Western Banks Saw Profits Flee In 3d Quarter

California banking woes deepened in the third quarter, while bank performance cooled off elsewhere in the West. As a result, the region's banks fared the poorest in the United States.

Western banks as a group lost money during the period, the only region to do so, according to preliminary calculations by SNL Securities, Charlottesville, Va. The region's banks recorded a return on assets of negative 0.31%, driven by huge losses at two Los Angeles-based giants, Security Pacific Corp. and First Interstate Bancorp, SNL found.

While the region may reach the breakeven point when more community bank reports are factored in, the West will still probably emerge as the country's sickest banking market, SNL president Reid Nagle said.

"The West continues to deteriorate relative to other parts of the country in terms of earnings and credit quality trends," he noted.

Where's the Bottom?

The performance represents a dramatic reversal for the West, which until this year produced the best results in the industry. But with recession strengthening its grip on California and an economic slowdown evident in other states, the bottom is not yet in sight.

California's economy was strong until recently, fueled by diversity, a well-developed infrastructure, and a strategic Pacific Rim location.

But now economic activity in the Golden State is limping along at a weaker pace than in the nation as a whole. The state's unemployment rate was 7.7% in September, a full percentage point above the national rate.

|Awful and Getting Worse'

"We've had big defense cuts, the effects of a freeze and a drought, and a state fiscal crisis," said David Hensley, director of the UCLA Business Forecasting Project. "The real estate situation is awful and getting worse. The California-specific factors are layered on top of the national recession. The outlook for 1992 is pretty bad," he warned.

The slump has pounded California banks, especially those based in the hard-hit southern part of the state.

Throughout the state, sour loans are mounting. Many banks have been forced to make large additions to loan-loss reserves, sometimes with a regulatory gun at their heads. Meanwhile, creditworthy borrowers are scarce.

"Problem loans have spread beyond commercial real estate. Banks are seeing it now in their commercial portfolios," said Campbell K. Chaney, analyst with Sutro & Co., San Francisco.

Virtually the only good news came on interest margins. Lower interest rates reduced banks' cost of funds, widening spreads.

In addition to Southern California's two major banking companies, community banks such CU Bancorp, Encino, and First National Corp., San Diego, reported losses. Most other Los Angeles and San Diego banks reported down quarters.

City National Corp., Beverly Hills, the largest independent bank in the state and until this year a highflier, lost $8.1 million after making a special $30 million loan-loss provision. The company suspended its common stock dividend.

In Northern California, results were more mixed. Bank-America Corp. eked out a small profit gain, but profits were down sharply at Wells, Fargo & Co.

Union Bank, the state's fifth-largest bank and the largest Japanese-owned institution in the United States, earned $5 million in the quarter, down about 87% from a year earlier. Bank of Tokyo owns a 77% stake in the bank.

A special $90 million addition to reserves, mainly to cover nonperforming real estate loans, depressed Union's earnings. The provision was 221% higher than the one taken in the third quarter of 1990 and 143% above the level of this year's second quarter.

Among Northern California community banks, Westamerica Bancorp, San Rafael, and Silicon Valley Bancshares, Santa Clara, reported that profits rose from a year earlier. But Pacific Western Bancshares, San Jose, and Bank of San Francisco registered losses due to real estate loan problems.

Credit problems were less severe outside California, but loan demand slackened sharply. Still, many banks managed to boost profits.

"In the Northwest, loan volume was anemic, but it was made up for by wider margins," said R. Jay Tejera, an analyst with Dain Bosworth Inc., Seattle.

U.S. Bancorp, Portland, Ore., the region's largest banking company, raised profits slightly despite an increase in problem assets. Although total loans grew only 2.2% from last year, net interest income was up 11.3%. The gain stemmed from a jump in net interest margin to 5.01% from 4.51% in last year's third quarter.

In Arizona, Valley National Corp., Phoenix, continued to make progress in reducing its nonperforming assets. It managed to earn $11.1 million for the quarter, but that was largely because of one-time gains from asset sales.

Salt Lake City-based First Security Corp. increased profits 26.7%, thanks to stable credit quality and a higher asset base. The company has competed nine acquisitions in the past two years.

West One Bancorp, Boise, Idaho, snapped a steady string of higher profit quarters with a 56.2% plunge in earnings. It blamed an $11.8 million loan-loss provision at its Utah unit.

Hawaii's two major banking companies, Bancorp Hawaii and First Hawaiian Inc., reported their customary earnings gains, owing to the state's continued ability to ward off the mainland recession. But the pace of their gains was below previous levels.

[Tabular Data Omitted]

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