The Times 100 : The Best Performing Companies in California : THE BOTTOM LINE : Banks Take High Ground as S&L; Industry Staggers : The state’s financial firms had a mixed year. Banks continued to improve; S&Ls; were in the tank. The race went to the cautious.

What a difference two years makes.

1989 was a pretty good year for California banks, a pretty lousy year for savings and loans--a flip-flop from the way things were just two years ago.

The reason is simple: New federal rules enacted last year have shaken up the savings and loan industry, by requiring thrift owners to put more of their own money at risk if they want to stay in business. Former high-flying thrifts are struggling to stay alive because of soured investments.

In any event, banks stood out as clearly the top performers during 1989 in The Times 100 survey of return on average assets (ROA) posted by the state’s largest financial institutions. Savings and loans lagged. By comparison, 80% of the most profitable financial institutions in the first such list The Times published, based on 1987 results, were savings and loans. Banks then were struggling with bad Third World loans and other fiascoes, while thrifts had yet to realize the extent of their growing problems.

Finishing at the top for the second year in a row was City National Corp. in Beverly Hills, an institution with a reputation as a “bank to the stars” that in reality makes most of its money through less glamorous lending. It was followed by Pacific Western Bancshares in San Jose and Wells Fargo & Co., the clear leader among the state’s giant banks.

Firms on the Times list had to meet three requirements: be a bank or savings and loan, have total assets of $1 billion or more in 1989 and be a public company in 1989. ROA, which shows how efficiently a bank or savings and loan uses its assets, is a widely used gauge of profitability. A return of 1% or more is considered excellent and means an institution earned $1 for every $100 in assets.

The ROA as measured in the Times survey may differ slightly from the numbers banks themselves publish because it is calculated differently by consultant MZ Group. Profit figures in the Times list also exclude special gains. As an example, the profit figures would not count a $283-million credit BankAmerica Corp. earned in 1989 that stemmed from tax benefits.

Three patterns emerged from the Times ROA list: Top institutions were conservative lenders, achieved efficiencies through mergers or pinched pennies.

Overall, results were weaker than in previous years. In 1987 and 1988, no institution that made the top 25 had posted a loss for the year. In 1989, three institutions did, the largest of which was First Interstate Bancorp, the Los Angeles banking firm that is suffering problems in its Arizona and Texas units.

City National Corp., parent of City National Bank in Beverly Hills, had an ROA of 1.31%, meaning it earned $1.31 for every $100 in assets.

Like a lot of things in Southern California, City National’s image as a bank to the stars was a mixture of truth and myth. Stars do bank there, mainly because City National has forged close ties with their business managers. But City National’s reputation as a Hollywood bank probably gives it a more quirky image than it deserves.

In reality, City National is a highly conservative lender. It uses its own appraisals on real estate, opting for the most conservative values. It requires that borrowers show substantial equity in a deal, demonstrate that they have plenty of other income to cover payments and also that they have a relationship with the bank that extends beyond the loan. As a result, it gets stuck with far less foreclosed property than other lenders.

The bulk of its activity is in areas less glamorous than entertainment. Important business segments include office and industrial real estate lending, loans to firms with less than $100 million in sales and a division that does data processing for smaller banks.

Chairman Bram Goldsmith attributed his bank’s success to its avoidance of risky ventures such as foreign loans.

In second place, with a 1.27% return, was Pacific Western Bancshares, parent of Pacific Western Bank in San Jose, which is made up of two banks that were merged in 1987: Pacific Valley Bank in San Jose and County Bank & Trust in Santa Cruz. The bank has benefited from strong growth in the San Jose area, cost controls and savings realized after combining the operations of the two banks.

Ironically, the bank’s success may make it a tempting acquisition for a larger bank or even an out-of-state institution once California’s interstate banking laws are eased next year.

“I’m sure we are on every list in town. We have been for a long time,” said Phillip R. Boyce, Pacific Western’s chief executive.

Pacific Western was on Security Pacific Corp.’s list earlier this year. But acquisition talks broke off, sources said, because the price of Security Pacific shares, which would have been swapped for Pacific Western shares, fell.

Wells Fargo was the top finisher among the state’s banking giants, taking third place on the ROA list. The San Francisco-based bank had a return of 1.26%. No other California giant came close, although Security Pacific might have, were it not for problems with its Arizona operation.

Thrifts as a group fared poorly. Last year, Congress passed the sweeping Financial Institutions Reform, Recovery and Enforcement Act. The act requires that thrifts bolster their capital to protect against losses, and even some of the state’s strongest have had to scramble to meet the standards.

The top-performing S&L; was Golden West Financial in Oakland, the parent of World Savings, followed closely by Santa Monica-based FirstFed Financial, parent of First Federal Bank of California.

Golden West, whose ROA was 0.87%, is considered one of the most skilled S&Ls; at keeping costs under control. Its co-chief executives, Herbert M. Sandler and Marion O. Sandler, say the goal of saving money must run through the entire organization.

“Controlling costs has no secret; it’s a matter of philosophy,” Herbert Sandler said.

Some stars of lists past have faded from the latest one. Imperial Corp. of America’s Imperial Savings operation in San Diego was seized by regulators, while the parent firm filed for bankruptcy court protection. Columbia Savings in Beverly Hills, which finished third in 1987, is now insolvent and in danger of being seized. Both firms suffered heavy losses because of investments in junk bonds.

TOP 25 BANKS AND S&Ls;

Institutions ranked by income as a percent of average assets.

% return on average 1989 income Rank Company assets ($ millions) 1 City National 1.31 59.1 2 Pacific Western Bancshares 1.27 13.4 3 Wells Fargo 1.26 601.1 4 Security Pacific 0.92 740.6 5 Union Bank 0.91 138.9 6 Golden West Financial 0.87 157.9 7 Imperial Bancorp 0.87 23.4 8 Firstfed Financial 0.85 20.5 9 BankAmerica** 0.85 820.0 10 Sumitomo 0.84 34.0 11 Unionfed Financial 0.82 18.1 12 Homefed 0.67 115.7 13 Bay View Federal Savings 0.59 16.4 14 Westamerica Bancorporation 0.56 7.3 15 California Financial Holding 0.50 4.9 16 Glenfed* 0.47 116.0 17 H.F. Ahmanson 0.46 193.9 18 Westcorp 0.35 9.3 19 Downey Savings & Loan 0.32 13.6 20 Calfed 0.31 82.4 21 Great Western Financial 0.29 100.1 22 Citadel Holding 0.17 8.1 23 San Francisco Federal S&L; (0.22) (8.6) 24 First Interstate Bancorp** (0.26) (151.9) 25 Homestead Financial (0.45) (19.7)

1989 assets Rank ($ billions) 1 4.69 2 1.05 3 48.73 4 83.94 5 15.37 6 19.52 7 2.95 8 2.58 9 98.76 10 4.40 11 2.34 12 17.76 13 2.88 14 1.35 15 1.02 16 25.62 17 44.65 18 2.88 19 4.09 20 26.19 21 37.17 22 4.98 23 3.38 24 59.05 25 3.02

* See exceptions, page 46. **See company notes, page 45.