County’s 38 Independent Banks Show Sharp Drop in Net Income : Banking: Second-quarter earnings fall from $17.4 million last year to $10.5 million, reflecting a weakening real estate market and difficulty in making various kinds of loans.

Feeling the early pinch of recession, Orange County’s independent banks posted combined net income for the second quarter of $10.5 million, a sharp drop from earnings of $17.4 million in last year’s second quarter.

The 38 banks with headquarters in the county reported aggregate earnings of $22.1 million for the first six months, a 36% drop from the $30.1 million earned in the first six months last year, according to data compiled by Alex Sheshunoff & Co., a financial institutions consulting and analysis firm in Austin, Tex.

Weakening real estate values in the county and in other regions of the nation was the primary cause for a 21% fall in earnings for the industry, Sheshunoff said. Nationwide, the industry’s net income for the first six months was $11.1 billion, about $3 billion less than earnings for the same period last year.

The county’s banking industry, which was devastated in the early 1980s from the twin evils of rampant inflation and falling real estate prices, is finding that it’s tougher than ever to make loans, and, thus, make money.

“Real estate loans, construction loans--they’ve just dried up,” said Gerry Findley of Brea, an industry consultant and analyst. “On top of that, the banks haven’t been able to cut their costs of funding,” essentially their deposit rates.

And to add to their misery, Findley said, non-interest costs like payroll and Social Security taxes are increasing. Payroll, for instance, will increase 2.5% this year “without banks doing a darn thing,” he said.

For the first six months, only four Orange County banks lost money.

The biggest loss was $3.3 million by Far Western Bank in Tustin, which has relied on purchases of loans by auto dealers, a highly volatile market. The bank also had the highest ratio--30.3%--of bad loans to total loans. Regulators and bankers typically get concerned if that ratio gets above 3%. Far Western, though, still has ample capital, its final reserve against losses.

The others reporting red ink were: Laguna Bank in Laguna Beach, a loss of $212,000; United American Bank in Westminster, a loss of $114,000, and Grand National Bank in Santa Ana, a loss of $45,000.

“We will see a drop for the third quarter,” Findley said. “And it’ll probably get worse in the fourth quarter. I expect the bottom-line result, though, to be down 10% for year.”

The county’s bigger banks continued to take on more assets, two of them in gulps. Both CommerceBank in Newport Beach and Frontier Bank in La Palma purchased other banks to boost their size.

Security Pacific State Bank in Irvine raked in the most money in the first six months, earning $3.1 million. It was followed by Eldorado Bank in Tustin with $2 million; CommerceBank with $1.8 million; National Bank of Southern California in Santa Ana with $1.7 million, and El Camino Bank in Anaheim with $1.5 million.

O.C. BANK EARNINGS

Here is how the five largest banks based in Orange County performed in the first and second quarters of 1990.

Assets Net Income 2nd Qtr 1st Qtr (in millions) (in thousands) (in thousands) CommerceBank 326.2 968 851 National Bank of So. Cal. 313.3 847 846 Security Pacific State 308.3 1,638 1,483 Eldorado 291.1 929 1,030 Sunwest 278.5 665 690

Source: Sheshunoff Information Services Inc.