Banks Report Bigger Profits Despite Burden of Bad Loans : Earnings: Turnaround by Orange County’s community institutions will help them meet stiffer regulations in December.

Lower interest rates and fewer expenses helped Orange County’s 31 community banks post significantly higher combined earnings of $11.1 million for the second quarter, even though two-thirds of the institutions were plagued by an increasing amount of bad loans.

The turnaround from lackluster profits in the past few years is a boon for locally based banks as they shore up capital and prepare to meet stiff new federal requirements scheduled to take effect in December.

“I think it’s going to be a very good year,” said Gerry Findley, an Anaheim banking consultant who specializes in community banks. “When the interest rates turn up, probably in 1993, I think inflation will go up and smaller banks will gain on that.”

Last year, county banks reported combined red ink of $5.1 million, but the results included $9.7 million in losses from three institutions that regulators have since seized and closed.

For the first six months, the local banking industry recorded total profits of $16.3 million, compared to $4.5 million earned in last year’s first half, according to regulatory statistics compiled by Sheshunoff Information Services Inc. in Austin, Tex.

With falling interest rates, banks have enjoyed higher profit margins as rates on deposits have gone down faster than rates on loans. But as that gap has closed, revenue hasn’t gone up as much.

“Gross income hasn’t materially improved,” Findley said. “But bankers have been doing a better job in cutting expenses, and they’ve done a good job on minimizing loan losses. That all goes to the bottom line and shows up as profits.”

He said banks also have shifted the mix of deposits, replacing higher-costing large deposits with lower-costing core deposits from local residents and businesses. That helps to improve profit margins, he pointed out.

Security Pacific State Bank in Irvine, once the county’s biggest bank, led in the second quarter with $6.4 million in profit. Bank of America acquired its parent company, Security Pacific Corp., earlier this year but hasn’t decided yet what to do with the state-chartered subsidiary. The state bank’s assets have shrunk to $277 million from a high of $430 million.

The next-biggest quarterly earners were Eldorado Bank in Tustin with $982,000 and Colonial Bank in Santa Ana with $808,000.

Only eight banks lost money for the second quarter. They were led by Bank of Newport in Newport Beach with a $691,000 loss and Sunwest Bank in Tustin with $677,000 in red ink.

Troubled loans--those more than 90 days past due--increased at 21 institutions, with 11 of them shooting above the regulatory guideline limiting bad loans to 3% of the total.

The county’s 11 thrift and loans, meantime, also continued steady earnings, reporting combined quarterly earnings of $3.1 million. That compared to $2.8 million in earnings for last year’s second quarter. Like the banks, six of them also saw bad loans jump.

The two biggest--First Fidelity Thrift & Loan in Irvine and Investors Thrift in Orange--made up most of the small industry’s earnings, with $1.8 million and $1.1 million, respectively.

Thrift and loans are sometimes confused with savings and loans, which are also called thrifts. Thrift and loans are industrial banks that operate as a cross between banks and finance companies, usually making high interest-rate loans that banks won’t touch.

O.C. Thrift & Loan Scoreboard

2nd quarter, 1992, Results

Ranked by assets ASSETS % NON-PER- NET INCOME (millions) FORMING TO (thousands) TOTAL LOANS Bank (a) 1992 1991 1992 1991 2nd Qtr 1st Qtr First Fidelity 479.4 442.6 9.79 9.20 1,763 1,100 Investors 342.9 243.5 3.99 1.34 1,056 911 Citizens 97.6 94.4 2.66 0.88 408 416 South Coast 81.1 79.4 7.72 7.84 85 -121 First Security 57.9 53.6 2.33 2.70 260 237 Huntington Pacific 40.9 51.9 7.71 5.30 -446 -109 Tustin 30.6 26.5 1.80 2.56 -312 35 Heritage 29.9 42.7 1.24 2.96 124 41 Centennial 21.9 27.5 8.50 6.04 49 35 Freedom Financial 20.1 22.9 6.67 7.51 10 53 Franklin 12.0 12.2 2.24 0.77 70 76 Totals 1,214.3 1,097.2 3,067 2,674

Note: Bad loans should not exceed 3% of total loans, according to bankers and regulators.

(a) Since the end of June, 1991, two thrifts with a total of $79.4 million in assets were closed by regulators.

Source: Sheshunoff Information Services Inc., Austin, Tex.

Orange County Bank Scoreboard

2nd quarter, 1992, Results

Ranked by assets ASSETS % NON-PER- NET INCOME (millions) FORMING TO (thousands) TOTAL LOANS Bank (a) 1992 1991 1992 1991 2nd Qtr 1st Qtr National Bank of So. Calif. $350.6 $369.8 3.99 2.79 $573 $549 Eldorado 350.4 288.0 3.23 2.26 982 781 Commercial Center 308.7 264.6 0.53 16.08 671 541 CommerceBank 303.8 330.4 1.52 0.76 83 286 Bank of Newport 282.7 282.4 2.08 2.27 -691 193 Security Pacific State 277.4 430.3 1.92 1.09 6,427 -280 Pacific National 229.2 129.8 2.91 1.74 -82 142 Sunwest 229.1 274.1 5.19 4.88 -677 232 Landmark 228.4 179.8 1.24 1.76 329 113 Pioneer 215.1 205.1 7.09 4.81 315 390 Liberty National 172.2 151.7 2.95 2.58 284 512 Orange National 165.0 161.1 2.52 0.07 212 91 American Commerce National 136.7 129.2 6.98 3.11 213 393 Colonial N.A. 135.1 77.6 2.75 1.05 808 285 Pacific Inland 130.5 120.1 1.28 4.13 442 126 Frontier N.A. 118.4 144.8 1.71 2.48 -97 108 Mid City N.A. 117.5 100.0 4.77 3.65 122 91 Marine National 112.6 78.6 0.10 0.28 94 70 Huntington National 106.2 110.6 2.14 0.39 327 -292 Corporate 94.4 97.8 4.03 1.14 190 95 Mariners 84.9 79.5 0.03 0.70 233 189 Bank of Anaheim N.A. 71.2 70.7 1.11 0.26 163 158 Grand National 65.7 41.6 0.59 0.02 177 112 Monarch Bank 65.1 58.2 2.30 0.09 56 65 Bank of Westminster 58.2 66.5 6.26 3.19 116 79 Bank of Yorba Linda 53.5 49.1 0.31 0.16 76 46 Bank of Orange County 49.0 43.4 0.24 0.97 96 63 Dana Niguel N.A. 47.9 66.8 7.60 2.17 -170 1 First American Capital N.A. 37.1 38.2 1.87 7.17 -43 133 United American 36.4 40.6 0.54 1.63 -35 -14 Laguna N.A. 11.1 13.6 5.54 1.90 -144 30 Totals 4,644.1 4,494.0 11,050 5,288

Note: Bad loans should not exceed 3% of total loans, according to bankers and regulators.

(a)Since the end of June, 1991, regulators have closed three banks with a total of $251.2 million in assets and $9.7 million in losses for the second quarter, 1991. Three other banks have been sold or merged out of existence, including Laguna Bank, which was sold in August to Orange National Bank.

Source: Sheshunoff Information Services Inc., Austin, Tex.