After three years of bleak earnings performance, California community bankers can finally say the pummeling is over.

The industry's returns are up for the first time since 1990.

After just breaking even in 1993 - with a return on assets of a mere 0.03% -- the state's 362 community banks earned 0.46% in the first quarter on their total $60.8 billion in assets.

Nevertheless, analysts and bankers said that many small banks in the state, particularly in the southern part, continue to have serious loan problems. Last year, the toughest in 50 years for small banks in the Golden State, some observers were predicting a modest turnaround. Data show, however, that at best the outlook is fair and that community banks shouldn't look forward to heady times like the early 1980s for years to come.

"Southern California is still seeing the worst of times," said Greg Madding, who follows small banks for Hoefer & Arnett in San Francisco. "A turnaround is at least a year away, and probably more."

Loan-loss provisions and credit costs have been the biggest gougers of earnings, and at least they appear to be on the decline. In the first quarter, loan-loss provisions at the states community banks were on track to be $264 million, compared with $594 million in 1993 and $642 million in 1992. Noninterest expenses are on a pace to reach $2.8 billion, compared with $3.1 billion in 1993.

Despite the poor performance, community banks in the state have increased their equity capital steadily over the years to 8.57% in the first quarter.

Yet, nonperforming assets continue to be the most threatening aspect of the community banks' balance sheet, with the worst damage by far inflicted in the southern part of the state.

Nonperforming assets have risen to 7.44% in the first quarter from 7.2% at the end of last year.

Bankers in Southern California say this will be another year of disposing of bad assets and preserving capital. The economy there is still in the doldrums, with the defense industry decimated and real estate prices stagnant.

Twenty-eight banks have failed in Southern California in the last 18 months.

And, while a measure of liquidity has returned to the real estate market, providing opportunities to sell foreclosed real estate, many small banks appear reluctant to take the hit to capital, a necessary evil to quickly dispose of large portfolios of non-performers.

First National Bank of Ventura is a prime example of the decisions being faced at many Southern California community banks.

After losing $808,000 in 1993, the $34 million-asset bank sold a chunk of written-down foreclosed real estate in the first quarter.

The gain catapulted the tiny bank to the best-performing community bank in the state during the first three months of the year, with an ROA of 4.28%.

The bank will be profitable this year, said chief executive Robert P. Zingg, but is still under a memorandum of understanding with the Office of the Comptroller of the Currency.

"We wrote off $1.4 million worth of assets last year," said Mr. Zingg, who was hired in January to turn the bank around. "But we still have strong capital. With what we have planned we should be successful."

Mr. Zingg admits that the economy isn't in recovery, but argues it has stabilized. He's optimistic, he added, because "this bank is on a recovery path during the right time."

First National isn't the only California community bank turning in huge gains after huge losses last year. The second-most-profitable small bank, Bank of Oakland, earned a 3.66% ROA because of a sharply lower loan-loss provision. Of the 25 most profitable banks in the state, nine had ROAs of less than 1% in 1993.

The one overriding trend in community banking throughout California is consolidation. With more than 300 small banks in the state, a good chunk with zero earnings momentum and weak loan demand, community banks are thinking merger.

"I hear bankers all the time tell me its merge or die," said Mr. Zingg. "But I just don't believe it. I think a lot of banks will be merged, but you will always have room for the local bank. I don't see much of a net reduction in community banks."

Mr. Madding said most of the merger action will remain inside California.

"You won't see many out-of-state players entering California on the community bank consolidation wave," he said. "The players are already here, and they are the midsize community banks."

Mr. Madding added, however, that many out-of-state private investors have bought foundering community banks in the state as a turnaround play. Golden State Leaders Most profitable community banks in California,first-quarter '94 Return on Total average assets in assets millions 1 First National Bank of Ventura 4.28% $34.302 Bank of Oakland 3.66 48.193 First Credit Bank, Los Angeles 3.08 146.464 Western State Bank, Duarte 2.58 46.55S Foothill Bank, Mountain View 2.5 78.756 Fremont Bank 2.35 395.697 Truckee River Bank 2.16 186.588 Clovis Community Bank 2.12 115.989 Heritage Oaks Bank, Paso Robles 1.88 55.6610 Bank of Willits 1.82 64.1411 United Security Bank, Fresno 1.81 90.7812 Savings Bank of Mendocino County, Ukiah 1.77 368.6713 Korman State Bank 1.67 71.2614 Bank of Commerce, San Diego 1.64 130.0415 Founders National Bank, Los Angeles 1.64 97.4216 El Capitan National Bank, Sonora 1.64 154.9817 Templeton National Bank 1.59 23.7418 Bank of Commerce, Auburn 1.57 62.7019 Tehama County Bank, Red Bluff 1.56 94.7320 California Business Bank, San Jose 1.55 68.1821 Pacific Valley National Bank, Modesto 1.54 168.0522 Golden Oak Bank, Oakhurst 1.48 36.9123 General Bank, Los Angeles 1.48 963.6024 California Commerce Bank, Los Angeles 1.47 647.3225 First Bank of San Luis Obispo 1.47 70.79

A community bank is a bank with total assets of $2 billion or less that makes loans and accepts deposits, Also, the bank is either independently owned or owned by a community bank holding company (company's consolidated assets are $2 billion or less).

Source: Sheshunoff Information Services Inc.

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