A core group of Southern California community banks has the worst asset quality problems in the country, according to a recent survey by Bauer Financial Reports Inc.

Taken from first quarter data, the survey shows that while some banks and thrifts in the state are recovering from the recession, many still have some of the industry's worst nonperforming asset and reserve ratios, and could fail as a result.

"If a bank has been able to raise capital and sell its problem assets, chances are it is going to recover," said Campbell Chaney, an analyst with Dakin Securities in San Francisco. "What muddies the waters in California, however, is that a group of institutions continue to have significant problems raising capital."

Bauer, a Coral Gables, Fla., bank rating firm, compiled information of banks and thrifts with nonperforming assets greater than 12% of total assets and reserves of less than 50% of delinquent loans.

Every one of the 65 financial institutions on the list is a community bank or thrift.

Of the 34 commercial banks on the list, 14 are in California, including four of the worst 10 banks.

First Fidelity Thrift and Loan Association of San Diego, an adequately capitalized industrial bank with $400 million in assets, has the highest nonperforming asset ratio in the country. More than 29.7% of First Fidelity's assets are not performing.

According to Sheshunoff Information Services Inc., 88% of First Fidelity's assets are in real estate, including 66% in commercial real estate.

Officials at First Fidelity declined to comment, but several sources said the thrift's strategy in the 1980s was to originate and buy, through brokers, commercial real estate loans in Southern California -- a region that has had the worst commercial real estate market in the country since 1990.

First Fidelity's reserve ratio to delinquent loans is a paltry 19%.

Only two California thrifts are included in the 31 institutions with 12% nonperformers or worse.

Hawthorne Savings and Loan Association, one of Southern California's most prolific planned-unit development lenders in the late 1980s, ranked third on the list with 25% of its assets not performing and reserves equaling 39% of delinquent loans.

The thrift with the worst asset quality problems in the country is Dollar Savings Bank in Newark, N.J. The $11.2 million, well-capitalized thrift has a 33% nonperforming asset ratio and a 14% reserve-to-delinquent-loan ratio.

Maryland by far had the most thrifts on the list with four in the top 10 alone. California community banks, meanwhile, continue to bear the brunt of the country's credit problems.

Mr. Chaney, the analyst, said that almost all banks making the Bauer list are trying to sell their bad loans and real estate owned in bulk, at written down prices.

"It's hard to get at a firm conclusion about whether or not asset quality is getting better for community banks," Mr. Chaney said, noting that only if a bank has the capital to absorb the losses on a bulk sale will it pursue such a strategy. "What I can say is that 10 to 12 months after community banks do these bulk sales, generally we are not seeing new nonperformers coming on the books. Whether or not the strategy of writing down assets so they can be sold in bulk is the right strategy the bank will probably never know. Only the buyers will know for sure."

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