Orange County's 41 independent banks posted combined earnings of $27 million in 1987, marking the first profitable year for the county's banking industry since deregulation in 1982.
The county's banks achieved a collective profit despite higher interest rates from April to October and a slowdown in mortgage lending, factors that prevented the industry from fulfilling the greater expectations of some bank consultants.
"It was a pretty good year for independent banks throughout the state and especially for Orange County banks," said Gerry Findley, a Brea-based industry consultant and publisher of the annual Findley Reports on California Banks.
But he warned that this year could be a rough one for banking if top managers fail to keep a lid on non-interest costs and if the rate of problem loans continues to climb.
In Contrast With S&Ls
Still, the overall performance of county banks exceeded that of banks statewide and nationwide, according to the Findley Reports and regulatory statistics. And it is in marked contrast with the country's savings and loans, which lost a combined $534.1 million during the first nine months of 1987.
The county's banks posted a combined 0.77% return on assets last year. Return on assets is a bank's profit expressed as a percentage of its total assets. It is the basic yardstick used to assess a bank's relative profitability.
Statewide figures are not available yet for the full year, but California banks recorded a composite loss of $910 million and a negative return on assets of 0.3% for the nine months ended Sept. 30. That negative return on assets is not expected to change much for the full year.
Nationwide, banks earned $3.7 billion--the lowest combined profit since the Depression--and reported a puny 0.13% return on assets.
Orange County banks overall turned the corner in 1987 after five years of combined annual losses totaling nearly $38 million. The biggest single hit--a combined loss of nearly $29 million--was logged in 1984.
Shifts in Bank Performance
In 1986, county banks lost a total of $808,000 (revised from an earlier figure of $204,000), according to the Findley Reports. The publication, a compilation of statistics and ratios based on financial statements filed by the banks with government regulators, revealed other significant shifts in bank performance:
Of 34 banks posting profits, 18 had higher earnings in 1987 than the previous year, and eight others became profitable after posting losses in 1986. The combined 1987 profits of the 34 institutions totaled $29.5 million.
-Just seven county banks posted losses last year, and four of them reported losses smaller than in 1986. Just one bank lost money after posting a profit in 1986. The combined red ink among the seven banks last year totaled $2.5 million.
-Total non-performing loans, a key indicator of possible future loan problems, jumped 23.7% to $71.2 million last year from $57.6 million in 1986. Loans are considered non-performing when they are 90 days or more overdue.
- The ratio of non-performing loans to total loans last year grew to an uncomfortable 3% for all county banks from 2.7% in 1986. Bankers typically view the acceptable limit for non-performing loans to be 1% to 3% of total loans.
-Combined assets for all 41 banks edged up just 2.4%. Many bank executives said last year that they planned to limit growth in favor of increasing profitability. They may have had little choice: Total deposits, which are needed to fuel growth, dipped 0.3% because of increased competition from other financial institutions and inordinately high December, 1986, deposits from real estate and securities sellers who wanted to take advantage of old tax laws.
-Total loans for the county's banks grew 13.7%, but bankers are reporting that loan demand, especially for mortgages, is flat or even decreasing. They attribute the trend partly to aftereffects of the Oct. 19 stock market collapse and partly to increased competition from other financial institutions and financial services companies.
The 3% ratio of non-performing loans at the county's banks is down from 3.3% at Sept. 30. At that point, banks statewide classified 4.8% of their loans as non-performing.
But California's four major banks, which wrote off $1.3 billion foreign loans and other problem debts, pulled down the state average. Excluding those four institutions, the rest of the state's banks had a 2.9% ratio, lower than the county figure.
Nationwide, 3.6% of loans were non-performing at Sept. 30.
"The rate of non-performing loans is a little bit of concern to us, but we believe they're connected with selective banks," Findley said.
Three banks--Pacific Regency in El Toro, Commercial Center in Santa Ana and the Bank of Orange County in Fountain Valley--had double-digit ratios of non-performing loans. Another nine banks had ratios exceeding the 3% level. But 16 banks had no problems or had classified less than 1% of their loans as non-performing.
Money Losers Reduced