As the real estate market goes, so goes the banking industry in Orange County.
And in 1985, that meant things went well. In fact, in 1985 Orange County banks on the whole had their best year since 1982. Lower interest rates fueled an upswing in both real estate and commercial borrowing last year and helped most of the troubled banks in the county return to profitability.
A few banks are still struggling, though, and at least two are in serious trouble, consultants said. Valencia Bank in Santa Ana was seized by regulators in February, making it the eighth Orange County-based bank to fail since 1982 because of sizable losses on real estate.
Still, for the first time since 1982, more local banks posted profits than losses at the end of the year.
Net income for the county's 29 independent banks that showed profits last year hit $19.6 million, a 62.5% increase over the $12.1 million in net income generated by 20 profitable banks a year earlier.
Losses Show Improvement
Total losses posted by the remaining 15 independent banks last year were $11.3 million, a 47.4% improvement over the previous year when the majority of the local banks--24--ended up with a collective $21.5 million in red ink.
These are just a few of the findings gleaned from the year-end results of all 44 commercial banks based in Orange County.
Other findings include:
- Ten banks posted annual profits last year after losing money in 1984. Only one bank that showed a profit in 1984 lost money last year.
- Fifteen banks posted higher profits last year than in the previous year. Only four banks posted lower profits.
- Losses at eight of the county's banks in 1985 were less than the same banks' losses the year before.
Despite the generally upbeat results, "there are probably a dozen banks in the county operating under some kind of order issued by (state and federal) regulators," said Gerry Findley, a Brea consultant for financial institutions who publishes the Findley Reports on California Banks. The orders require anything from improving minor operating matters to forcing banks to raise more capital.
But for most banks, the results in 1985 were encouraging.
"El Camino, Eldorado, CommerceBank, Orange City, American Interstate, Pacific National . . . are all turn-arounds, showing much better performances," Findley said.
'Feel Good' About Industry
"We feel pretty good about the independent banking industry. We wish it were in better condition, but we feel good about the improvements taking place in the financial structures and operating performances," he said.
In one critical measure of a bank's soundness, the capital-to-assets ratio, only four banks last year fell below the 6% minimum required by federal regulators. In 1984, six banks fell below the ratio and 12 were under the 6% mark at the end of 1983. The ratio measures a bank's capital, or net worth, as a percentage of its total assets.
Often banks are forced by regulators to raise additional capital through the sale of stock. But perhaps the easiest way to improve that ratio is to reduce assets. And last year, 10 area banks chose to reduce their assets.
Overall, though, the county's banks increased total assets 37.5% to $3.4 billion from $2.5 billion.
Banks used other techniques, besides cutting back on assets, to improve their health and earnings. Many banks cut payrolls and other operating costs, some initiated new marketing plans to build up consumer deposits and loans, and starting in late 1984, 34% of the banks changed top management personnel. Many banks also devalued their real estate and loan portfolios to position themselves for big gains this year.
Statistics, of course, can sometimes be misleading.
CommerceBank, for instance, ended the year with a capital-to-asset ratio of 5.8%. But the otherwise healthy bank typically gets a huge influx of deposits on the last few days of the year, which waters down the year-end ratio. Last year, title and escrow companies pumped about $25 million into the bank in the final days of December.
Change in Computations
But federal regulators--who monitor banks' capital-to-asset ratios--know when slumps below the minimum ratio are temporary. Additionally, the regulators now have begun using an average annual asset figure rather than the Dec. 31 total. That formula would give CommerceBank a 6.9% ratio for 1985.
In another case, Mission Viejo National Bank was the second-biggest loser last year, but the bank has been operating profitably since November and turned in a $75,000 profit for the first quarter that ended March 31. Jack R. Barnes, president and chief executive of the bank, projects an annual profit this year of $500,000 to $1.5 million, which would mark one of the bigger turn-arounds in the last few years.