FDIC Girds for Record Year of Bank Failures
Despite earlier predictions of a decline in the number of bank failures this year, Federal Deposit Insurance Corp. officials now believe 1985 will be a record year for bank collapses, The Times has learned.
A growing number of farm-loan losses in the Midwest is largely responsible for the revised estimate for 1985, but Southern California’s independent banking industry is likely to account for a sizable share of the failures, industry and regulatory sources say.
The FDIC’s 18-month-old bank liquidation office in Costa Mesa is adding 100 new employees in the next few months, a 33% staff increase made, in part, in anticipation of further bank failures. The office, according to Charles Holm, liquidator-in-charge, is responsible for all of Southern California.
Of the six banks in California that failed last year, three were in Orange County: Heritage Bank of Anaheim, Garden Grove Community Bank and Bank of Irvine. All three were heavily engaged in real estate lending, and industry sources say problem real estate loans could be the downfall of three or more Orange County banks again this year.
The FDIC, which oversees the federal bank-deposit insurance system, logged 79 failures in 1984--the most in one year since the insurance program was begun, in 1933. An FDIC survey of its regional directors, during the agency’s annual winter management meeting in San Diego last week, revealed, however, that most of the directors believe problems with agricultural, energy and real estate loans will continue throughout 1985.
The directors said they expect to see substantially more banks fail this year than in 1984. Results of the survey were disclosed to The Times Saturday by Alan Whitney, director of corporate communications for the FDIC.
The failure rate already is running 75% ahead of last year’s, with seven failures logged as of Monday, compared with four failures in the same period of 1984.
Banking observers say Southern California, where stagnant and even declining real estate values are forcing many independent banks to take losses on a sizable number of real estate-secured loans, could again cause California banks to have one of the highest rates of failure in the nation. In 1984, California and Texas--with six bank failures each--tied for second place among the 22 states in which at least one bank collapsed. Tennessee was first, with 11 failures, most of them related to the collapse of the Jake Butcher banking empire.
“In Southern California, the regulators are looking at real estate lenders,” said Edward Carpenter, chairman of Edward Carpenter and Assn., Los Angeles. “It’s not so much because of old loans going sour but because the underlying collateral is worth much less now because of real estate depreciation.”
Southern California banks caught in that situation, Carpenter said, are being required to set aside large amounts of their operating capital as reserves against loan losses, and that inhibits their ability to make new loans and other revenue-generating investments.
He said banks that have taken over a lot of real estate through foreclosures are often finding that they cannot sell the property for nearly as much as they loaned on it because of the price depreciation.
