Earnings Something to Bank on in Second Quarter

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A stack of strong earnings shows that L.A.’s banking industry is continuing on the path to recovery.

Six of seven local publicly traded banks met or exceeded expectations with their second quarter earnings, a sign that that the industry continues its upswing after several dismal years.

The better-than-expected reports came from across the spectrum, from big banks such as City National Corp. to small institutions such as Preferred Bank.

Wade Francis, chief executive of Long Beach bank consulting firm Unicon Financial Services Inc., said there has been growing optimism for several quarters and the latest earnings show that the worst is over.

“The positive news for banks should be expected,” he said. “The banks that have made it this far have a very good chance at survival.”

Indeed, survival had been in doubt for some local banks not long ago. Koreatown’s Hanmi Financial Corp. reported huge losses during the downturn, but had net income of $8 million in the recent second quarter, its third straight profitable quarter.

Center Financial Corp., the only bank that didn’t meet analyst expectations, reported net income of $4.9 million, or 10 cents a share, for the second quarter. Analysts had expected 14 cents a share. However, the holding company for Center Bank was profitable for the sixth straight quarter.

Six of the seven Los Angeles County banks that had reported earnings as of July 27 were profitable in the second quarter. Koreatown’s Wilshire Bancorp Inc. was the only one to lose money, and that was because of a one-time write-down.

The holding company Wilshire State Bank recorded a net loss of $4.6 million, or 9 cents a share, for the quarter. But that was due to a $6.7 million noncash goodwill impairment charge caused by falling share prices. Without that, Wilshire’s earnings would have been positive, with a $2.1 million profit, or 4 cents a share.

Still, that was a dramatic improvement from the first quarter, when Wilshire reported red ink of more than $52 million. After its most recent earnings report, the bank’s stock jumped nearly 9 percent.

“This is a very significant increase in share price,” said Aaron James Deer, an analyst with Sandler O’Neill & Partners in San Francisco. “Especially since most banks were down for the day.”

City National, the downtown L.A. parent of City National Bank, surpassed expectations with second quarter net income of $47.5 million, or 88 cents a share. Analysts had expected 77 cents. The results beat both the previous quarter and the same quarter last year.

It was “(the) best quarter in more than three years with improvements across the board in loans, deposits and credit quality,” Chief Executive Russell Goldsmith said in a statement.

Preferred Bank, meanwhile, was expected to have a loss of 3 cents a share, but instead posted a profit of $1.7 million, or 13 cents a share. That was a strong reversal from a year ago, when the bank lost more than a buck a share.

The earnings drove Preferred stock to $8.27 on July 27, up 11 percent from the week before. It was the top gainer on the LABJ Stock Index (page 24).

Julianna Balicka, an analyst with New York-based Keefe Bruyette and Woods Inc., noted that some banks’ earnings were actually held back by efforts to clean up lingering asset quality issues. Koreatown bank holding company Nara Bancorp Inc., for instance, met expectations at 14 cents a share after disposing of about $26 million in loans.

“Their earnings had the potential to be even higher if they hadn’t sold off some of their problem loans,” Balicka said. “Their earnings could have been up to 24 cents per share for the quarter.”

Deer said that 64 percent of U.S. banks reported earnings that exceeded analyst expectations, while 24 percent did worse than expected. That means L.A. banks actually had a stronger showing than their U.S. peers.

He added that many institutions are looking to grow their loan portfolios.

“We’ve been in the midst of a rebound for several quarters, and now the banks have gotten some traction on loan growth,” he said. “It might sound contrary to media reports, but most banks have been eager to bring in new clients. Their livelihood is in making loans.”

Meanwhile, an improvement in banks’ long-term outlook can allow the institutions to draw down their loan loss reserves, which were higher at the depths of the recession. Francis said many banks set aside extra cash in the event of catastrophic loan losses; the cash can now be used to pad net income in the coming quarters.

“The storm is coming to a close, so the sandbags are no longer necessary,” he said. “But were they useful during the storm? Of course.”

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