BankAmerica Losses : Banks: High Profit, High Failure Rate

With its glittery facade and atrium lobby, the Hyatt Regency hotel in Oakland was supposed to be a centerpiece for that city’s downtown redevelopment effort. But it turned out to be just another bad loan for Bank of America.

Earlier this month, the wounded giant’s parent company, BankAmerica Corp., stunned the financial world by reporting that it had lost $640 million during the second quarter. The company cited continued hemorrhaging in troubled real estate, energy and foreign loan portfolios.

Coming just weeks after the bank had forecast that its profits would continue a recovery started in the first quarter, the announcement shook BankAmerica’s credibility, shattered employee morale and sent shudders through the nation’s banking system, already straining under the highest number of bank failures since the Great Depression.

Problem Loans

In announcing what turned out to be the second-largest quarterly loss in U.S. banking history, BankAmerica also reported that its problem loans had climbed to a staggering $4.5 billion as a result of the plunge in oil prices, glutted commercial real estate markets and troubled foreign economies. The bank also owns $491 million in real estate acquired through foreclosure.

The problem loans include $29.5 million that the bank lent to build the 500-room Oakland Hyatt, whose owners stopped making interest payments earlier this year as a result of sluggish occupancy and low room rates.

“The projections for our hotel were made in an era of rampant inflation,” explained Stuart Cross, president of Oakland City Center Hotel Co., which is trying to stave off Bank of America’s attempt to foreclose on the property. Rooms that were expected to fetch $100 a night are going for an average of $74.

It is much the same story for farmers, office-building developers, energy producers and their suppliers--all of whom are well represented in BankAmerica’s $83.5-billion loan portfolio and those of other struggling banks.

‘Replaced by Deflation’

“The inflation of the ‘70s and early ‘80s has been replaced by deflation in agriculture, energy and commercial real estate,” said Alex Sheshunoff, whose Sheshunoff & Co. consulting company, based in Austin, Tex., tracks loan-loss and other data in the banking industry.

As prices have plunged, borrowers have been unable to repay their loans. What is worse, from the bankers’ point of view, the value of the collateral securing those loans--farmland, hotels, office buildings, oil rigs--has also collapsed.

The result: More banks will fail this year than at any time since the Great Depression, according to officials of the Federal Deposit Insurance Corp. So far this year, 79 banks have failed--more than in the entire decades of the 1950s and the 1960s, and just shy of the 81 banks that failed during the 1970s. There were 120 bank failures in 1985.

This month alone saw the second-largest collapse in U.S. commercial banking history, that of First National Bank & Trust Co. of Oklahoma City, a post-Depression record nine bank failures in a single week, BankAmerica’s startling announcement and other big losses reported by major banks in the Texas-Oklahoma energy belt.

First National Bank & Trust of Oklahoma City, with $1.5 billion in deposits, was taken over by a newly created Oklahoma subsidiary of First Interstate Bancorp, headquartered in Los Angeles, after the FDIC agreed to retain $418 million of the energy lender’s worst assets.

‘A Lot of Bad News’

“There has been a lot of bad news this month,” acknowledged William M. Isaac, who until October was chairman of the FDIC and now heads a Washington consulting firm called Secura Group. “It’s pretty clear there will be more of it,” he added, noting that the FDIC’s list of problem banks numbers more than 1,300 of the nation’s roughly 15,000 banks.

The previous peak since the Depression in the number of problem banks--378--came in 1976, reflecting the aftermath of the 1973-74 recession. About 10,000 banks failed between October, 1929, and March, 1933, during the Great Depression.

Not all observers are troubled by the current high rate of bank failures. “Until recently, banking was a highly monopolistic industry in which banks were sheltered from competition by government regulation,” argued Hoover Institution economist Milton Friedman.

Moreover, the conservative economist and other banking industry observers note that, with the exception of such rare cases as the July, 1982, failure of Penn Square Bank of Oklahoma City, all deposits--even those exceeding the FDIC’s limit of $100,000 per account--have been paid off. That is because regulators have typically merged failing banks into healthier institutions rather than shutting them down.

“Deposit insurance is doing its job,” Friedman said. “It has prevented a repeat of the situation we had in 1931 and 1932, when depositor panics forced the closing of perfectly sound banks.”

Regulators and banking analysts also point out that the crisis in the banking industry is not a nationwide phenomenon. “Generally speaking, everything on the East Coast, from Maine to Florida, is doing well,” Sheshunoff noted. “Things start to turn the other way as you start getting into the middle of the country.”

‘Recession if Not Depression’

Montgomery Securities banking analyst J. Richard Fredericks added: “Take the East and West coasts out, and the rest of the country is in the pits. Thirty states are in recession, if not depression.”

Indeed, while a post-Depression record number of banks was failing last year, the banking industry as a whole had record profits of $16 billion. “While there are clearly more problems in the industry today and more bank failures, most of the banks--the vast majority of the banks--are performing better than ever,” Isaac said.

The regional contrasts are starkly illustrated by second-quarter statistics that analyst Fredericks has compiled. Loan losses, on an annualized basis, were 0.49% of total assets for a group of banks in the Southeast; 0.92% of assets in New York; 1.40% in California and 2.0% in Texas.

Even within regions, there is marked variation in bank performance. A bank’s performance reflects both the quality of its management and the economies in which it does business. In California, Security Pacific, Wells Fargo and First Interstate have all posted healthy increases in net income while BankAmerica sagged.

In Texas, which has borne the brunt of the drop in oil prices, all big banks are suffering, but RepublicBank, MCorp, Texas Commerce Bancshares and Allied Bancshares are relatively better off than InterFirst and First City Bancorp of Texas.

“As deregulation unfolds, we’re seeing a Darwinian order assert itself,” Fredericks said. “There are too many problems out there. The message for stock market investors is clear: Stick with quality.”

Echoed Todd Conover, former U.S. comptroller of the currency: “The good performers, the well managed banks, are doing better, and the poor performers are doing worse. The performance spread is widening”--and will likely continue to widen.

“More and more, customers--particularly borrowing customers--want to do business with strong banks,” Sheshunoff said. And, he added, “There’s a hunker-down-behind-the-desk mentality at problem banks.

“But if a bank is strong from an earnings and capital standpoint, it’s going to bring a positive attitude to a new loan,” he continued. “You’re going to see loans contract at certain banks while other banks grow.”

‘Hunker-Down’ Mentality

Some customers say the “hunker-down” mentality is becoming more and more apparent at BankAmerica, whose earnings have been sliding for five years. “I like Bank of America,” said the president of a corporation in the San Francisco Bay Area with annual revenues of $6 million. “They’ve provided me with loans that enabled my business to grow.

“But the attitude there has been changing,” added the entrepreneur, who said he has never missed a payment on his loans. “Everyone there is afraid. They are less accommodating. The day after they dropped the $600 million, they got tougher.”

As a result, he said, he has begun to shop around for a new bank. “If loans that are performing get scared away, what’s going to be left of the bank?” he asked.

Although bank borrowers may be growing alienated, BankAmerica insists that its depositors are showing no signs of deserting. “Funding simply is not an issue,” said John Keane, a vice president and spokesman for the bank. In fact, he said, the bank has excess liquidity and is lending money to other banks.

But observers suggest that that could change, especially if the bank has another bad quarter. More than 32% of BankAmerica’s deposits of $94.3 billion are held by foreigners, who tend to hold large deposits that exceed the FDIC’s $100,000-per-account insurance limit.

‘Bank Is Nervous’

“I am sure the bank is nervous,” said Colin Campbell, a professor of economics at Dartmouth College who specializes in money and banking. Although some borrowers from the bank may be obligated by the terms of their loan agreements to keep funds on deposit there, many other depositors are not similarly bound.

“Why would you keep your money in Bank of America if you were sitting there in Korea reading all this bad news?” Campbell asked.

BankAmerica officials said the company’s recently bolstered loan-loss reserve should reassure depositors that the bank will not be swamped by the rising tide of problem loans.

In addition, they promise to take action shortly to shore up the company’s sagging common stockholder’s equity, which at $3.26 billion, or 2.8% of total assets--is just over half the percentage of other big banking companies. They can do that by shrinking the bank (by selling off loans and other assets), by issuing securities or by seeking an infusion of outside capital.

First Interstate Bancorp’s expansionist chairman, Joseph Pinola, remains keenly interested in merging with BankAmerica, although BankAmerica’s president and chief executive officer, Samuel H. Armacost, seems equally resistant to Pinola’s overtures.

In the last six months, Armacost--who has been dubbed “the Teflon banker” for his ability to survive a series of earnings shocks, financial scandals and other embarrassments--has installed an almost entirely new top management team consisting largely of people from outside the company in an effort to reverse BankAmerica’s downward slide.

Thomas A. Cooper, a Philadelphia banker promoted to president and chief operating officer of Bank of America in March, has moved aggressively to slash the bank’s expenses. Glenhall E. Taylor, a Wells Fargo alumnus named vice chairman for credit policy, has strengthened some of the lax lending and loan monitoring procedures that led to the bank’s problems.

‘People Are Disappearing’

But Cooper’s sharp ax has hurt employee morale. Five thousand positions will be eliminated this year; another 7,500 may be let go in 1987. “People are disappearing left and right,” a bank trust officer said.

The bank’s problems may be driving away some of its most valued employees. Said one first-line manager who recently received a performance bonus: “They like me, but I’m looking for a new job. You can’t imagine how bad the atmosphere is.”

Gallows humor is the order of the day. One joke making the rounds of employees is that the bank is dropping its “Bank on the Leader” advertising slogan in favor of a new one: “Bank on the Bleeder.”

And while Taylor has stepped up the monitoring of problem loans, there is little he can do about past lending mistakes. The bank’s portfolio includes loans to such troubled energy-related borrowers as Penrod, Dome Petroleum and Zapata Oil and dozens of troubled hotel, office building and industrial park developers across the country.

Energy and commercial real estate enjoyed great booms in the late ‘70s and early ‘80s. “The test of a good banker is whether he can leave the party early enough,” consultant Sheshunoff said.

BankAmerica, it is clear, got to the party late and stayed too long. During 1985, for example, the bank’s construction and development loans--which were among those cited for the second-quarter debacle--soared 21%, to $3.6 billion, even as experts warned of an impending collapse of the commercial real estate market.

The big increase in inherently risky construction and development loans came at a time when BankAmerica’s total loan portfolio fell by 1.6%. This indicates that the company was trying to grow itself out of its earnings problems by taking on loans bearing high interest rates--a gamble that failed.

Overhanging BankAmerica’s loan woes is the still-present threat that one or more troubled foreign debtor nations may default. At the end of the first quarter, 2.3% of BankAmerica’s assets were invested in Mexico, 2.4% in Brazil and 1.2% in Venezuela.

Inevitably, BankAmerica’s trauma has elicited comparisons to Continental Illinois Bank & Trust Co., the big Chicago bank whose mounting losses and dismal loan portfolio led to a run on deposits and a costly federal bail-out. Continental was effectively nationalized in 1984, though the FDIC plans to sell off its 80% stake as the bank returns to health.

Assets That Can Be Sold

But most observers assume that if BankAmerica gets into further trouble, it can sell off such valuable assets as Charles Schwab & Co., its discount brokerage unit, and Seafirst Bank, its banking subsidiary in Washington state. BankAmerica’s valuable retail banking network--something Continental Illinois lacked because Illinois law forbids branch banking--would also make BankAmerica an attractive merger partner.

“I don’t foresee another Continental Illinois developing,” said Conover, the former comptroller of the currency. “The very fact that the Continental situation occurred and was dealt with should prevent another one from occurring.”

But, the nation’s former top banking regulator added, “The mechanisms are in place to deal with another crisis in the banking industry. The public should not fear. The regulators have the capability, the willingness to act and a legal framework in which to do so.”

TEN LARGEST COMMERCIAL BANK FAILURES SINCE 1982

Date of Assets Deposits Failure The First National Bank & Trust Co. of Oklahoma City $1.6 billion $1.5 billion July 14, 1986 The First National Bank of Midland Midland, Tex. 1.404 billion 574.2 million Oct. 14, 1983 United American Bank in Knoxville Knoxville, Tenn. 778.4 million 584.6 million Feb 14, 1983 Park Bank of Florida St. Petersburg, Fla. 592.9 million 543.9 million Feb 14, 1986 Penn Square Bank Oklahoma City 516.8 million 470.4 million July 5, 1982 Girod Trust Co. San Juan, P.R. 398.7 million 263.1 million Aug. 16, 1984 American City Bank Los Angeles 271.8 million 191.4 million Feb 25, 1983 Metropolitan Bank & Trust Co. Tampa, Fla. 261.4 million 171.7 million Feb 12, 1982 City and County Bank of Knox County Knoxville, Tenn. 243.9 million 227.5 million May 27, 1983 Moncor Bank, N.A. Hobbs, N.M. 204.9 million 114.0 million Aug. 30, 1985

Continental Illinois National Bank & Trust was kept from falling in 1984 by a $4.5-billion federal bail-out.