corporate National 32.4 33.6 320 364 Mission Viejo Nat’l 35.4 19.7 1,277 -1,570 Bank of Westminster 31.8 21.2 330 87 California City, N.A. 29.2 26.3 142 -632 Bank of San Clemente 23.3 29.2 -302 -1,228 Bank of O.C. 20.8 24.9 -175 225 Mariners, N.A. 21.1 18.1 356 286 Dana Niguel, N.A. 18.9 16.7 301 80 Bank of Yorba Linda 20.0 26.5 -452 -301 Bank of Anaheim, N.A. 15.6 14.3 178 -229 Founders National 19.2 11.4 -589 7 Grand National 23.0 17.0 40 302 Laguna, N.A. 20.6 22.0 -434 127 New City*** 16.9 28.4 -3,509 410 First Amer. Cap., N.A. 18.8 19.8 -427 -419 Pacific Regency 17.1 14.7 -413 -757 United American 12.8 9.4 210 -128 Mission Valley, N.A. 8.8 7.8 8 -151 TOTALS 1,924.8 1,659.0 4,588 745

* List American Bank changed its name to American Merchant Bank in April, 1987.

** Frontier Bank moved to La Palma in Los Angeles County from Buena Park in December, 1986.

*** New City Bank was closed March 20 and certain assets were transferred to newly created Colonial Bank, N.A., which plans to move to Santa Ana from Orange.

All figures are from Findley Reports on California Banks and include amendments to 1985 figures filed by banks.