County-Based Banks Poised to Show First Profitable Year Since Degregulation in ’82

Orange County’s 41 independent banks posted combined income of $16.9 million for the first nine months of 1987, setting the stage for their first profitable year since deregulation of the financial industry in 1982.

The nine-month bank performance figures, which became available late last week, show that Orange County institutions outperformed their counterparts both statewide and nationwide.

The state’s banks recorded a composite loss of $910 million, which included $1.3 billion of losses by the four major commercial banks--mainly because of foreign loan problems.

The county’s banks had a 0.51% return on assets for the nine months, while banks statewide had a negative return on assets of -0.30% and the nationwide figure was barely positive. Return on assets, a major indicator of bank performance, is net income divided by total assets.

“I think we probably are going to have a pretty good year for the county,” said Gerry Findley, a Brea-based industry consultant who puts together annual performance reports on all banks operating in the state.

Preparing Reports

Findley, who is preparing his annual Findley Reports on California Banks, said he is not seeing massive write-downs or charged-off losses that often occur in the fourth quarter and dampen the annual figures.

“Overall, the banks are going to be back strong from an income standpoint,” he said.

The county’s banks have been rebuilding for the last two years, he said, and the process has been aided by lower interest rates, a brisker economy, a tighter rein on expenses and time to work out loan problems.

If the county’s banks can maintain their profits for the final quarter, it will be a marked contrast to their money-losing ways in each of the previous five years.

Combined losses for the five years totaled $37.4 million, with the biggest hit--a $28.97 million deficit--coming in 1984.

High interest rates and the failing real estate market in the early 1980s made losers out of many county banks. The number of banks posting losses in each of the five years ranged from 13 in 1986 to 24 in 1984.

For the first nine months of 1987, only seven Orange County banks reported losses. Their combined losses totaled $1.4 million, according to federal regulatory statistics compiled by Sheshunoff & Co., an Austin, Tex., industry consulting firm.

Sheshunoff’s income figures for banks do not include any extraordinary, or non-operating, gains or losses, such as the sale of a branch building. But since 90% of all banks do not have extraordinary items to report, the figures are close to net income, the company said.

Only two of the money-losers--Pacific Regency Bank in El Toro and Monarch Bank in Laguna Niguel--need to shore up their capital bases to meet regulatory requirements, Sheshunoff’s figures indicate. Capital at each bank amounts to less than 4.6% of assets. Regulators require a minimum 6%.

A third bank with red ink and little capital at the end of the first nine months was the Bank of San Clemente. But Irvine developer John E. Wertin paid $1.5 million for an 80% stake in November, after the third quarter ended, making it one of the healthier county-based banks. The bank, in fact, already was turning itself around before the deal was closed.

The 34 banks that posted profits for the first nine months had combined income of $18.4 million.

One of the biggest surprises in the nine-month figures is the skyrocketing growth of Far Western Bank in Tustin, which nudged out longtime leaders to head the list as the county’s largest bank.

At the end of September, Far Western had $223.1 million in assets, a sixteenfold increase over $13.8 million in assets at the end of 1985.

Far Western’s growth has been fueled by three branches that specialize in purchasing automobile loans, which account for more than 80% of the 8-year-old bank’s loan portfolio, said Richard Trotter, the bank’s president.

“Independent banking has to find a niche and do well at it,” he said. “We found a niche and we’re serving it.”

Assuming two pending mergers win expected approval from regulators, the holding companies for Eldorado Bank in Tustin and Citizens Bank of Costa Mesa would become the county’s two largest banking firms, based on Sept. 30 figures.

Eldorado Bancorp, which plans to operate American Merchant Bank in Newport Beach as a separate entity from Eldorado Bank, would have about $250 million in assets. And Citizens Holdings, which also plans to operate Anaheim-based El Camino Bank as a separate entity from Citizens Bank, would have about $228 million in assets.

One of the more disturbing nine-month results is the poor loan quality at a few of the county’s banks. Alex Sheshunoff, president of Sheshunoff & Co., lists non-performing loans as one of the key indicators of future troubles at a bank.

Non-performing means that payments on loans are at least 90 days overdue or are not being made at all. Banks typically view the acceptable limit for non-performing loans to be 1% to 3% of total loans.

Overall, county banks classified 3.3% of their loans as non-performing as of the end of September. Statewide, the figure was 4.8%. Excluding California’s four major commercial banks, which have taken substantial write-downs on foreign debts, the statewide figure was 2.9%. Nationwide, non-performing loans amounted to 3.6% of total loans.

Commercial Center Bank in Santa Ana, once known as Westlands Bank and once the county’s largest bank with more than $400 million in assets, classified $28.5 million--or 16.5% of its loan portfolio--as non-performing at the end of September.

The bad loans, though, are primarily a few large ones that the bank expects to collect this year, said Cindy Bird, the bank’s marketing director.

In 1981, Canadian Commercial Bank in Edmonton, Alberta, began buying shares in Westlands, which was plagued with overpriced property it acquired through foreclosures. It bought the entire institution in 1984, but a year later, the Canadian bank went into receivership. Commercial Center, however, soon began its recovery.

With $222.3 million in assets at the end of September, Commercial Center posted net income of $1.35 million for the year and had $70 million in capital--more than five times the amount required by regulators, Bird said. Now Commercial Center is looking to acquire another bank, she said.

Nationwide, Sheshunoff said, most lending was real estate-related, while commercial and industrial borrowings were down. Typically, real estate loans make up one-third of the portfolios of most California banks, far in excess of banks nationwide.

“Given the overbuilt condition of real estate markets in many parts of the country, this is probably not a good sector from which to look for future growth earnings,” Sheshunoff said. “But if history is any guide, it is probably a good place to look for future loan quality problems.”

COMBINED INCOME FOR COUNTY BANKS

In Thousands of Dollars

1982: -$4,850

1983: -$2,822

1984: -$28,970

1985: -$537

1986: -$204

1987: $16,966 (9 months)

Source: Federal Deposit Insurance Corp. statistics compiled by Findley Reports, Brea, and Shesshunoff & Co., Austin, Texas. COUNTY-BASED BANKS RANKED BY ASSETS

At Sept. 30, 1987

Nonperforming Assets Loans Loans (millions) (millions) % of total Far Western $223.1 $185.2 3.9% Commercial Center 222.3 172.9 16.5 CommerceBank 200.9 138.1 2.1 Eldorado (1) 197.2 122.0 0.6 Sunwest 173.1 140.6 2.0 Bank of Newport 166.1 115.3 4.1 Landmark 142.7 96.3 0.05 National Bank of So. Cal. 131.8 85.0 0.5 Orange National 121.7 80.2 0.3 Citizens (2) 118.6 80.4 3.4 El Camino (2) 110.1 60.2 0.5 Pioneer 109.2 78.6 2.8 Security Pacific State 102.9 80.3 0.3 Liberty National 100.5 66.0 2.7 Pacific National 78.2 41.9 2.1 American Commerce National 74.3 55.0 2.5 Pacific Inland 72.9 49.0 7.3 Huntington National 64.0 50.8 0.7 American Interstate 63.3 44.7 4.0 Monarch 58.8 46.1 1.7 Frontier 58.2 25.5 4.7 Corporate National 55.0 37.9 0.9 Marine National 54.2 37.4 0.5 Mission Viejo National 53.8 31.3 1.3 American Merchant (1) 53.6 44.4 1.9 Bank of Westminster 49.5 34.8 1.1 California City 45.3 33.0 ** Colonial 43.6 15.6 0.6 Bank of Anaheim 38.3 18.8 0.0 Dana Niguel 37.9 19.9 2.0 Bank of San Clemente 37.8 22.9 2.2 Mariners 37.6 22.4 ** Founders National 36.1 25.5 1.5 Grand National 33.8 18.7 2.1 Bank of Orange County 31.7 15.2 7.9 Bank of Yorba Linda 29.9 16.5 1.0 Laguna 27.7 18.9 0.7 First American Capital 23.3 18.7 9.6 United American 21.1 15.1 5.3 Pacific Regency 18.0 12.2 10.7 Mission Valley 15.0 9.6 0.8 TOTALS 3,333.1 2,282.9 3.3

*Income (thousands) Far Western $642 Commercial Center 745 CommerceBank 1,164 Eldorado (1) 1,822 Sunwest 736 Bank of Newport 940 Landmark 763 National Bank of So. Cal. 670 Orange National 752 Citizens (2) 1,298 El Camino (2) 1,239 Pioneer 742 Security Pacific State 2,017 Liberty National 621 Pacific National 260 American Commerce National 835 Pacific Inland 321 Huntington National 428 American Interstate 288 Monarch -320 Frontier 224 Corporate National 156 Marine National -79 Mission Viejo National 435 American Merchant (1) 227 Bank of Westminster 118 California City -428 Colonial 109 Bank of Anaheim 144 Dana Niguel 151 Bank of San Clemente -212 Mariners 199 Founders National 46 Grand National 98 Bank of Orange County -15 Bank of Yorba Linda 20 Laguna 17 First American Capital -306 United American 91 Pacific Regency -76 Mission Valley 84 TOTALS 16,966

* Does not include extraordinary items.

** Insignificant percentage.

(1) Eldorado Bancorp, holding company for Eldorado Bank, is awaiting regulatory approval to buy American Merchant Bank, which will continue to operate as separate entity. Merger would give Eldorado Bancorp about $250 million in assets, based on Sept. 30 figures.

(2) Citizens Holdings, parent of Citizens Bank of Costa Mesa, is awaiting regulatory approval to buy El Camino Bank, which will continue to operate as a separate entity. Merger would give Citizens Holdings about $228 million in assets, based on Sept. 30 figures.

Source: Sheshunoff & Co.

FIVE MOST PROFITABLE BANKS

First nine months of 1987

Bank Income (in thousands) Security Pacific State $2,017 Eldorado 1,822 Citizens 1,298 El Camino 1,239

CommerceBank 1,164

Source: Sheshunoff & Co.

FIVE BANKS WITH BIGGEST LOSSES

First nine months of 1987

Bank Loss (in thousands) California City $428 Monarch 320 First American Capital 306 Bank of San Clemente 212 Marine National 79

Source: Sheshunoff & Co.