By All Accounts, 1990s Will Cost Banks, S&Ls; : Banking: Analysts say industry upheaval is far from over. They expect more failures as well as more consolidation among banks and thrifts.
After a decade of upheaval marked by the failure of two dozen local financial institutions, banks and thrifts in Orange County are cautiously approaching the 1990s with the expectation that their businesses will gradually merge into one.
The restructuring of the financial industry, prompted by the federal financial institutions bailout law, is already making savings and loans operate more like banks. Thrifts are substituting “bank” for “S&L;” in their names and offering consumer and commercial loans. And many banks are invading the S&L;’s traditional bastion by making more home loans.
“The way I see it, the only difference between a bank and a savings and loan now is the name,” said Maurice L. McAlister, president of Downey Savings & Loan in Newport Beach.
Both banks and thrifts have collapsed in the past decade as deregulation ushered in a period of risky lending, intense competition and, in some cases, mismanagement. The failure of Irvine-based Lincoln Savings & Loan stands as a symbol of the troubled era.
Federal regulators seized the 29-branch institution after a three-year, politically charged battle with its management, headed by Phoenix developer Charles H. Keating Jr. Lincoln’s failure may ultimately cost taxpayers more than $2 billion, leave 22,000 bondholders with large losses and cripple the careers of several United States senators.
The debate over Lincoln will continue in 1990, as will the shakeout in the thrift and bank industries. And the new bailout legislation may force the demise of more institutions as they scramble to shore up their capital bases and curb losses from bad loans.
In Orange County in the few next years, the predicted softening in the economy, increased competition brought on by interstate banking and the forced writedown of bad loans should contribute to the demise of a dozen more banks and thrifts, consultants said.
The rescue of the thrift industry is certain to hit taxpayers harder. The bailout law commits $166 billion in taxpayer funds to repair the devastated S&L; industry, though government officials say now that the job will cost more than $200 billion.
Many thrifts will enter 1990 searching for capital. The bailout law requires S&Ls; to meet three new tests for capital, which is an institution’s final reserve against losses. About 800 of the nation’s 2,600 thrifts don’t meet the initial requirements and more are likely to fall short.
In Orange County, 10 thrifts didn’t meet one or more of the new capital tests, based on data compiled as of June 30, the latest period for which figures are available. At least two of those thrifts have since raised additional capital--Pacific Savings Bank in Costa Mesa through its sale to Royal Trustco of Toronto, and Delta Savings Bank in Westminster through an infusion from new investors. And others have taken steps to downsize to meet the regulatory requirements.
On a more encouraging note, 20 local thrifts meet initial tests for two of the capital requirements, based on June 30 statistics, and 18 of them already meet the final test for those capital levels, scheduled to take effect in five years. Calculations for a third test are unavailable for all county S&Ls.;
Still, industry consultants Gerry Findley of Brea and Edward Carpenter of Santa Ana predict that next year, at least two banks and three S&Ls; in the county will fail and up to six banks and eight S&Ls; will merge or be acquired.
Currently, CommerceBank in Newport Beach is awaiting regulatory approval to buy California City Bank in Orange.
On the S&L; side, two thrifts were closed this year, three more were seized by regulators and will be closed or merged, and Downey Savings is awaiting regulatory approval to merge its Butterfield Savings & Loan unit in Santa Ana into the parent S&L.; In addition, Westport Savings Bank moved its headquarters back to Hanford from Mission Viejo and Constitution Federal Savings & Loan will pull out of Tustin at the end of the year and return to Monterey Park.
By the end of the decade, the consultants said, what will be left in the county will be big banks, providing services to major businesses and individual account holders, and small banks, acting as boutique firms servicing small and mid-size businesses or offering unique services.
In addition, Carpenter believes, more trust companies will set up private banking offices throughout the county to establish “total banking relationships” with wealthy residents. Such operations, sometimes called personal banking, handles financial planning, asset management and investment analyses.
Firms like the Boston Co., Northern Trust, Morgan Guaranty and Bankers Trust already are competing with the private banking offices of the four major California banks.
On another front, full interstate banking becomes effective in 1991 in California. This will allow banks and companies from 38 Midwest and Eastern states to open shop in deposit-rich California.
But those shopping for merger deals will be making their moves in 1990. Even after deals are worked out, it could take six months for regulators to approve them, so bankers and consultants said they expect the first deals to be sealed by mid-summer.
Interstate banking should increase competition and provide good deals for customers, bankers said. But if the economy dives into the long-predicted recession, they said, few if any out-of-state banks will be moving into California.
The consolidation of both the bank and thrift businesses will also contribute to the eventual formation of a single financial industry, experts said. Downey Savings & Loan in Newport Beach, for instance, will start offering more banking services, such as car loans and commercial loans, McAlister said.
Clyde Gossert, president of CommerceBank in Newport Beach, suspects the movement to a single industry might be going the other way.
“It isn’t so much S&Ls; coming our way as it is banks going toward S&Ls;,” Gossert said. “I’ve looked at a lot of banks, and they operate like S&Ls.; They go after big deposits, like jumbo certificates of deposit, and they do real estate lending.”
Indeed, with most local and national thrifts limiting or curtailing mortgage operations because of concerns over capital levels, some bankers have stepped in to grab chunks of the home-lending market.
Thrift executives complain that the bailout law, while praiseworthy in some respects, doesn’t make economic sense in the way it limits their businesses to home lending and eliminates other successful strategies, which some greedy entrepreneurs had abused, causing many of the failures.
Smaller thrifts, for instance, often relied on a few big borrowers for a steady stream of business, but the law drastically limits the amount that S&Ls; can loan to any single borrower. This forces borrowers to go to more lenders and hampers relationships that thrifts have built over the years, said Stephen W. Prough, president of Western Financial Savings Bank.
Executives at large, healthy S&Ls; such as Downey and Western Financial expect the rules to be softened somewhat.
“If the regulations were to remain the same for the next 10 or 12 years, it would not be worth it to have the responsibilities and management problems of a thrift,” McAlister said. “In my judgment, there’s no way the regulations can stay the same. They have to make a lot more changes to make them a lot more reasonable.”
He also complained that a large part of management time will be spent on adapting to the complexity of the new law and attendant rules. “That translates into a loss of earnings,” he said, “because management’s attention is being diverted to regulation, not business.”
S&L;’S FACE NEW CAPITAL TESTS
Savings and loans must meet three tests for maintaining an adequate level of capital. Figures for one test are not available yet. The other tests require S&Ls; to have tangible capital equal to 1.5% of their assets and to have core, or leveraged, capital equal to 3% of assets.
Tangible capital is the basic cash that has been put into institutions over the years.
Core capital is tangible capital plus certain intangible items, such as good will, which is the value that one company pays in excess for the basic value of a firm it acquires.
The requirement for tangible capital gradually grows to 3% in five years, and the core capital test will no longer be used. The chart below lists Orange County S&Ls; and their assets and tangible and core capital levels as of June 30:
Assets Tangible Core Institution (in millions) Capital Capital New West Federal S&L; (a) $21,890 0.91% 0.91% American Savings Bank 15,685 3.43 3.43 Household Bank 5,776 1.97 3.47 FarWest S&L; 4,898 2.27 2.63 Lincoln S&L; (b) 3,811 -25.18 -24.13 Downey S&L; 3,774 5.96 6.24 Western Financial Savings 2,719 4.66 4.66 Mercury S&L; 2,313 0.20 1.68 Beverly Hills Savings 1,668 3.23 3.23 Pacific Savings Bank 1,037 (c) (c) Newport Balboa Savings 847 5.56 6.08 United Savings Bank 669 5.21 5.21 Butterfield S&L; 657 7.60 7.60 Guardian S&L; 648 3.79 3.79 Western Empire S&L; 492 -1.70 -0.24 Charter Savings Bank 415 -1.06 0.44 Fullerton S&L; 357 6.90 6.92 San Clemente Savings Bank 341 2.85 3.19 Universal Savings Bank 279 3.91 4.42 Standard Pacific Savings 270 5.76 6.09 Malibu S&L; 212 3.38 4.17 Sterling S&L; 199 10.50 10.50 Westport Savings Bank 171 2.21 2.21 Huntington S&L; 126 0.34 0.34 Beach Savings Bank 99 4.73 6.11 Irvine City S&L; 90 4.37 4.37 University S&L; 78 3.68 3.68 Security Federal S&L; (b) 77 -4.67 -4.67 Constitution S&L; 72 0.20 0.20 Cornerstone S&L; 70 4.97 4.97 Plaza S&L; 66 5.69 5.77 Delta Savings Bank 58 (c) (c) American Interstate S&L; (b) 25 -1.30 -1.30 Pioneer S&L; 15 2.70 2.79
a) New West is a self-liquidating S&L; consisting of bad assets from the now-defunct American Savings & Loan.
b) Lincoln, Security Federal and American Interstate were seized this year by regulators.
c) Pacific Savings and Delta Savings were both insolvent in June but now have new owners and fresh cash.
Source: Alex Sheshunoff & Co., Austin, Tex .
