A Bank on Front Line in Credit Crunch

Last month, executives at Antelope Valley Bank in Lancaster granted a $400,000 loan to a man who wanted to put up a building for his van business.

Logic said it might not be a good idea. As the economy slows, the number of empty office and industrial buildings could soon grow as fast as Joshua trees in this once-booming town in the western Mojave Desert. No bank wants to be stuck with a building that might be hard to sell.

But this loan was promised six months earlier if the borrower met certain conditions, which he did. And this is community banking, where a banker’s most fragile asset is his or her word. So the loan was made.

“We live with our customers,” Chief Executive Jack D. Seefus said. “We have a reputation in this town to protect. People talk, don’t they?”

This is the front line of the nation’s so-called credit-crunch battle, a much-overused term that nonetheless sums up the caution shown by bankers toward making many new loans and the disappointment of customers used to being told yes . Policies on how to ease it are being debated in the corridors of the Federal Reserve and in the halls of Congress. Out in places like Lancaster is where lender and borrower square off.

For a bank like Antelope Valley, the crunch is for the most part self-imposed, brought on in part by a slowing of a 1980s boom and a reluctance to do anything that may trigger special regulatory scrutiny.

People like the van business owner want loans, and many are still made. But they are made with more caution, and higher-risk loans such as those for real estate projects are given added scrutiny.

“It’s no secret. Banks are being very, very careful on how and who they are lending money to,” said Lancaster developer Andrew J. Eliopulos, who is president of the Antelope Valley Building Industry Assn.

Some blame regulators, who have become tough on what they perceive as sloppy loan practices by banks. The Western Independent Bankers recently released survey results in which one-third of the bankers said they are passing up good loans. One reason cited was “the regulatory climate.”

But for many independent banks in California, the blame lies in the slowing of a once-heated economy.

Antelope Valley Bank rode a boom the past 10 years that few banks experience. In the 1950s, pilots there broke the sound barrier. In the 1980s, people broke commuting barriers. Lancaster’s population more than doubled in 10 years to 97,291, the third-fastest growth rate among cities in Los Angeles County.

It didn’t matter that Lancaster was 75 miles of freeway and two area codes away from downtown Los Angeles. To tens of thousands of people, a $150,000 house that costs $250,000 in the San Fernando Valley is worth two to four hours a day on the freeway.

Commuters made good customers. Billboard ads were bought on the freeways. The bank opened on Saturday long before it was fashionable. Then it opened on Sunday.

With the population surge came lots of custom homes, which meant lots of loans were needed by builders who put them up. For banks, the fees and profits made on those loans were lucrative.

Builders often paid the money back before the last nail was hammered. Money turned over two to three times in a year. Speculative homes--ones where construction begins with no buyer lined up--were no problem because they sold quickly. The bank’s profit soared from $916,000 in 1988 to $1.6 million in 1989 before dipping last year to $1.5 million. Assets grew from $108 million at the end of 1988 to nearly $134 million now.

But that changed last summer. As the defense slowdown started, people lost jobs. One week last month five people turned over their car keys because they had lost their jobs and feared they couldn’t pay off the loans. Real estate brokers and escrow companies that were good customers showed strain.

And construction dried up. The bank’s real estate loan volume dropped 50% from a year ago. Among the hardest hit were custom homes, especially the so-called spec homes built with no buyer lined up in advance--because they were riskier.

“The little bubble burst,” said Seefus, whose office sits at the entrance of a shopping center anchored by a Builders Emporium.

Eliopulos said builders often must prove to bankers now that they have a long track record and have weathered previous slumps, which makes it harder for newer builders to get loans. He added that it is especially hard to get a loan to build more expensive homes--ones that sell for about $250,000 in the Antelope Valley area--and he said banks are giving special scrutiny to marketing plans builders present.

“They are looking, two, three and four times at these studies and asking for more backup information,” Eliopulos said.

The slowdown in construction has proved a special challenge for Antelope Valley Bank. It has long sought to strike a balance in which one-third of its loans were in construction lending, one-third in business loans and one-third in consumer loans for such items as autos and boats. But like other small banks, much of its profit in recent years came on construction loans.

“The earnings and growth of most community banks in California have been fueled by construction lending and real estate ventures. That has started to slow down, in some areas to a trickle,” said Michael J. Conover of the Pasadena office of Secura Group, a bank consultant firm.

Steps are being taken. With construction lending softening, there is more emphasis on making auto and business loans. Ways to save on costs are being studied, such as looking at whether the bank needs to be open as many hours on Saturday. To save on postage costs, the bank is planning to send in one envelope statements to customers who have both checking and savings accounts.