Slight improvement seen for banks, thrifts in 1994; but industry's slogan remains, 'Stay alive until 1995.' (Special Report: Forecast 1994) (Industry Overview)

Los Angeles bankers say they are expecting to have a much better year in 1994 than in 1993. Of course, that's not saying much considering 1993 couldn't have been much worse for local banks.

The just-concluded year witnessed a high number of local bank failures and deteriorating financial conditions brought on by sour real estate loans. At best, it is expected by financial institution analysts that the banking and thrift industries have hit bottom and may show a slight improvement in 1994.

Even among the most optimistic voices, few gave a more positive assessment than to say that local institutions on the whole are entering 1994 in better shape than they began 1993.

"We have coined the phrase 'Stay alive until 1995,'" said Gerry Findley, banking consultant and editor of the Findley Reports, to describe his belief that there will be no true turnaround in the industry until more than a year from now.

"From the standpoint of profitability, next year should show some improvement, but not much," Findley said.

Again, this improvement is only relative. Findley's prediction is that somewhere in the range of 20 to 25 percent of banks in California will end up showing a reasonable return for 1993. Half of California banks will show a mediocre return, and the remaining 20 to 30 percent will either break even or post losses for the year.

Most banking analysts agreed with Findley that many California banks will show larger profit margins in 1994, and that, as the banks have improved their capital levels, there may be increased lending activity in Southern California as a result.

"There is a general sense that banks are going to be lending more in 1994," said Campbell Chaney, financial institutions analyst with Dakin Securities in San Francisco. "Small business seems to be the target of choice."

Still, others warn that for banks and thrifts to really get back on their feet and start lending heavily again, an overall positive change in the local economy is needed.

Financial institutions typically mirror the health, or illness, of the industries they serve. As a result, the high unemployment which has plagued Los Angeles in recent years has taken its toll on local financial institutions. With more people on the unemployment line, there is less demand from bank customers for home loans, business loans and other bank products and services.

Two major obstacles to a complete recovery of Los Angeles financial institutions have been the layoffs in the defense industry and plummeting real estate values in the area, according to numerous analysts and bankers.

"We're hoping that in 1994 we actually see some positive job growth," said William Siart, president of First Interstate Bancorp.

Additionally, those banks and thrifts that have not significantly dealt with troubled assets will continue to have difficulties.

"Banks and thrifts in the Los Angeles area are going to be subject to a number of influences -- most specifically to the local real estate market," said Jim Marks, financial institutions analyst with securities firm Sutro & Co. in San Francisco. "Until it stops its fall, banks and thrifts in the area are going to be on shaky ground in terms of their financial results."

Many of L.A.'s largest financial institutions have been focused on ridding themselves of troubled real estate assets in the past year. "I think that the major institutions have addressed the problem real estate," said Siart. "That means that we'll do well, but some of the others will continue to have problems."

Los Angeles' largest bank, First Interstate Bank, has had an ongoing program of cleaning its books of troubled real estate. As a result, that institution has been able to make a faster return to profitability than have other local financial institutions.

First Interstate, which has $50 billion in assets, has been showing steady profits since 1992. Its third quarter 1993 net income was $150.5 million, or $1.80 per share, vs. $75.1 million, or 82 cents a share, a year earlier.

Los Angeles' largest thrifts are having a slower recovery, but are hoping to get back into the black in 1994. Los Angeles' largest thrift, Home Savings of America, showed respectable earnings in the third quarter of 1993. For the third quarter of 1993, Home Savings reported net earnings of $70 million. However, that institution expects to show overall losses on the year. A second quarter net loss of $290 million, after completing a bulk sale of troubled assets, is likely to offset any possibility of showing a profit at year's end, according to Home Savings spokeswoman Samantha Davies.

Despite their dismal performances during most of the year, some experts have hopes that two of L.A.'s shakiest thrifts -- California Federal Bank and Glendale Federal Bank -- will be back in the black during 1994.

Both those thrifts succeeded in raising capital and unloading some problem assets in 1993, and that means that they could turn around in the year to come, according to analyst Chaney. "GlenFed and CalFed are likely to show losses in the fourth quarter, and for the year, but their problems are getting near to the bottom," said Chaney.

A number of bankers and analysts did distinguish between the small and large institutions when forecasting the year ahead. Despite the turnaround experienced by several of the larger banks, many analysts said they see tough times ahead for L.A.'s community banks. "A lot of the small banks have not addressed the problems that the larger ones did," said Siart.

"We know that we are in a different position from the large banks," said Robert Turicchi, president of the Community Bankers Association of Southern California. "1993 community bank earnings are not going to be as good as (those of) the big banks, and 1994 is not going to be a gangbuster year."

According to Turicchi, the main problem facing community banks is low loan volume. He pointed out that many large institutions expanded their services to include the sale of securities and insurance during 1993 to make up for lost loan volume, but most community banks did not move into that area simply because most do not have the resources to do so.

Despite the ongoing problems facing small banks, most analysts and bankers interviewed said they expect to see fewer bank failures in 1994 than in 1993. A total of 16 California banks failed over the course of 1993, compared with 8 statewide in 1992, according to the California State Banking Department. Nine of the 16 failed banks were headquartered in Los Angeles County. The number of failed savings and loans in California held steady at five, four of which were headquartered in Los Angeles, S&L failures peaked in the state in 1991, with 24 S&L failures that year.

"I think that most of that (failures) is behind us," said James Montgomery, president of Chatsworth-based Great Western Financial Corp. "We have gotten most of the weak sisters off the market." For that reason, 1994 promises to be a better year in terms of the number of failures that will be seen, industry sources said.

But that does not mean government regulators are expected to disappear from the banking scene. In fact, several regulatory issues will likely face the banking community in 1994.

The Clinton Administration is proposing a consolidation of the financial regulatory offices. Currently, banks and thrifts are regulated by four federal governmental agencies -- The Office of Thrift Supervision. The Office of the Comptroller of the Currency, The Federal Reserve and the Federal Deposit Insurance Corp.

The administration is proposing a single banking commission that would serve as bank and thrift examiners. Tom Celebrezze, spokesman for the California Bankers Association, said that his trade group applauds the efforts at streamlining. Having only one examining agency would certainly reduce the amount of time that financial institutions have to prepare for examinations conducted by the various agencies. However, the trade group's support for the White House proposals is accompanied by some concerns.

Some of those concerns involve the new, tougher revisions of the Community Reinvestment Act that the banking industry expects to soon face. In early December, the Clinton Administration released its proposal to require banks and thrifts to make more credit available to inner-city businesses and residents. The rules, which are expected to go into effect some time in 1994 after a period of public comment, are designed to make enforcement of the inner-city lending act more effective.

Siart of First Interstate explained that, while most bankers agree that more lending should be done in low-income areas, there will be disagreement between financial institutions and their regulators as to how to achieve that goal.

Banking analyst Chaney pointed out that one important way in which the new Community Reinvestment Act rules may effect the industry is that a poor inner-city-lending rating may now be used to deny planned mergers or acquisitions. That may prove to be an important sticking point because 1994 is expected to be a big year for banking mergers and acquisitions.

"As things firm up here, you should see a lot more opportunity for mergers and acquisitions," said banking analyst Marks. "Acquisitions should hit larger banks and thrifts that cannot generate a return on equity. Anyone who is not earning 15 percent on equity right now is a potential target."

First Interstate has already signaled that it is in an acquisition mode. "Our acquisition of San Diego Trust and Savings Bank will make us a big player in San Diego," said Siart. First Interstate also recently announced its acquisition of Ventura County-based Bank of the Oaks.

Siart said First Interstate is still interested in acquisitions and will definitely be shopping around L.A. "We would absolutely buy anywhere in Southern California if there is the right opportunity for the right price," he said. "In the long run, Los Angeles is a good market."