Credit crunch grows as banks falter and S&Ls shrink.

Credit crunch grows as banks falter and S&Ls shrink

This year turned into a nasty one for Los Angeles County banks and thrifts.

Increased real estate losses, fears of more losses to come and a declining California economy led to reduced revenues, tight access to capital and falling stock prices for local banks and S&Ls in 1990.

Investors in 1990 turned skittish on both banks' and savings and loans' stocks, fearing that a rolling real estate recession would spread to California and result in massive losses. While financial stock prices had fallen since late 1989, they nosedived from June to November of this year.

The average price to book value fell from 169 percent of book value in September 1989, an all-time high, to 89 percent of book value a year later, according to Michael Conover, president of Ryan, Beck & Co. Pacific.

Even the strongest institutions saw their shares reach the lowest level in several years. Security Pacific Corp.'s stock declined from $40 to a low of about $17 per share from Jan. 1 to Oct. 31, and H.F. Ahmanson & Co. shares declined from $19 to $11 from Jan. 1 to Nov. 2

Both Security Pacific Corp. and First Interstate Bancorp., Los Angeles County's largest banks, streamlined their operations. Security Pacific, after three quarters of healthy earnings, surprised the investment community by announcing that the company would take a whopping fourth-quarter loss of between $320 million and $360 million because of higher loan loss reserves. The bank said that it would end the year with 1990 earnings of $160 million to $200 million compared to earnings of $740.6 million in fiscal 1989.

Security Pacific, with assets of $88.9 billion, also announced that it would eliminate its less profitable merchant banking operations and focus on its more profitable retail banking operations and consumer and business finance companies.

One analyst, however, praised Security Pacific's moves, saying the bank was essentially cleaning house. "We are very enthused with the changes Security Pacific is making," said stock analyst Tony Howard of Crowell Weedon & Co. of Los Angeles. "Overall, we think other banks will follow suit and we applaud Security for taking the lead action. Nineteen-ninety is a washout anyways, so why not take a loss in the fourth quarter?"

First Interstate, which had third quarter assets of $53.8 billion, reported net income of $377.7 million for the first nine months, compared to $219.8 million a year earlier. Analysts called it one of the company's better years.

The company continued to shrink, most notably by selling its wholly owned consumer finance subsidiary, NOVA Financial Services, its non-relationship credit card portfolio and four banks with nearly 30 branches in Colorado and New Mexico.

There was a changing of the guard at both banks. At Security Pacific, Richard J. Flamson III resigned as CEO in January (but remained chairman) and was replaced by Robert H. Smith, formerly president and CEO of the institution's subsidiary, Security Pacific National Bank. At First Interstate, chairman and CEO Joseph Pinola, the man who largely built First Interstate's multistate network of banks, resigned on June 1 and was replaced by Edward Carson, who was formerly president.

Most of the smaller banks in Los Angeles County had flat earnings in 1990, but tended to be healthier than the large banks because of fewer loans in problem areas such as highly leveraged transactions and out-of-state real estate loans, Howard said.

Raising capital was impossible for most institutions and came at a high cost for even the healthiest institutions.

A stock offering by First Interstate in February was under-subscribed, netting only $276 million, instead of the $400 million targeted.

On Nov. 5 Security Pacific was forced to pay a comparatively high 11.5 percent interest on $150 million of new 10-year bonds. And in September, the company was only able to sell $87 million of $100 million in preferred stock offered.

The dominant trend for the S&L industry was shrinkage. The number of Los Angeles-based S&Ls decreased from 59 as of June 30, 1989 to 51 a year later. The industry's books continued to hemorrhage, albeit at a slower rate than 1989. Countywide losses totaled $368 million as of June 30, 1990, compared to losses of $903 million a year earlier, according to data from Sheshunoff Information Services Inc., of Austin, Texas.

By one measure, Los Angeles County S&Ls were deemed less healthy than those of the nation at large. An April survey by Bauer Communications (publisher of Jumbo Rate News of Coral Gables, Fla.) of 1,118 S&Ls showed that only eight of them are headquartered in California, which has 13.1 percent of local institutions rated.

S&Ls laden by junk bonds fell by the wayside in 1990. Columbia Savings & Loan of Beverly Hills, once one of largest S&Ls in the country, faded fast as its junk bond portfolio steadily declined in value from $3.4 billion in January to $2.5 billion in December 1990, and regulators forced the S&L to write off the decline.

An attempt to sell the junk bond portfolio was rejected by federal regulators as being too heavily financed. On Nov. 19, the company's chief executive conceded that the S&L would very likely be seized by the Resolution Trust Corp.

The man behind Columbia's phenomenal growth, former Columbia chief executive Thomas Spiegel, was sued by the Office of Thrift Supervision on charges of misappropriation of company funds. Regulators, seeking $24 million in penalties, forced Spiegel to freeze $21 million of his personal assets. As of Dec. 17, Spiegel was awaiting an administrative hearing.

The Federal Deposit Insurance Corp. indicated that it would hold executives and board members on insolvent institutions liable for losses incurred. That sent directors and officers insurance through the roof, with some S&Ls going bare.

For those S&Ls that survived, all but the largest and healthiest S&Ls faced severe constraints on operations caused by increased required capital reserves and a return to mortgage lending mandated by 1989's S&L bailout bill.

Symptomatic of the problem was $10.9 billion (assets) Coast Federal Bank of downtown Los Angeles. After largely ridding its books of junk bonds and other problem assets in 1989, this year the company fought a successful battle to keep its capital ratios above the required amounts, only to announce Dec. 5 that - because of increased reserves for loan losses - it would fall below a new, higher ratio minimum effective Jan. 1 and would have to file a capital plan with federal regulators.

However, the county's two largest S&Ls, Home Savings of America and Great Western Bank, continued their expansion. Despite increased large loan loss provisions, both reported significant profits through the third quarter.

The $48.8 billion (assets) Great Western became Florida's largest savings and loan after buying 129 branches with $4.4 billion in deposits in 1990. Beverly Hills-based Great Western Financial Corp., the $42 billion (assets) parent of Great Western Bank, reported net income of $189 million for the first nine months, compared to $177 million for the corresponding 1989 figure.

Irwindale-based H.F. Ahmanson & Co., the $48.8 million holding company of Home Savings of America, reported net income of $183.1 million for the first nine months, compared to $128.1 million in the first three quarters of 1989. The company expanded into New York through its acquisition, approved in November, of the 13 offices of Home Savings Bank of New York.

Some S&Ls sought to escape the industry's woes by converting to banks. All three California S&Ls which successfully made the switch were based in Los Angeles. They include Westside Bank of Southern California, based in West Los Angeles; Frontier State Bank of Redondo Beach; and Eastern International Bank of Alhambra.

Banks expanded into the real estate breach left by S&Ls. Real estate loans comprised 43.7 percent of total Los Angeles loan portfolios as of June 1989, compared with 30.1 percent at the end of 1986, according to a study published by the California Banking Department.

Lending standards were tightened in 1990 as federal regulators examined the books of banks and S&Ls with heightened vigilance. Some executives said that they were asked more questions about their real estate portfolios and about whether they were prepared for real estate worst case scenarios than in previous examinations.

"I've been in this business 50 years and (the examination) was more thorough now than it's ever been," said Joseph Walling, chairman of Santa Monica Bank.

Heightened capital requirements, less available capital and more federal scrutiny added up to a credit squeeze for many borrowers, especially small business owners and construction loans.

"The banks are totally inflexible," said a developer, regarding banks' willingness to renegotiate construction loans.

Because of the sluggish real estate market, many developers were unable to pay off short-term construction loans from home sale proceeds and banks. And long-term lenders are not, as in years past, offering long-term loans to replace the short-term bank construction loans, said one developer.

Still, as S&Ls and banks cut back on real estate loans, pension funds have begun to assert themselves as real estate investors. From virtually no role in the real estate market 20 years ago, pension funds now account for $110 billion to $115 billion of real estate capital. And that amount should double or even triple in the next three to five years, said William J. Chadwick, chairman of the Pension Real Estate Association and president of PSI Institutional Realty, an asset management arm of Glendale-based Public Storage Inc.

One company that hopes to benefit from troubled bank loans is Foothill Capital Corp., which in May set out to raise $100 million for a fund to invest in bank loans made to companies experiencing financial difficulties.

A bright spot in banking was the performance of Asian banks. Return on assets at the three largest Asian-American banks in Los Angeles County was more than 2 percent, compared to a median of 1.18 percent for California banks, according to a survey by California Research Corp., based in Santa Monica.

The three largest local Asian-American S&Ls, East-West Federal Bank, Standard Savings Bank and First Public Savings Bank, had returns on assets of 0.4, 1.9 and 1.8 percent respectively, compared to a median of 0.26 percent, according to the survey.

Serving growing Asian communities and reliance on low-priced deposits as a source of money were two factors behind the Asian banks' successes, said Sal Serrantino, president of California Research.

Federally insured financial institutions also faced growing government and community scrutiny over their lending policies and efforts to help depressed communities.

As of July 1, Community Reinvestment Act ratings became public. The 14-year-old law obliges banks to lend in the communities in which they take deposits. The law, which took effect for examinations conducted after July 1, stung one local bank: Farmers & Merchants Bank, of Long Beach. The bank received the lowest possible rating, "substantial noncompliance," and was denied permission to open at least one branch.

Mitsui Manufacturers Bank of Los Angeles also faced protests by community groups over its community reinvestment compliance when it attempted to sell 20 percent of its stock to Security Pacific.

A wary public grew increasingly concerned and confused over which institutions were safe and which were not.

Confusion was demonstrated by several incidents. In early January, Imperial Thrift & Loan Association, based in Burbank, suffered an $800,000 run on deposits when depositors confused the thrift's name with troubled San Diego-based Imperial Savings & Loan Association, the subject of a prominent Daily News article in January, according to Gary McCoy, assistant to the president at Imperial Thrift.

And Lincoln Bank of Encino changed its name to California United Bank as fears grew that depositors were confusing the institution with the infamous, insolvent Lincoln Savings & Loan or Irvine.

The move was all the more necessary because Lincoln Bank's president, John Keating, shared the same last name as Lincoln Savings owner Charles Keating.

PHOTO : A problem year: Even the biggest financial institutions experienced trauma