Banks’ Net Income Falls 46% for 1st Quarter : Earnings: 32 county institutions see profits dip to $5 million. Continuing recession and added regulation get the blame.

Feeling the effects of the recession as well as the burden of added regulation, Orange County’s banks suffered a 46% drop in net income for the first quarter as earnings reached $5 million.

Profits for the same 32 local banks were $9.2 million in last year’s first quarter, according to the most recent figures compiled by Sheshunoff Information Services Inc. in Austin, Tex.

Bankers attributed the lower income to the soft economy that has caused property values to plummet, reducing the collateral for many loans and forcing bankers to sock more money away in reserve for possible loan losses.

“There’s no doubt about it: The high provision for loan losses is the major reason for the lower income,” said J.B. Crowell, president of Eldorado Bank in Tustin. “The recession is very, very serious in California. Bankers have been putting away a lot more than they normally do, probably half for a rainy day and half for actual losses.”

The recession has also resulted in fewer loan requests from customers, who are uncertain about the future, and in the flight of deposits to stocks, bonds and other non-bank investments that offer higher interest rates.

In addition, increasing regulations in recent years have burdened small community banks with paperwork that does little more than detail the procedures they took to make a loan.

“We probably spend an extra 20% of our time supplying information and confirmation to regulators that we didn’t have to supply before,” said Stanley Pawlowski, chairman of Corporate Bank in Santa Ana. “We’re just inundated with paperwork.”

The cost of complying with new laws is compounded by the increased cost of regulatory audits and, especially, the higher cost of deposit insurance, which has jumped from 8.5 cents for every $100 on deposit a few years ago to 23 cents per $100 this year. That rate will jump to 28 cents per $100 in January.

Still, only four Orange County banks lost money in the first quarter. One of them, American Interstate Bank in Newport Beach, which lost $267,000, was eventually seized by regulators and sold to Marine National Bank in Irvine. The surviving money-losers were Huntington National Bank in Huntington Beach ($292,000 in the red), Security Pacific State Bank in Irvine ($280,000) and United American Bank in Westminster ($14,000).

The local industry’s money-makers were led by Eldorado with $781,000. The county’s biggest bank, with $363.9 million in assets at the end of the quarter, was followed on the profit list by National Bank of Southern California in Newport Beach ($549,000), Commercial Center Bank in Santa Ana ($541,000) and Liberty National Bank in Huntington Beach ($512,000).

Bad loans also rose among the county’s banks. At the end of March, 15 banks had ratios of bad loans to total loans that exceeded the 3% level that prompts regulatory criticism. Nine banks had ratios above 5%, though none hit 10%.

Last year, 11 banks had bad loan ratios above 3%, but only four were above 5%. Two had ratios in double digits and were eventually closed by regulators.

The economy apparently had less effect on the county’s 12 thrift and loans, according to Sheshunoff. Thrift and loans are hybrid institutions--a cross between banks and finance companies--and are sometimes confused with savings and loans because S&Ls; are often referred to as thrifts.

The county’s small thrift and loan industry posted net income of $2.5 million, a 14% drop from $2.9 million in earnings in last year’s first quarter.

Half of the thrifts had bad loan ratios above 3%, but the nature of the thrift industry is such that loans often are backed by more collateral than banks require, and that results in fewer actual losses at thrifts, industry experts say.