A Bumpy Ride for Banks
FirstPlus Bank’s bet on high-risk home-equity loans catapulted the Tustin-based thrift and loan to the top of the list of Orange County’s--and Southern California’s--most profitable financial institutions last year, according to a study commissioned by The Times Orange County.
Among the worst performers was tiny Orange-based Franklin Thrift & Loan, which reported a rising number of bad loans, a negative return on assets and a risk-based capital ratio that dipped below what banking regulators like to see.
Overall, the Times review of 28 banks and thrifts headquartered in Orange County found that profitability dropped slightly in 1998, despite growth that outpaced the rest of Southern California, and a sharp decline in overall delinquency rates.
“Banks in Orange County found they had to spend more money last year on marketing and redefining themselves than they have in the past,” said Ed Carpenter, an Irvine bank consultant. “There was increasing competition and rate-cutting from larger banks, which cut into profits.”
Profitability also was hurt by last year’s interest-rate cuts by the Federal Reserve, which reduced the amount of interest income collected by small and mid-sized banks in Orange County, Carpenter said.
The Times study--complied by Bauer Financial Reports using data from the Federal Deposit Insurance Corp.--found that total assets of Orange County banks and thrifts grew about 18% last year, to $18.8 billion. That was in sharp contrast to the rest of Southern California, where mergers and acquisitions by out-of-state banks and thrifts resulted in a 16% decline in overall assets.
A healthy residential real estate market helped reduce bad loan rates in Orange County to 0.68% of total assets, compared to about 1% in 1997.
But the improvements and growth didn’t help the bottom line. The average return on assets fell to 0.83% in Orange County, compared with 1.03% in 1997. Return on assets for all banks and thrifts in Southern California last year was 0.94%.
FirstPlus Bank, which is best known for its high-fee, high-rate home-equity loans, reported an enviable 4.5% return on assets in 1998, more than four times the average in Orange County and Southern California.
But the Tustin bank--which last year focused on loans that gave homeowners up to 125% of their property value--isn’t looking for a repeat performance this year.
Last fall, a global financial panic led to a meltdown in the 125% home-equity market, and now FirstPlus Bank is looking for a new lending focus. In addition, the bank’s troubled parent, Dallas-based FirstPlus Group, has been liquidating many of its assets and placed two key divisions into bankruptcy court. The Tustin bank is not part of the bankruptcy filings.
“We are restructuring ourselves,” said FirstPlus Bank Chief Executive Michael McGuire, noting that the bank is focusing on home-equity loans, home renovation loans and traditional mortgages. “This year’s earnings will be considerably less.”
Mortgage lending proved profitable for other Orange County banks too, including Pacific National Bank, a unit of Western Bancorp that reported a 3.16% return on assets, and Bank of Yorba Linda, an Orange-based lender with a 1.77% return on assets.
Downey Savings & Loan’s concentration on residential lending enabled it to easily hold on to its top spot as Orange County’s largest financial institution, with about $6.3 billion in assets. Much of the countywide drop in delinquency rates can be attributed to the Newport Beach-based thrift’s own decline in bad loans, which were halved to a slim 0.38% in 1998 from 0.77% a year earlier.
In contrast to the profits of residential real estate, auto lending proved to be a rocky road for several county banks and thrifts.
Franklin Thrift, with just $25 million in assets, stood out as one of the county’s most troubled institutions, reporting a -1.75% return on assets and an 8.24% delinquency rate, up from 1.78% in 1997. The thrift makes most of its loans to individuals, including car loans.
Because of rising loan defaults, the bank’s risk-based capital ratio--a widely watched measure of an institution’s cushion against potential losses--fell from a strong 23% in 1997 to less than 9% last year. Under federal guidelines, an institution is defined as well-capitalized if it has a risk-based capital ratio of 10% or higher.
Franklin Chief Executive Dawn Snuggerd did not return phone calls seeking comment.
Irvine-based Western Financial Bank, the county’s second-largest financial institution, also ran into problems in auto lending, largely through its ownership of WFS Financial, which targets borrowers with poor credit.
Western reported a -0.33% return on assets last year, compared with 1.06% in 1997. Company officials did not return phone calls.
Costa Mesa-based PriVest Bank, a newly formed bank trying to focus on private banking services, reported the worst losses of any Orange County institution. But officials said that wasn’t unusual for a start-up.
“Numbers never look good for new independent banks,” said Ben Crowell, chairman at PriVest and former chief executive at Eldorado Bank. PriVest reported a return on assets of -9.6%. “We expect to break even by the fourth quarter.”
Acacia Bank, a Laguna Hills-based commercial real estate lender, enjoyed the fastest growth in the county, with assets rising 167%, to about $85 million at the end of 1998.
High loan delinquencies plagued Security First Bank, a Fullerton-based commercial lender that reported a 6.75% bad loan rate, the second-worst in the county.
Times staff writer Edmund Sanders can be reached at edmund.sanders@latimes.com
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A Bumpy Ride for Banks
Fastest/Slowest Growing, Most/Least Profitable, Lowest/Highest Delinquency, Best/Worst Risk Ratio.
1998 Orange County Bank Scorecard
Here’s a look at how 20 Orange County-based financial institutions fared in 1998, listed by total assets:
