Following our recent looks at troubled banks and S&Ls in Florida and Georgia, we're shifting our focus to California.

The state of California has been at the forefront of the housing crisis, with a lot of coverage on the thousands of foreclosures in Riverside County (and others) and continued chatter about option-payment adjustable-rate mortgages.

These mortgages allow borrowers to choose from a few options for their loan payment. If they take the lowest payment option, the monthly payment is lower than the interest accrued the previous month, which makes the loan balance increase. A rising loan balance can be brutal in a declining real estate market.

While we're going to look at banks headquartered in California, we need to mention Wachovia (WB) - Get Report ( WB) and its ill-timed purchase of Golden West Financial in 2007. Most of Wachovia's current problems stem from the portfolio of option-ARMs, more than half of which are to California borrowers, inherited from Golden West. Wachovia's option-ARM portfolio totaled $121 billion as of March 31.

Here are the 10 institutions out of California's 319 banks and S&Ls with the weakest asset quality as of March 31:

In order to be considered well-capitalized, a bank or S&L needs to have a leverage ratio of at least 5% and a risk-based capital ratio of at least 10%. 

Four California institutions were considered below well-capitalized per regulatory guidelines as of March 31. These included the three bolded ones above, as well as County Bank of Merced (held by Capital Corp. of the West (CCOW( CCOW)).)

With a sharp decline in asset quality, County Bank took a $14 million net loss in the fourth quarter of 2007, as it made a large provision for loan loss reserves. The $2 billion institution's earnings recovered somewhat in the first quarter, with net income of $3.1 million, but its capital ratios slipped a bit further since it paid out dividends of $2.8 million. County Bank isn't on the above list because its nonperforming assets ratio was 3.04%. Loan-loss reserves covered 68% of nonperforming loans as of March 31.

County Bank and the other California institutions that were below well-capitalized were all considered adequately-capitalized, except for Fremont Investment & Loan, which was undercapitalized, with a leverage ratio of 3.98% and a risk-based capital ratio of 7.11%.

While Fremont Investment & Loan is still open for business, parent holding company Fremont General

( FMNTQ) filed for bankruptcy on June 18, as part of its deal to sell the bank's branches, deposits and some assets to CapitalSource Inc





) which is in the midst of organizing CapitalSource Bank.

Security Pacific Bank had the worst asset quality for any California institution, with nonperforming assets, including loans past due 90 days or more and repossessed real estate, comprising 13.47% of total assets as of March 31. This is more than double from the previous quarter. The bank took a net loss of $26.8 million for the first quarter, the same amount it added to loan loss reserves. Reserves covered a very high 4.69% of total loans as of March 31, but covered only 30% of nonperformers. This level of coverage could well be inadequate, since most of the problem assets are residential construction loans.

The second quarter could easily see another sharp rise in nonperformers for Security Pacific, since loans past due 30-89 days (but still considered performing) comprised another 5.81% of total assets as of March 31.

We discussed Downey S&LA (a unit of Downey Financial Corp





(DSL) - Get Report

) back on

April 25


While the above table shows nonperforming assets of 11.18% for Downey, that figure includes performing loans that were modified as part of Downey's customer retention program. While still performing when modified, these loans were required to be reported as nonperforming. If we net these loans out, the actual nonperforming assets ratio was 7.41% as of March 31, with loan loss reserves covering 69.7% of nonperforming loans.

All things considered, Downey was still pretty strongly capitalized as of March 31, with a leverage ratio of 8.43% and a risk-based capital ratio of 15.28%.

The problem with Downey is that its interim reports are showing a continuing rapid slide in loan quality. According to the holding company's interim report, adjusted nonperforming assets (again netting out the performing modified mortgages) had increased to 9.77% of total assets as of May 31. We'll have to wait and see how the thrift's capital levels look when the second-quarter earnings results are released.

PFF Bank & Trust of Pomona (held by PFF Bancorp

(PFF) - Get Report



)) slipped to adequately capitalized when it took a $97 million net loss for the first quarter. This was the thrift's third consecutive quarterly loss. Just in the first quarter, nonperforming assets doubled, to 10.95% of total assets as of March 31.

The good news is that on June 16, the holding company announced a merger agreement for PFF to be acquired by FBOP Corporation, the holding company of California National Bank of Los Angeles.

Largest Banks

Here's a list of California's 10 largest banks and S&Ls. All were well capitalized as of March 31:

While one would normally think of Wells Fargo

(WFC) - Get Report



) as the largest bank based in California, its largest charter, Wells Fargo Bank, NA, is headquartered in Sioux Falls, S.D.

Bank of the West (held by

BNP Paribas


) is the largest depository institution actually chartered in California, with $62 billion as of March 31. While the institution's earnings have hit a bump over the last two quarters with higher provisions for loan loss reserves, loan quality has held up pretty well, with a nonperforming assets ratio of 0.73% as of March 31, and reserves covering 117% of problem loans.

Union Bank of California (a unit of Mitsubishi UFJ Financial Group (




) has maintained strong loan quality, with limited chargeoffs. Nonperforming assets comprised just 0.28% of total assets as of March 31, excellent for an active lender in this environment.

The bank's earnings have weakened of late, with net income of $103 million for the first quarter, or a return on average assets of 0.73% and return on average equity of 8.86%. In comparison, these returns were 0.99% and 11.70% for 2007 and 1.48% and 15.88% for 2006. We will also be watching the risk-based capital ratio, which was down to 10.22% as of March 31. Of course, the holding company has very deep pockets.

IndyMac responded on Monday with an 8-K filing stating regulators were being kept abreast of the thrift's financial condition and that the Federal Home Loan Bank of San Francisco was being diligent in increasing collateral and margin requirements for all of its members' borrowings.

( IMB)

The letter addressed Senator Schumer's concerns about brokered deposits by pointing out that over 96% of the institution's deposits were fully insured by the FDIC. The letter went on to complain that "as a result of Senator Schumer making his letters public and the resulting press coverage," IndyMac experienced over $100 million in deposit withdrawals last Friday and Saturday, although this activity slowed down on Monday.

Senator Schumer's letter was also directed to the Federal Housing Finance Board, the regulator of the Federal Home Loan Bank of San Francisco, which had outstanding advances (loans) to IndyMac Bank, FSB of $10.4 billion as of March 31. The twelve regional Federal Home Loan Banks are cooperative wholesale banks, chartered by Congress and owned by district member banks. The advances to IndyMac are mainly collateralized with residential mortgages.

IndyMac's shares closed at 81 cents last Friday. IndyMac was unable to comment about the news last week, but may issue comments today or tomorrow. Please click


for our discussion of IndyMac's first quarter numbers.

Strongest Large Banks

California has 39 banks and S&Ls with at least $1 billion in total assets and nonperforming assets comprising less than 1% of total assets as of March 31. Here are the 10 with the strongest asset quality as of March 31:

As always, you can check any bank or S&L's financial strength rating using's

Ratings Screener