Calif. Bank Regains Luster by Making Tough Calls on Costs

A year of austerity has propelled Eldorado Bancorp into the top ranks of Southern California community banks, proof that biting the bullet on costs can pay off.

In its bid for long-term survival, Eldorado left no expense - or employee - unjustified.

"After 1993 we took a hard look at ourselves," said David R. Brown, chief financial officer of the Tustin-based bank. "Any hard look at our cost structure showed that we had to get our costs down to stay competitive here."

While Mr. Brown likens what Eldorado did to what many major banks are doing in the West, the bank stands out among its peers.

California's community banks have some of the highest cost structures in the industry, mostly because of high pay and expensive office space.

Analysts who follow California's independent banks say that if a bank can't attack its cost structure, it will probably have to merge.

In Orange County, Eldorado's home, nearly all of the dozen community banks have overhead expenses exceeding 6% of their assets. In contrast, Eldorado's overhead expense ratio was 4.49% in the third quarter. And in the first quarter this year, with the full benefits of a yearlong restructuring on the books, the overhead ratio fell below 4%.

Eldorado's story starts in 1989, when real estate prices in Southern California were going up 25% a year. Mr. Brown said the $307 million-asset bank was heavyily into construction financing but more selective in purchase financing for real estate. That selectivity kept the bank's real estate credits above water through 1991 and 1992. But in 1993 the appraisals started coming in smaller and smaller.

The bank took a $3.5 million chargeoff and $1.8 million in provisions in the fourth quarter of 1993, resulting in a $1.5 million annual loss.

Galvanized by those losses, managers took a hard look at operations costs.

"I mean, we have 10 branches," Mr. Brown said, "and many of them are very small. We had a very expensive delivery system."

So Eldorado centralized all data processing and credit underwriting functions. That allowed the bank to reduce its branch staffing while better leveraging the employees who were left.

"It allowed (the employees) to spend more time on business development," he said. "Some of them are becoming great salesmen. Others aren't, and they are either in the back office or are no longer with us."

All told, Eldorado has gotten rid of 87 of the 205 employees it had last June, making greater use of part-timers. About 25 employees were jettisoned when the bank hired Fiserv to do its data processing. In all, the cutbacks saved the bank $1.2 million in salary expenses in 1994.

In addition, to save on rental costs and further streamline the back- office functions, management moved its administration from Tustin to an upstairs office of its Irvine branch.

"You can see the significance of it, both in terms of numbers of people gone and its effect on the bottom line," Mr. Brown said.

In the first quarter of this year, the first full quarter after all the severance packages were paid, Eldorado's earnings vaulted 75%, giving it a 1.1% return on assets.

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