County Banks Turn 1st Joint Profit Since 1982

Orange County’s 41 independent banks posted combined earnings of $27 million in 1987, marking the first profitable year for the county’s banking industry since deregulation in 1982.

The county’s banks achieved a collective profit despite higher interest rates from April to October and a slowdown in mortgage lending, factors that prevented the industry from fulfilling the greater expectations of some bank consultants.

“It was a pretty good year for independent banks throughout the state and especially for Orange County banks,” said Gerry Findley, a Brea-based industry consultant and publisher of the annual Findley Reports on California Banks.

But he warned that this year could be a rough one for banking if top managers fail to keep a lid on non-interest costs and if the rate of problem loans continues to climb.

In Contrast With S&Ls

Still, the overall performance of county banks exceeded that of banks statewide and nationwide, according to the Findley Reports and regulatory statistics. And it is in marked contrast with the country’s savings and loans, which lost a combined $534.1 million during the first nine months of 1987.

The county’s banks posted a combined 0.77% return on assets last year. Return on assets is a bank’s profit expressed as a percentage of its total assets. It is the basic yardstick used to assess a bank’s relative profitability.

Statewide figures are not available yet for the full year, but California banks recorded a composite loss of $910 million and a negative return on assets of 0.3% for the nine months ended Sept. 30. That negative return on assets is not expected to change much for the full year.

Nationwide, banks earned $3.7 billion--the lowest combined profit since the Depression--and reported a puny 0.13% return on assets.

Orange County banks overall turned the corner in 1987 after five years of combined annual losses totaling nearly $38 million. The biggest single hit--a combined loss of nearly $29 million--was logged in 1984.

Shifts in Bank Performance

In 1986, county banks lost a total of $808,000 (revised from an earlier figure of $204,000), according to the Findley Reports. The publication, a compilation of statistics and ratios based on financial statements filed by the banks with government regulators, revealed other significant shifts in bank performance:

Of 34 banks posting profits, 18 had higher earnings in 1987 than the previous year, and eight others became profitable after posting losses in 1986. The combined 1987 profits of the 34 institutions totaled $29.5 million.

-Just seven county banks posted losses last year, and four of them reported losses smaller than in 1986. Just one bank lost money after posting a profit in 1986. The combined red ink among the seven banks last year totaled $2.5 million.

-Total non-performing loans, a key indicator of possible future loan problems, jumped 23.7% to $71.2 million last year from $57.6 million in 1986. Loans are considered non-performing when they are 90 days or more overdue.

- The ratio of non-performing loans to total loans last year grew to an uncomfortable 3% for all county banks from 2.7% in 1986. Bankers typically view the acceptable limit for non-performing loans to be 1% to 3% of total loans.

-Combined assets for all 41 banks edged up just 2.4%. Many bank executives said last year that they planned to limit growth in favor of increasing profitability. They may have had little choice: Total deposits, which are needed to fuel growth, dipped 0.3% because of increased competition from other financial institutions and inordinately high December, 1986, deposits from real estate and securities sellers who wanted to take advantage of old tax laws.

-Total loans for the county’s banks grew 13.7%, but bankers are reporting that loan demand, especially for mortgages, is flat or even decreasing. They attribute the trend partly to aftereffects of the Oct. 19 stock market collapse and partly to increased competition from other financial institutions and financial services companies.

The 3% ratio of non-performing loans at the county’s banks is down from 3.3% at Sept. 30. At that point, banks statewide classified 4.8% of their loans as non-performing.

But California’s four major banks, which wrote off $1.3 billion foreign loans and other problem debts, pulled down the state average. Excluding those four institutions, the rest of the state’s banks had a 2.9% ratio, lower than the county figure.

Nationwide, 3.6% of loans were non-performing at Sept. 30.

“The rate of non-performing loans is a little bit of concern to us, but we believe they’re connected with selective banks,” Findley said.

Three banks--Pacific Regency in El Toro, Commercial Center in Santa Ana and the Bank of Orange County in Fountain Valley--had double-digit ratios of non-performing loans. Another nine banks had ratios exceeding the 3% level. But 16 banks had no problems or had classified less than 1% of their loans as non-performing.

Money Losers Reduced

A key aspect of last year’s statistics is the big reduction in the number of money-losing banks. During the previous five years, the number of banks winding up in the red ranged from a low of 15 in 1986 to a high of 24 in 1984.

“We’ve gotten rid of a number of problem situations,” said Findley, explaining the lower number of unprofitable banks.

Since the start of 1982, federal regulators have closed 10 insolvent county banks and one thrift and loan. The only bank to shut its doors last year, though, was New City Bank in Orange. Regulators seized New City in March, 1987, and sold some of its assets to a newly chartered bank, Colonial Bank in Santa Ana.

And a deal is pending to merge Pacific Regency, a bank with just a third of the capital required by regulators, into the National Bank of Southern California in Santa Ana. The only other county bank that needs more capital is Monarch Bank in Laguna Niguel, which has about two-thirds of the capital required by regulators for a bank of its size.

“Many banks got in trouble in the early 1980s because of speculative real estate deals,” Findley said. “They got their hands burned and they learned. Now they’re tougher, more conservative, in terms of lending on speculative deals.”

The questionable loans in the early 1980s--mainly real estate construction loans--were made with the idea that real estate values would continue to soar. But the values, especially of higher-priced homes, plummeted, and banks were stuck with bankrupt developers and properties that could not cover loan amounts.

Findley also attributed the lower number of money-losing banks to “some stabilizing” of problem banks, mainly through new management brought in to turn them around.

One of the biggest turnarounds came last fall when the Bank of San Clemente, long on the regulators’ list of “death row” banks, clawed its way into the black. The institution then got a big boost when Irvine developer John E. Wertin pumped $1.5 million in cash into the capital base, giving him an 80% stake in the bank and making it one of the healthier county financial institutions.

Some banks had to scramble to reposition themselves during the shaky times last year.

Craig Colette, president of Landmark Bank in La Habra, said: “What happened was that when real estate activity came to a screeching halt, deposits came to a halt. Banks like ours with deposits from escrow, property management and title companies saw deposits drop.

“Banks started losing business to brokerage firms in midyear and to savings and loans after the stock market crash because S&Ls were paying higher interest rates for deposits. And you can’t grow without deposits.”

At Landmark, Collette said he and his managers quickly moved to emphasize the bank’s commercial lending, an active market that is providing the bank with 60% of its business.

Reducing non-interest costs--the amount spent on payroll, occupancy and other operating expenses--will be “very critical” this year, said Donald L. Solsby, president of Pacific National Bank in Newport Beach.

Findley predicted that the number of employees at banks will be cut 10% by 1990 because banks have nowhere else to go to improve operating income. Banks already have their interest costs--mainly the amounts they pay depositors--down to bare bones.

A study Findley is preparing of 30 “premier” performing banks--based on criteria he has established--indicates that banks are better able to keep interest costs down when interest rates are falling than when rates are going up.

“Banks adjusted faster on savings by cutting down the interest they provide depositors,” he said. “They paid depositors 11% less in interest, but they had a reduction in interest rates of only 5%.”

When rates are rising, he said, banks must move faster to increase the amount they pay depositors because depositors are more likely to move their accounts to higher-paying institutions.

Findley figures that banks ought to keep non-interest costs to 45% of gross income and to lower the figure to 40% in the next two years.

But last year, 25 county banks spent more than 50% on salaries, benefits and other non-interest costs, while just six county banks kept below the 45% level. The highest expenses were 77% at Bank of Orange County and 71.8% at Pacific Regency, while the lowest were 24.9% at Far Western Bank in Tustin and 38.2% at American Commerce National Bank in Anaheim.

Many county bankers are hoping financial results this year will mirror last year’s. Collette, whose Landmark Bank got off to a record start before deposits fell off in midsummer last year, said his bank is off to another fast start.

And Solsby said this year should be “pretty much a repeat of 1987” for Pacific National.

The Findley Reports includes unearned income and loan loss reserves in total assets to reflect what Findley believes is an accurate picture of a bank’s balance sheet. Unearned income is income that banks would lose if installment contracts were paid off before they were due.

Most banks have no unearned income and barely $1 million in loan loss reserves. But Far Western, which has catapulted itself to the top of the heap by specializing in buying automobile loans from car dealers, had $67 million in unearned income and $8.7 million in loan loss reserves.

Under Findley’s compilation, Far Western has $311.9 million in assets. Regulators list the bank at $236.2 million in assets.

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TOP 5 COUNTY BANKS--1987 LOANS

Banks: Loans (millions)

Far Western: 224.4

Commercial Center: 168.5

Sunwest: 157.0

CommerceBank: 136.9

Eldorado: 125.4

Source: Findley Reports on California Banks

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TOP 5 COUNTY BANKS--1987 NET INCOME

Bank: Net Income (thousands)

Security Pacific State: 3,716

Sunwest: 2,760

Eldorado: 2,409

Far Western: 1,648

El Camino: 1,645

Source: Findley Reports on California Banks

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TOP 5 COUNTY BANKS--1987 DEPOSITS

Bank: Assets (millions)

Far Western: 222.9

CommerceBank: 203.6

Eldorado: 179.2

Commercial Center: 165.1

Sunwest: 160.9

Source: Findley Reports on California Banks

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NON-PERFORMING LOANS, % OF TOTAL LOANS

Banks with Least Problem Loans

- Non-Performing Loans as % Loans

*--* BANK 1987 1986 Colonial, N.A. 0.0 -- Dana Niguel, N.A. 0.0 1.7 Mariners, N.A. 0.004 1.4 B. Of Anaheim, N.A. 0.04 0.0 Security Pac. State 0.1 0.3 California City, N.A. 0.1 0.9

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Banks with Most Problem Loans:

- Non-Performing Loans as % Loans

*--* BANK 1987 1986 Pacific Regency 19.7 3.4 Commercial Center 18.5 9.9 Bank of O.C. 12.4 13.6 Frontier National 5.5 2.2 American Merchant 4.9 1.3

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Source: Findley Reports on California Banks

ORANGE COUNTY BANK SCOREBOARD

ranked by 1987 assets

*--* Assets Deposits (millions) (millions) BANK 1987 1986 1987 1986 Far Western $311.9 $80.6 $222.9 $63.0 Commercial Center 238.6 405.0 165.1 330.4 CommerceBank 219.6 236.6 203.6 219.3 Eldorado 203.5 187.2 179.2 163.6 Sunwest 182.9 160.2 160.9 137.4 Bank of Newport 175.6 184.3 148.5 153.5 Landmark 140.7 156.1 124.4 141.0 Natl Bank of 137.2 131.2 123.7 118.9 So. California Orange National 125.2 131.0 113.2 121.6 Citizens Bank of 114.6 139.6 102.9 127.7 Costa Mesa El Camino (a) 110.2 106.1 98.0 94.8 Pioneer 109.3 98.9 100.4 91.4 Security Pacific 106.3 111.1 44.5 49.4 State Liberty National 103.7 113.1 88.8 104.9 Pacific Inland 86.2 82.0 73.2 71.4 Pacific National 80.6 64.9 74.2 59.1 American Commerce 77.0 70.6 69.3 65.1 National Huntington National 66.6 65.9 60.2 59.7 Frontier, N.A. 64.4 57.5 57.6 50.4 Mission Viejo Natl. 63.8 50.6 58.1 46.2 American Interstate 61.1 59.9 54.5 52.9 Monarch Bank 60.9 65.5 57.7 61.4 Marine National 59.3 61.9 53.2 55.3 Corporate (b) 56.4 53.2 50.1 47.4 American 51.7 69.6 47.2 65.7 Merchant (c) California City, N.A. 51.4 45.4 46.3 40.0 Bank of 47.0 49.5 42.6 45.0 Westminster Colonial (d) 43.7 na 40.4 na New City (d) na 26.7 na 25.8 Mariners, N.A. 41.5 37.9 38.2 35.2 Bank of Anaheim, N.A. 40.7 33.0 37.2 30.0 Bank of San 38.1 43.6 34.9 41.5 Clemente Dana Niguel N.A. 37.1 36.1 33.9 33.1 Founders National 36.8 31.2 33.4 28.2 Grand National 34.4 29.4 30.9 25.6 Bank of Yorba 29.8 34.9 27.4 32.7 Linda Bank of Orange 28.6 41.2 25.0 37.5 County Laguna, N.A. 27.7 27.1 25.3 24.9 United American 23.4 20.2 20.2 18.1 First American 22.4 23.1 20.7 21.4 Capital, N.A. Pacific Regency 15.5 22.8 15.0 21.0 Mission 14.9 14.0 13.1 12.3 Valley, N.A. Totals 3,540.3 3,458.7 3,015.9 3,023.8

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*--* Total Loans Income (millions) (thous.) BANK 1987 1986 1987 1986 Far Western $224.4 $60.4 $43,272 $6,624 Commercial Center 168.5 174.0 20,540 27,474 CommerceBank 136.9 119.4 18,000 15,689 Eldorado 125.4 121.1 21,266 21,329 Sunwest 157.0 118.2 18,367 16,971 Bank of Newport 122.9 118.4 18,240 18,050 Landmark 98.9 94.9 14,524 13,732 Natl Bank of 90.7 87.4 14,326 13,322 So. California Orange National 85.4 77.2 10,954 9,728 Citizens Bank of 81.9 76.4 11,884 11,092 Costa Mesa El Camino (a) 67.2 61.4 11,492 11,514 Pioneer 85.6 64.1 10,425 8,402 Security Pacific 83.7 81.9 14,865 15,855 State Liberty National 69.8 67.6 11,523 11,415 Pacific Inland 52.0 48.3 8,158 6,762 Pacific National 44.6 43.3 7,510 6,612 American Commerce 56.1 50.5 9,016 7,432 National Huntington National 50.8 41.8 6,832 6,736 Frontier, N.A. 24.6 27.0 5,387 5,636 Mission Viejo Natl. 37.2 35.4 12,159 6,948 American Interstate 40.5 40.0 6,553 5,923 Monarch Bank 44.8 54.5 6,216 8,016 Marine National 37.5 42.1 5,501 6,378 Corporate (b) 42.4 32.4 5,947 5,326 American 43.0 43.4 6,302 6,414 Merchant (c) California City, N.A. 34.8 29.2 4,649 4,183 Bank of 34.2 31.8 5,351 4,831 Westminster Colonial (d) 7.4 na 1,950 na New City (d) na 16.9 na 3,460 Mariners, N.A. 26.5 21.1 3,950 3,586 Bank of Anaheim, N.A. 19.9 15.6 3,376 2,701 Bank of San 21.4 23.3 4,285 5,318 Clemente Dana Niguel N.A. 20.4 18.9 3,931 3,609 Founders National 26.5 19.2 3,655 2,817 Grand National 19.2 23.0 3,436 3,085 Bank of Yorba 17.1 20.0 3,333 4,277 Linda Bank of Orange 15.7 20.8 2,826 3,631 County Laguna, N.A. 17.4 20.6 3,249 3,070 United American 18.3 12.8 2,336 2,046 First American 17.0 18.8 2,949 3,057 Capital, N.A. Pacific Regency 10.2 17.1 2,097 2,566 Mission 9.8 8.8 1,643 1,453 Valley, N.A. Totals 2,387.6 2,099.0 372,235 327,070

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*--* Net Income (thous.) (thous.) BANK 1987 1986 Far Western $1,648 $332 Commercial Center 1,350 -4,792 CommerceBank 1,644 1,257 Eldorado 2,409 1,869 Sunwest 2,760 -1,120 Bank of Newport 1,115 -1,296 Landmark 724 1,171 Natl Bank of 1,128 1,001 So. California Orange National 1,048 982 Citizens Bank of 1,620 1,098 Costa Mesa El Camino (a) 1,645 1,400 Pioneer 1,033 539 Security Pacific State 3,716 1,497 Liberty National 900 274 Pacific Inland 285 485 Pacific National 615 550 American Commerce 858 201 National Huntington National 560 391 Frontier, N.A. 265 592 Mission Viejo Natl. 707 1,277 American Interstate -321 -370 Monarch Bank -574 -2,636 Marine National 33 46 Corporate (b) 293 320 American 369 -733 Merchant (c) California City, N.A. -281 142 Bank of 138 330 Westminster Colonial (d) 410 na New City (d) na -3,509 Mariners, N.A. 375 356 Bank of Anaheim, N.A. 302 -229 Bank of San -180 -302 Clemente Dana Niguel N.A. 377 301 Founders National 50 -589 Grand National 112 40 Bank of Yorba 529 -452 Linda Bank of Orange -35 -175 County Laguna, N.A. 147 -434 United American 265 210 First American -590 -427 Capital, N.A. Pacific Regency -491 -413 Mission 59 8 Valley, N.A. Totals 27,017 -808

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NOTES:

Acquired on March 15 as a separate operating subsidiary by Citizens Holdings, the parent of Citizens Bank of Costa Mesa.

Formerly Corporate National.

Formerly List American Bank. Acquired March 3 by Eldorado Bancorp in Laguna Hills to be merged into the company’s Eldorado Bank subsidiary in Tustin.

New City Bank in Orange was closed March 20, 1987, and certain assets were transferred to newly created Colonial Bank, N.A., in Santa Ana. Commercial Center Bank is a foreign-owned bank with its sole office in Santa Ana.

Avco National Bank and International Central Bank & Trust Corp. are not full-service banks and are not included in statistics.

Partial year figures for Valencia Bank and Saddleback National Bank, both of which were declared insolvent and closed by regulators during 1986, also are not included in statistics.

Source: Findley Reports on California Banks, including amendments to1986 figures filed by banks.