Orange County banks and thrifts continued to show signs of improvement as most posted first quarter profits and worked through problem loans that have dented balance sheets the last three years.
Twenty-two local banks posted a profit in the first quarter and three had losses, according to an analysis provided to the Business Journal by Anaheim-based Findley Reports Inc.
The figures mark a vast improvement from a year ago when nine homegrown banks posted first-quarter losses, according to reported data from the Federal Deposit Insurance Corp.
One of the banks with red ink in the first quarter, Rancho Santa Margarita-based South County Bank N.A., cuts its losses to $190,000 from about $3 million a year earlier. Newport Beach-based Orange County Business Bank lost $95,000 after posting profits a year earlier. A $224,000 loss for Saigon National Bank in Westminster continued its downward trend of recent years.
The gains among the rest of the banks and thrifts came in spite of more stringent regulatory standards stemming from the recent downturn. That has led banks to set aside more cash to cover potential loan losses.
Higher Fees
Higher fees paid to the FDIC for its bailout fund also have detracted from bottom lines.
Costa Mesa’s Pacific Mercantile Bank, the county’s largest homegrown bank by assets, posted a $1.9 million profit in the first quarter, a 658% jump from a year earlier.
The bank has spent the better part of the last year ridding itself of troubled loans tied to real estate.
“We’ve trimmed the balance sheet,” Pacific Mercantile Chief Executive Ray Dellerba said. “You can see the turn has been made.”
Fees from electronic transactions, mortgages and sales of foreclosed properties that have been written down were the main drivers of revenue gains for the bank, according to Dellerba.
Most of Pacific Mercantile’s nonperforming loans—those 90 days past due or more—have been charged off or are producing income again as customers restarted payments.
Pacific Mercantile reported assets of $995 million in the quarter, down 17% from a year earlier.
Carrying bad assets was costly for the bank as legal expenses on its real estate portfolio eclipsed $4 million in each of the past two years, Dellerba said.
“Ninety-seven percent of our problems were in real estate,” he said
Now most of those assets have worked their way through the system, have been foreclosed and are being sold. The bank has millions of dollars’ worth of properties under contract or in escrow, Dellerba said.
“We sold more real estate which shows a promise in the economy,” he said.
Last year Pacific Mercantile’s parent company agreed to a consent order with federal and state regulators to reduce problem loans and assets while strengthening capital reserves. The bank hopes to have its capital reserves in line with regulatory requirements soon, Dellerba said.
Costa Mesa-based Pacific Premier Bank, the county’s second-largest bank by assets, posted a $4.8 million profit, up 778% from a year ago. The profit was by far the highest of any bank or thrift here.
The bank has benefited from its February acquisition of Palm Springs-based Canyon National Bank, which brought $205 million in deposits.
“We picked up a core deposit base and that really helped us to expand our net interest margin,” said Pacific Premier Chief Executive Steve Gardner.
Slowly Improving
Loan demand still is tepid, but improving, according to Gardner.
“Things have definitely improved for many of the banks,” he said. “I don’t think we’re completely out of the woods yet, just given the slow economic numbers we’ve seen the last couple of months.”
Fountain Valley’s Centennial Bank, the county’s third-largest bank or thrift by assets, saw a profit of nearly $2 million, up 19% from a year earlier.
The bank, which lends to businesses and apartment owners, among others, got a cease-and-desist order from the FDIC last year to shore up its management team, improve its capital position and reduce risk exposure.
Centennial’s equity capital was $84.5 million in the first quarter, up from $78.2 million a year earlier.
Even as banks and thrifts return to profitability, a number of them haven’t improved their Texas ratio, a much-watched measurement that compares bad loans to how much shareholders would salvage in a failure.
The lower the score the better on the Texas ratio, which is considered among the toughest measurements for banks.
The ratio was devised by analysts at Royal Bank of Canada’s RBC Capital Markets while looking at banks and thrifts in the Lone Star state during the savings and loan meltdown of the 1980s and 1990s.
A Texas ratio of 50% or higher typically draws extra scrutiny from regulators. A score of 100% or higher indicates a bank is teetering toward collapse.
Six banks in the recently ended quarter scored higher than 50%, including Pacific Mercantile at 59% and Centennial at 69.15%. A year ago three banks eclipsed that mark.
Seven scored 10% or lower, showing little risk of default. Ten local banks scored 10% or lower a year earlier.
Only eight banks improved their Texas ratios from a year ago, but the average for all local banks and thrifts is a healthy 28.26%.
