Battered and Bowed : California Lenders That Survived Recession Adapt to New Playing Field

California’s lending industry is coming through the recession as a battered survivor that has a vastly different look from the business that fueled the state’s enormous growth in the 1980s.

As the California economy and real estate market slog through their fourth year of an economic downturn, the state’s banks, thrifts and many other financial service companies are still being pummeled.

Widespread loan defaults have rippled through the economy as borrowers lost jobs, closed businesses and abandoned properties. More than two-fifths of California’s savings and loans have vanished since 1988. Just over 100 remain, and even the best of those have been damaged by plunging real estate values.

After earning $3.4 billion in 1990, the state’s commercial banks made less than that during the next two years combined. At the same time, their bad loans shot up 43% to $10.4 billion.

California’s handful of big banks, with their far-flung operations, are beginning to recover. But the state’s 350 or so small community banks--with their loans concentrated in hometown real estate--are still languishing.

“It’s going to take two or three more years for it to get better” for small banks, predicted Barry Rubens, chief executive of California Research Corp., a banking consulting firm in Santa Monica. In the meantime, “we could lose quite a few” to mergers or failures, he said.

But while the banks and thrifts struggle to pull out of the worst downturn since the Depression, a new cadre of companies has emerged to lead the lending and financial services industry.

New names such as Countrywide Credit, a mortgage lender, have blossomed, while old names such as Security Pacific National Bank have disappeared. After being a pillar in California lending circles through much of the 20th Century, troubled Security Pacific merged with Bank of America last year.

“When you go through a period of economic stress, you can expect this sifting-out process,” said David S. Berry, an analyst with the investment firm Keefe Bruyette & Woods. “It’s a very dynamic financial system.”

The evolution is clearly evident in California’s work force. Whereas Bank of America laid off 5,700 people after buying Security Pacific, Pasadena-based Countrywide has lifted its statewide employment to 2,600 from 600 in 1990.

The result: The state’s overall financial services employment, at 367,800 people in June, was down only 6% from the end of 1990, according to the state Employment Development Department.

But there is still rough sledding ahead for financial service companies, which include not only banks and S&Ls; but also mortgage bankers and brokers, credit unions, securities brokerages, trust departments and credit agencies.

A recent quarterly report from UCLA’s Business Forecasting Project predicted that California will remain in a recession until next spring at the earliest.

“As harsh as it seems, California’s economy will remain in recession for several more years and inflict great pain on the state’s banks,” added George Salem, an analyst with Prudential Securities who has been a vocal bear about the state’s economic future.

Banks and S&Ls--in; Southern California, particularly--have a huge portion of their assets tied up in residential or commercial property loans. As real estate values appreciated relentlessly in the mid-to-late 1980s, homeowners borrowed heavily against their houses, and lenders gladly shoveled cash into existing commercial property and new construction.

Both actions came back to haunt the lenders as the 1990s and the recession arrived. Borrowers defaulted in droves. Foreclosures on all types of real estate in Southern California hit 110,621 last year--nearly double 1989 levels, says foreclosure specialist TD Service Co. in Orange.

Several S&Ls; failed after being unable to overcome their mountain of bad loans, including Valley Federal Savings, a Van Nuys-based thrift that folded last year. Homefed Bank, the giant San Diego-based S&L; that was seized by federal regulators last year, is still being run by the Resolution Trust Corp. while the government looks for buyers.

Other big S&Ls; are holding on for dear life, such as Glenfed, whose Glendale Federal Bank--the nation’s fifth-largest thrift--also faces government seizure unless it can quickly raise more cash.

A few lenders have prospered, however, and they typically did so by sticking to their knitting.

These include Golden West Financial Corp., a big, low-cost thrift based in Oakland that mainly makes home mortgages through its World Savings unit, and American Pacific State Bank in Sherman Oaks, which focuses on Small Business Administration loans.

Another is Northern Trust Co. of California, a small Los Angeles-based unit of Northern Trust Corp. in Chicago that manages assets and trust services for the affluent. The firm has opened seven California offices in recent years and more than tripled its work force to 145.

The firm’s president, Alison Winter, said the gains reflect Northern Trust’s focus on just one market niche.

“We didn’t try to be all things to all people,” she said.

California’s recession also is helping accelerate a structural change in the lending industry that is altering its fundamental makeup.

The banking business, for example, continues to face increasing competition from growing “non-bank” lending companies such as Countrywide and Aames Financial Corp. The interlopers’ efforts gained strength as the recession eroded the health of banks and thrifts.

Despite the real estate slump, Countrywide is flourishing because it has aggressively catered to the mortgage-refinancing boom triggered by the sharp decline in interest rates in the past three years.

“That segment of the industry, from the largest like Countrywide all the way down to small niche players, has had just a wonderful time,” said Norman Katz, managing partner of MCS Associates, a consulting firm in Irvine.

But for many other lenders, rapid growth is unlikely until California’s economy gets rolling again and real estate values stop going down.

“We take it as a given that a recovery will happen in California,” said Berry of Keefe Bruyette. “But no one seems to think it’s around the corner.”

Mixed Results for Banks and Thrifts...

The recession and real estate slump pummeled California’s banks and thrifts beginning in 1990, and while the banks are starting to recover, the savings and loan associations are still mired in problem loans.

For years ended Dec. 31

Number of institutions*

Banks Thrifts ’89 435 161 ’92 414 121 Total assets (In billions) Banks Thrifts ’89 $319.4 $389.3 ’92 $324.1 $284.1 Non-performing loans (In billions) Banks Thrifts ’89 $6.5 N/A ’92 $10.4 $7.52 Return on average assets (profits as % of assets) Banks Thrifts ’89 1.16 -0.45 ’92 0.59 -0.46

* Includes those being run by federal regulators.

N/A: Not available.

Sources: California Banking Department; California League of Savings Institutions; Sheshunoff Information Services

...and a Net Loss of Financial-Sector Jobs

Job growth in some sectors of the financial services industry--such as mortgage banking--has partially offset lower employment among banks and thrifts, but the industry’s total employment has fallen over the last five years.

Number of jobs in thousands (For years ended Dec. 31)

Depository (banks, thrifts, credit unions) Non-depository (Mortgage bankers, credit agencies) Securities (Investment banks/brokerages, mutual funds) Holding/Investment (Trust agencies, real estate investment trusts) Total * Through May 31

Source: California Employment Development Department