Bankers hope to scrape bottom of lingering malaise.

Opinions differ about timing of any coming recovery

In 1993, beleaguered Los Angeles bankers may see some light at the end of the economic tunnel. But bank analysts said it will be faint.

The bullish among them hope the Southern California real estate decline will bottom out during the first half of 1993 and by year end the economy will turn around. Others are encouraged that a new administration in Washington, D.C., may mean, at the very least, an opportunity to lobby for an easing of tough federal regulatory requirements.

However, the more pessimistic of bankers predict a continuing Southern California economic malaise in 1993 will hammer bank profits, increase the number of non-performing loans and prompt more L.A. County bank and thrift failures and mergers.

"Sadly, we're still going through a lot of trauma and things aren't likely to get better as far as banking goes for quite awhile," said Gerry Findley, banking consultant and editor of the Findley Reports. "We have to look to 1994."

Several bank analysts agreed that while the banking industry as a whole is pulling out of the recession, the recovery of Los Angeles banks will take much longer.

The UCLA Business Forecasting Project in December said the weak California economy, coupled with the sluggish construction sector and the consolidation of Bank America Corp. and Security Pacific, will mean the state's financial institutions will continue to lay people off in 1993. The study predicts a loss of 9,000 financial-related jobs statewide from December through the end of 1993.

"My fear is that we're not done yet," said Dave Smith, of Smith Banking Consultants in downtown L.A. "We're not at the bottom of the barrel."

However, some of those operating in the banking trenches are more positive.

"We think by mid-year or by the end of 1993, we will see some improvement in California," said William Siart, president of First Interstate Bancorp. "We're very positive about 1993."

Since the completion of the Security Pacific and Bank of America merger, First Interstate is Los Angeles' largest bank, with $49.6 billion in assets. First Interstate posted profits of $75.1 million in the third quarter of 1992. It was quite a change from a year earlier, when the bank posted a $207.5 million loss and announced layoffs.

Other Los Angeles County-based institutions are also doing well.

"In my personal opinion, we've hit close to the bottom, if not the bottom, in terms of de-evaluation of property," said Jerry Baker, managing director at Pasadena-based Countrywide Credit Industries. "I'm encouraged. We have no intention of reducing our number of offices for mortgage origination in California."

Countywide can afford to be positive. As the largest mortgage lender in the country, Countrywide netted $34 million during the first half of 1992.

Unlike thrifts and banks, mortgage bankers do not take federally insured deposits and fund loans from those deposits. As a result, mortgage bankers, such as Countrywide, are not regulated by federal banking and thrift regulatory agencies, and the reinvestment act.

Such regulations were a major complaint of Los Angeles bankers and thrift operators during 1992 and promise to be a continuing point of concern during 1993. Regulations call for many banks to beef up capital levels and limit some types of loans.

"Probably the most significant regulations are the ones authored in 1992 that don't take effect until 1993," said Siart, of First Interstate. "I wouldn't say the new regulations make banking impossible, but they make things very difficult."

Siart said he was "hopeful" the new Clinton administration would loosen the regulatory log jam.

Indeed, even in early December, bank and thrift industry groups had joined forces to lobby President-elect Bill Clinton to ease regulatory rules.

Many bankers predict Clinton's appointments will set the tone. During his first months in office, he will pick the Comptroller of the Currency, the director of the Federal Deposit Insurance Corp. and the head of the Office of Thrift Supervision.

"They've got to create an environment to give banks an incentive to lend," said Dave Smith of Smith Banking Consultants. "We need to get Congress out of micro-managing the regulatory process. Maybe Clinton could pull that off."

However, pro-regulatory forces argue if the federal rules are eased or removed, more banks will engage in marginal lending and end up in the tank. Many predict a looming banking crisis on par with the savings and loan debacle.

Already, most banking experts predict several Los Angeles County banks will fail during the first half of this year.

Findley, of the Findley Reports, said in early December he compiled a list of California's 10 most terminal banks. He would not release the names, but said there were four in Los Angeles County.

Nancy Sheppard, executive director of the Western Independent Bankers Association, said that more banks, especially smaller ones, will merge rather than fail.

She predicted that instead of larger institutions swallowing up smaller ones, the smaller banks will acquire each other, because it is easier for them in terms of paperwork and legal issues to do that kind of acquisition.

But other bankers predicted merger activity may slow down in 1993.

"I think there will be some mergers, but most people are looking internally," said Siart, of First Interstate. "There are an awful lot of people who are digesting things they already bought."

Siart said that during 1993, First Interstate could "possibly" acquire "some institutions, probably not L.A.-based." Siart mentioned Texas.

"I don't see something in L.A. County but you never know," Siart said.

Another topic on many bankers' minds is the uncertain future of two L.A. County savings and loans. California Federal Bank, owned by giant thrift holding company CalFed Inc., has been plagued by bad real estate loans. The government wanted the 170-branch California Federal to boost capital levels by $25.7 million by the end of 1992 or face seizure.

At a special shareholders meeting Dec. 16, investors approved a plan to restructure $150 million of debt in a stock for bonds swap which was expected to provide the S&L enough to satisfy regulators through 1992. However, the thrift will still need about $100 million more to meet the higher levels required by regulators by June 30.

Frank Moore, thrift spokesman, said the money will be raised through several options one of which could include a stock offering to existing shareholders.

Also shaky is the future of Glendale Federal Bank, a subsidiary of Glenfed Inc., which spent the year in litigation with the federal government.

In July, the U.S. Court of Federal Claims granted a summary judgment in Glendale Federal's favor declaring that the government breached a contract relating to the bank's acquisition of a failing Florida thrift. Glendale Federal is claiming damages and the government has appealed the ruling.

Another L.A. County institution struggling to comply with regulations is City National Corp. the holding company of Beverly Hills-based City National Bank. With $3.9 billion in assets, City National is the second largest commercial bank in Los Angeles. It reported a net loss of $2.3 million for the third quarter of 1992.

Chairman Bram Goldsmith elected to take a salary reduction and announced the bank would focus on managing expenses and collecting bad loans. He declined to be interviewed.

Regulators from the Office of the Comptroller of the Currency have told City National to come up with $65 million in additional capital by June 30, 1993. The bank has agreed to invest $10 million and hired First Boston Corp., a New York-based investment banking firm to help it secure the additional capital. By June 30, City National must submit a three-year capital plan to the OCC for approval.

"They'll survive. I'm confident they'll raise the capital. Nobody's better plugged into Los Angeles' Westside than those guys," said Mike Abrahams, an investment banker with Oppenheimer & Co., Inc. in Westwood.

Several analysts predicted that even if California banks did not start to improve this year, bank stock prices should increase on anticipation of a 1994 recovery.

Scott Burford, principal of Burford Capital in Glendale, said independent California banks' stock prices have fallen "so far, so fast" there is nowhere to go but up.

"If the California economy is suffering from a cold, California bank stocks have pneumonia," he said. Burford predicted in mid-December that California bank stocks are a good buy because many banks are undervalued.

"Where else could I make a 15 to 20 percent return on earnings?" said Burford. "You've seen California banks go down to a price where you'd think that everyone was about to go out of business."

Burford said that California independent banks' stocks offer long-term, aggressive investors with an exceptional investment opportunity. He added that prices, as of mid-December, were near the point of "maximum pessimism."