First National Reports Loss, Big Rise in Problem Loans

Confirming its previous advisory that it would report a large third-quarter loss, the parent of First National Bank on Thursday also disclosed an alarming increase in its problem loans, especially in its loans to businesses. The disclosures knocked First National Corp. stock down to an all-time low in Thursday trading.

The bank said losses for the third quarter ended Sept. 30 of $5.5 million were due mainly to loan loss provisions of $11.8 million. The loss contrasts with a profit of $1.8 million and loss provisions of only $710,000 over the same period last year.

The company had announced in September that it expected the loss and provisions, partly because of its dealings with Pioneer Mortgage, the bankrupt La Mesa-based mortgage loan investment firm that defaulted on $3 million in loans to First National.

But Thursday’s news release also detailed growing loan quality problems. As of Sept. 30, First National’s non-performing assets were $34.2 million, or 5.3% of $646 million in total assets, up from $11.5 million or 2% of assets as of June 30. Analysts generally regard a bad loans-to-assets ratio of 5% or higher as a negative indicator.

Declining loan quality was particularly evident in the bank’s business loans, where problem assets grew to $15.6 million from $3.4 million a year ago. Nancy Celick, the bank’s chief financial officer, said the bad loans were “a reflection of the general deterioration in the San Diego economy, particularly in the real estate sector.”

Although the bank’s commercial or business loans are not directly tied to real estate projects, they can feel the consequences of a real estate market downturn, Celick said.

“You have a lot of companies--a subcontractor or cabinet shop or design company--that revolve around the real estate industry,” Celick said. “So, as the real estate market deteriorates, those companies are also going to have difficulties.”

First National stock closed down $.50 to $7.125 a share in American Stock Exchange trading, an all-time low.

Campbell Chaney, a stock analyst with Sutro & Co. investment bankers in San Francisco, said other California banks, large and small, share First National’s souring business loan problem. Wells Fargo Bank, for example, recently reported a 211% increase in bad business loans over the third quarter, and Bank of America reported a 175% increase, Chaney said.

“What they are suffering through is what a number of banks are suffering through in Southern California: the devastating recession,” Chaney said.

“It’s the trickle-down effect of the construction downturn, aerospace layoffs and other work force reductions,” Chaney said. “Those (laid-off workers) are no longer consuming as much, which has an impact on small to medium--sized businesses, which in turn can’t pay their loans and end up as problem loans on a bank’s balance sheet.”