Orange County Banks Rack Up Robust Earnings : First Successive Years of Profits Since Deregulation

Orange County’s 39 banks posted a combined net income of $41.4 million last year, giving the local industry successive years of profits for the first time since deregulation in 1982.

The earnings were spurred by such factors as a robust economy, higher profit margins and fewer bad loans and write-offs, bankers and industry consultants said.

The earnings are 54% higher than the aggregate $26.8-million profit posted by the county’s banking industry in 1987, according to figures compiled by Gerry Findley, an industry consultant in Brea.

‘Last Year’s Results Were the Best’

“Last year’s results were the best that I’ve ever seen,” said Findley, who has been tracking the performance of the state’s banks since 1968 and has been consulting for banks since 1950.

No statewide figures are available yet, but the 13,200 banks in the United States earned a record $25.3 billion last year, despite a post-Depression record of bank failures, primarily in Texas and other economically strapped oil states.

The good news for the county’s banks, however, was tempered with a warning from Findley and others in the industry that banks will find it tougher to make a buck this year.

Competition is driving up interest rates paid on deposits, for instance, narrowing the profit margins most banks enjoyed through much of last year. And rising interest rates may also slow the economy and lead the country into a recession.

The high profits are also creating shareholder pressure to pay out cash dividends, said Findley and Edward Carpenter, a Costa Mesa consultant for financial institutions.

Plowing Earnings Back for Growth

Many independent banks have been plowing earnings back into operations to foster future growth and to attract buyers at higher prices.

“Banks that aren’t brides (in mergers and acquisitions) are going to face shareholders who want yields on their investments,” Carpenter said. “There’s nothing worse than hopes unfulfilled.”

Findley said he is advising his healthier clients to start paying cash dividends. Last year, just five banks--Eldorado, Com- merceBank, Orange National, Citizens Bank of Costa Mesa and El Camino--paid regular cash dividends to shareholders.

But L. William Seidman, chairman of the Federal Deposit Insurance Corp., recently chided banks for passing on more than half of their aggregate profits to stockholders and advised banks to adopt a more conservative approach.

For most county banks, profits were churned out last year as never before, as these statistics compiled by Findley demonstrate:

* Sixteen banks posted annual net incomes of $1 million or more last year. Twelve banks hit seven figures the previous year. Security Pacific State Bank in Irvine led the way last year, with $4.2 million in net income.

* Just three banks lost money last year; seven were floating in red ink the previous year. The biggest money loser last year was Laguna Bank in Laguna Beach, which lost nearly $1.1 million.

* The combined return on assets--a key indicator of health--was 1.05% last year, up from the previous year’s return of 0.76%. Banks consider a 1% return to be very good. Colonial Bank, a 2-year-old institution formed from the ashes of the New City Bank failure, recorded a 3.87% return. Older banks--Pioneer, Corporate and Mission Viejo National--each had returns above 3%.

Far Western Fell Back

The statistics also show that Far Western Bank, which shot from $81 million in assets in 1986 to become the county’s biggest bank in 1987, with $311.9 million in assets, fell back to $160 million in assets last year.

The decline is a result of a change in operations. The bank had concentrated almost exclusively on buying auto loans made mostly by dealers, an activity that regulators questioned last year.

Now, Far Western acts much as a mortgage banker, making and selling auto loans and earning money on loan fees and loan servicing fees, said David Watt, the bank’s vice chairman.

The object is to curtail the bank’s heavy loan losses, he said. Though Far Western earned $2.2 million last year, it also wrote off loan losses of $9.6 million--on top of $10.6 million the previous year.

‘Somebody Else’s Portfolio’

“Certainly the regulators are happy to see the loans in somebody else’s portfolio,” Watt said.

Commercial Center Bank in Santa Ana regained its position as the county’s largest bank. As Westlands Bank, it had been the county’s biggest bank in 1983, with $490 million in assets, but it fell on hard times and was bought in 1984 by Canadian Commercial Bank of Edmonton.

The Canadian bank, now in receivership, has been trying to sell Commercial Center, but no buyer has been willing to pay the $70.3 million that the Santa Ana bank had in capital at the start of 1988.

So Commercial Center restructured its capital base last year to wind up with $45.3 million in capital at the end of December--nearly three times what federal regulators require and probably still more than anyone is willing to pay for it.

Success--for at Least 1st Half

The county’s banks should generally continue to enjoy success, at least for the first half of the year, said bankers J.B. Crowell and Philip S. Inglee.

Inglee said he believes that banks are doing better so far this year than they ever have in the traditionally slow first quarter, but he and Crowell worry about what is ahead.

The Federal Reserve Board, which regulates the nation’s credit availability, has been raising interest rates to slow down the economy and avoid double-digit inflation. Still, wholesale prices rose 1% in January and again in February, the highest back-to-back increase since March and April of 1981, according to the U.S. Labor Department.

Crowell, president of Eldorado Bank in Tustin, said: “People still can afford homes, but if interest rates go above 12%, it makes it tougher for everybody to cover their borrowing costs. I just hope the Fed doesn’t overdo it and choke us out.”

Tough Times in Early ‘80s

Banks went through tough times in the early 1980s as inflation boosted the prime rate--which banks charge their best customers--to 21.5%. Stuck with fixed-rate loans and overvalued property they took back in foreclosures, banks posted losses and began failing at rates not seen since the Depression.

“The question is, ‘Did we learn anything from the early 1980s?’ ” said Inglee, president of Liberty National Bank in Huntington Beach. “I think most banks will do OK if a recession comes. They have cut staffs back and become more efficient.

“But it really depends on how tough it gets. There’s really no reason to have a recession like we had in the early 1980s.”

ORANGE COUNTY BANK SCOREBOARD ranked by 1988 assets

TOTAL TOTAL NET ASSETS REVENUE INCOME (millions) (millions) (thousands) Bank 1988 1987 1988 1987 1988 1987 Commercial Center $254.9 $238.6 $23.4 $20.5 $3,038 $1,350 Eldorado 254.5 203.5 24.6 21.2 3,356 2,409 Security Pacific State 245.9 106.3 30.5 14.9 4,189 3,716 CommerceBank 233.9 219.6 21.7 18.0 2,644 1,644 Sunwest 232.0 182.9 23.3 18.4 2,749 2,760 Bank of Newport 214.5 175.6 21.6 18.2 1,075 1,115 National Bank of So. Cal. 199.8 137.2 17.9 14.3 1,735 1,128 Far Western 160.2 311.9 50.6 43.3 2,203 1,648 Landmark 150.4 140.7 14.7 14.5 1,410 724 Orange National 149.8 125.2 13.3 11.0 1,369 1,048 Pioneer 130.8 109.3 13.2 10.4 2,101 1,033 Citizens Bank of 119.0 114.6 13.5 11.9 1,959 1,620 Costa Mesa El Camino 118.7 110.2 12.5 11.5 2,010 1,645 Liberty National 116.6 103.7 13.2 11.5 1,120 900 Pacific National 105.0 80.6 8.5 7.5 654 615 Pacific Inland 86.0 86.2 10.2 8.2 -377 285 American Commerce 84.5 77.0 10.3 9.0 1,018 858 National Mission Viejo National 82.8 63.8 12.6 12.2 1,651 707 Marine National 82.5 59.3 6.5 5.5 454 33 Huntington National 81.0 66.6 8.3 6.8 766 560 Corporate 72.0 56.4 7.5 5.9 987 293 Frontier, N.A. 69.6 64.4 6.1 5.4 508 265 California City, N.A. 57.7 51.4 5.9 4.6 704 -281 American Interstate 57.4 61.1 6.6 6.5 477 -408 Mariners, N.A. 54.4 41.5 5.1 4.0 474 375 Monarch 52.1 60.9 6.0 6.2 26 -574 Bank of Westminster 48.7 47.0 5.3 5.4 220 138 Bank of Anaheim, N.A. 46.6 40.7 4.1 3.4 521 302 Dana Niguel, N.A. 43.7 37.1 4.9 3.9 459 377 Colonial, N.A. 40.5 43.7 3.3 2.0 980 410 Bank of San Clemente 43.1 38.1 4.2 4.3 235 -180 Founders National 42.2 36.8 4.3 3.7 367 50 Bank of Orange Cty 36.9 28.5 3.2 2.8 106 -120 Bank of Yorba Linda 32.8 29.8 3.7 3.3 353 529 United American 30.8 23.4 2.9 2.3 319 265 Laguna, N.A. 29.5 27.7 2.9 3.2 -1,091 147 Grand National 27.4 34.4 3.3 3.4 95 112 First American Capital, 25.7 22.4 3.4 2.9 589 -590 N.A. Mission Valley, N.A. 18.4 14.9 1.7 1.6 -75 59 American Merchant * na 51.7 na 6.3 na 369 Pacific Regency * na 15.5 na 2.1 na -491 TOTALS 3,932.3 3,540.2 434.8 372.0 41,378 26,845

* In 1988, American Merchant Bank was purchased by Eldorado Bank and Pacific Regency Bank was bought by National Bank of Southern California.

Source: Findley Reports on California Banks