Local Banks Saw a Record Year in 1999.

Los Angeles may not be home to any major banking institutions anymore, but the ones that have survived the merger wars of the last few years are thriving.

Big or small, the financial institutions doing business in L.A. bad a very good 1999, and the fourth quarter was no exception.

The Big Three institutions that dominate the local landscape even though they're not based here -- Bank of America Corp., Wells Fargo Corp. and Washington Mutual Inc. -- all reported a sharp jump in fourth-quarter earnings. They were all helped by a dramatic upswing in investment banking revenue.

Simultaneously, local medium-sized banks posted record earnings, further demonstrating that they have adapted to the industry consolidation, albeit in different ways.

Beverly Hills-based City National Corp., L.A. County's third biggest bank, and Pasadena's East-West Bancorp, its fourth largest, each reported record earnings for the final quarter of 1999, and each enjoyed double-digit growth in earnings per share. Second-largest Imperial Bancorp had not released its earnings as of late last week, but was expected to announce strong fourth-quarter earnings on Monday, Jan. 24.

The biggest bank headquartered in Los Angeles County, Sanwa Bank of California, is a unit of Japan's Sanwa Bank Ltd., and doesn't release separate earnings.

While City National and East-West have taken different paths to growth, they have each spread their roots in the local economy.

The region's continuing growth of small and medium-sized businesses, combined with a healthy real estate market, are keeping local banks very busy servicing relatively small clients.

"These banks are doing well because nobody else is out there in the market," said Campbell Chaney, an analyst at Sutro & Co. "For a loan size under $10 million but over $2 million, you have to go through a ton of bureaucracy if you're Wells or BofA, but if you're City National or East-West or Sanwa, it's easier. Local connections pay off. And the earnings speak for themselves."

Small but successful

City National reported its fourth straight year of record income in 1999, with earnings per diluted share jumping 15 percent to $2.30, from $2 in 1998.

For the fourth quarter, City National's earnings per share were also up 15 percent -- 60 cents vs. 52 cents in the like year-earlier quarter.

East-West's 1999 per-share earnings were $1.22, up 60.5 percent from 76 cents in 1998. For the fourth quarter, its earnings rose to 35 cents, up from 27 cents in the last quarter of 1998.

The local banks, of course, remain mere pipsqueaks compared with the industry giants. City National and East-West have assets of $7.2 billion and $2.2 billion, respectively -- inconsequential compared with $633 billion-in-assets Bank of America and $201 billion Wells Fargo.

But their small sizes have facilitated rather than hindered the ability to make money. By keeping close to their traditional customer base while expanding outward, each bank is thriving.

City National is a business bank with close ties to the entertainment industry, and while it has few branches, it is known for its personalized service. At the same time, City National has expanded into other areas, including agribusiness, international trade and technology. It opened a branch at the Irvine Spectrum business park to cater to tech-oriented businesses and the entrepreneurs who head them.

It also has been expanding through acquisition, most notably with its purchase of San Francisco-based Pacific Bank for around $153 million. That deal, through which City National wants to tap into the wealth of Silicon Valley, is expected to close by early spring.

"We've been successful in our efforts to grow outside of the Westside and outside of the entertainment industry," said City National President George Benter. "And continuing with our intended acquisition in Northern California, we'll expand our private banking business and also our technology-based business."

Shifting loan focus

East-West, by contrast, primarily caters to the growing Chinese-American community and has made a couple of recent acquisitions to boost its local presence. Its buyout of First Central Bank, Los Angeles in May and its just-completed takeover of American International Bank give it 29 branches in Southern California.

But it is venturing into other markets as well.

The bank has benefited from its conversion from a thrift to a bank a few years ago, raising its margins by focusing less on home loans and more on commercial and construction lending, which is more lucrative.

As a result, more than 50 percent of East-West's commercial lending is to customers outside the Chinese-American population.

"On the retail side, clearly we are the biggest franchise in the Chinese community," said Dominic Ng, president of East-West. "But with the acquisitions, we are picking up Armenian customers, Middle Eastern customers. You have to develop a reputation bit by bit in other ethnic communities. We're still not going to have the business of WaMu or BofA. But if I were a typical Latino resident in Rosemead or El Monte, where we have branches, I'd give us a look. After they get disappointed with the service elsewhere, they'll give us a shot."

By playing up its status as a community bank, East-West is successfully leveraging its reputation for personal service to maximize the business it generates from each of its customers, analysts said.

"Community banks have something of an advantage because they attract a greater amount of deposit inflows because they have so much more of a relationship business," said Joseph Morford, a banking analyst at Dain Rauscher Wessels. "They'll say, 'We'll grant you this loan, but we'd like you to have some deposits at our bank.'"

Stock woes

For all the good numbers, most of the banks operating in Los Angeles share a common problem: Their stocks are in the tank. In reaction to three successive interest rate hikes in 1999 by the Federal Reserve Board, investors have been dumping bank shares. And that lack of interest is expected to continue for the foreseeable future, industry analysts said.

Fed Chairman Alan Greenspan has been warning the markets about a possible increase in rates next month, due to fears of an overheated economy. Until he signals that rate hikes are done, bank shares will suffer, analysts said.

As of late last week, City National's stock was trading at about $33, well off its 52-week high of $41.50 in November. East-West went public in February at $7 and was trading at around $12 last week, but isn't expected to get above $14 anytime soon. At around $47 late last week, Bank of America is trading far below its 52-week high of $76.38. Wells Fargo and Washington Mutual are similarly depressed.

"It isn't a question of how low will (bank shares) go, it's a question of when will they stop falling," Sutro's Chaney said. "The sector needs a catalyst and the only catalyst I can see is the Fed stopping its jawboning and rate hikes. Banks will continue to be underweighted, while remaining fundamentally sound."

                              Banking Profits
              Institutions in L.A. saw big jumps in earnings.
                   4th Qtr. '99   4th Qtr. '98
Institution        Net Income [*] Net Income [*]
Bank of America       $1,902         $1,162
Wells Fargo Bank         970          (194)
Washington Mutual      450.3          157.1
City National Bank      27.9           24.7
East-West Bank           7.9            6.5
(*.)In millions