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First National Reportedly Shops Loan Unit

November 08, 1991|CHRIS KRAUL | SAN DIEGO COUNTY BUSINESS EDITOR

Rocked by a $5.5-million third-quarter loss, First National Bank is stepping up its previously announced plan to divest its loan servicing operation, sources say, an action that would raise much needed cash.

The bank disclosed in July that it was seeking to sell or spin off the mortgage loan servicing operation, partly because it is facing more stringent regulatory capital requirements covering "purchased loan rights." The rights are assets that give a bank the right to collect, for a fee, payments on loans originated by outside lenders at minimum risk.

Last month, First National reported a $5.5-million loss for its third quarter and that it was closing its Carlsbad branch to cut costs. The loss was caused principally by loan loss reserves to cover souring commercial loans.

The bank's regulatory capital levels were in excess of minimum amounts after the loss. But its non-performing loans increased to $34.2 million, or 5.3% of its $646 million in total assets, a dangerously high ratio. The bank also said that its asset quality could continue to deteriorate if the San Diego region's economy fails to recover.

The news pushed First National stock down in American Stock Exchange trading as shares closed at $6.75 in Monday trading, down from a close of $11.375 as recently as Aug. 23.

Sources in the mortgage business who asked not to be identified say First National is actively shopping the loan servicing operation. In an interview Monday, First National Bank President Michael West limited his reaction to the reports by quoting the wording in the bank's July filings that the bank is "still evaluating alternative strategies . . . including possible divestiture (of the loan servicing unit) through sale or dividend."

West said emphatically that the recently reported third-quarter loss did not put any added pressure on the bank to dispose of the loan servicing unit, which employs 130.

Bert Ely, a financial institutions consultant based in Alexandria, Va., said many banks of First National Bank's approximate asset size find themselves in the same position of having to dispose of loan servicing operations because of higher capital requirements, particularly purchased loan servicing rights.

"That is a special problem and what First National may be doing is killing two birds with one stone, in terms of selling off the servicing rights to get past the limitation and selling for a gain that would help its capital position too," Ely said.

The problem faced by First National and others is that prices being fetched for loan servicing operations are not so attractive because of the number of sellers shopping their loan servicing units.

According to regulatory rules enacted late last year, a bank cannot hold purchased loan rights that amount to more than 25% of the bank's equity.

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