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County-Based Banks Poised to Show First Profitable Year Since Degregulation in '82

February 17, 1988|JAMES S. GRANELLI | Times Staff Writer

Orange County's 41 independent banks posted combined income of $16.9 million for the first nine months of 1987, setting the stage for their first profitable year since deregulation of the financial industry in 1982.

The nine-month bank performance figures, which became available late last week, show that Orange County institutions outperformed their counterparts both statewide and nationwide.

The state's banks recorded a composite loss of $910 million, which included $1.3 billion of losses by the four major commercial banks--mainly because of foreign loan problems.

The county's banks had a 0.51% return on assets for the nine months, while banks statewide had a negative return on assets of -0.30% and the nationwide figure was barely positive. Return on assets, a major indicator of bank performance, is net income divided by total assets.

"I think we probably are going to have a pretty good year for the county," said Gerry Findley, a Brea-based industry consultant who puts together annual performance reports on all banks operating in the state.

Preparing Reports

Findley, who is preparing his annual Findley Reports on California Banks, said he is not seeing massive write-downs or charged-off losses that often occur in the fourth quarter and dampen the annual figures.

"Overall, the banks are going to be back strong from an income standpoint," he said.

The county's banks have been rebuilding for the last two years, he said, and the process has been aided by lower interest rates, a brisker economy, a tighter rein on expenses and time to work out loan problems.

If the county's banks can maintain their profits for the final quarter, it will be a marked contrast to their money-losing ways in each of the previous five years.

Combined losses for the five years totaled $37.4 million, with the biggest hit--a $28.97 million deficit--coming in 1984.

High interest rates and the failing real estate market in the early 1980s made losers out of many county banks. The number of banks posting losses in each of the five years ranged from 13 in 1986 to 24 in 1984.

For the first nine months of 1987, only seven Orange County banks reported losses. Their combined losses totaled $1.4 million, according to federal regulatory statistics compiled by Sheshunoff & Co., an Austin, Tex., industry consulting firm.

Sheshunoff's income figures for banks do not include any extraordinary, or non-operating, gains or losses, such as the sale of a branch building. But since 90% of all banks do not have extraordinary items to report, the figures are close to net income, the company said.

Only two of the money-losers--Pacific Regency Bank in El Toro and Monarch Bank in Laguna Niguel--need to shore up their capital bases to meet regulatory requirements, Sheshunoff's figures indicate. Capital at each bank amounts to less than 4.6% of assets. Regulators require a minimum 6%.

A third bank with red ink and little capital at the end of the first nine months was the Bank of San Clemente. But Irvine developer John E. Wertin paid $1.5 million for an 80% stake in November, after the third quarter ended, making it one of the healthier county-based banks. The bank, in fact, already was turning itself around before the deal was closed.

The 34 banks that posted profits for the first nine months had combined income of $18.4 million.

One of the biggest surprises in the nine-month figures is the skyrocketing growth of Far Western Bank in Tustin, which nudged out longtime leaders to head the list as the county's largest bank.

At the end of September, Far Western had $223.1 million in assets, a sixteenfold increase over $13.8 million in assets at the end of 1985.

Far Western's growth has been fueled by three branches that specialize in purchasing automobile loans, which account for more than 80% of the 8-year-old bank's loan portfolio, said Richard Trotter, the bank's president.

"Independent banking has to find a niche and do well at it," he said. "We found a niche and we're serving it."

Assuming two pending mergers win expected approval from regulators, the holding companies for Eldorado Bank in Tustin and Citizens Bank of Costa Mesa would become the county's two largest banking firms, based on Sept. 30 figures.

Eldorado Bancorp, which plans to operate American Merchant Bank in Newport Beach as a separate entity from Eldorado Bank, would have about $250 million in assets. And Citizens Holdings, which also plans to operate Anaheim-based El Camino Bank as a separate entity from Citizens Bank, would have about $228 million in assets.

One of the more disturbing nine-month results is the poor loan quality at a few of the county's banks. Alex Sheshunoff, president of Sheshunoff & Co., lists non-performing loans as one of the key indicators of future troubles at a bank.

Non-performing means that payments on loans are at least 90 days overdue or are not being made at all. Banks typically view the acceptable limit for non-performing loans to be 1% to 3% of total loans.

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