After two bank collapses in as many weeks and five in the past 13 months, the future of Orange County's banking industry remains clouded by the threat of more failures.
The shadows of gloom may be larger than the problems themselves, however, some analysts and regulators say.
In 1984, three banks in the county failed, and 50% of the survivors lost money. According to a Times study of the Orange County-based banks' 1984 financial statements, six of the losers reported that their capital-to-assets ratios--a critical measure of a bank's financial health--had shrunk below the 6% minimum required by federal regulators.
The losses rung up by 22 independent banks eclipsed by more than $11 million the gains that the 22 profitable institutions posted. The average loss was $1.05 million, up 61.5% from the average loss of $650,000 reported by the 15 Orange County banks that ended 1983 in the red.
Those grim facts don't tell the entire story, however, according to local and national banking consultants and regulatory sources.
The recent troubles, in fact, are obscuring a number of promising trends:
- Although three banks failed, four new ones opened in the county last year to take their places. That, analysts said, is an indication that the marketplace is not saturated, and that there is still some investor confidence in banks.
For the Record
Los Angeles Times Wednesday April 17, 1985 Orange County Edition Business Part 4 Page 2 Column 3 Financial Desk 1 inches; 24 words Type of Material: Correction
Valencia Bank's deposits as of Dec. 31, 1984, totaled $127.5 million. The Santa Ana bank's deposits were misstated in a table in the Orange County Business section Sunday.
For the Record
Los Angeles Times Tuesday April 23, 1985 Orange County Edition Business Part 4 Page 5 Column 4 Financial Desk 1 inches; 18 words Type of Material: Correction
Orange National Bank's 1984 profit totaled $756,000. The bank's net earnings were misstated in a chart that appeared April 14.
- Although six banks had sub-par capital ratios, 38 banks ended the year with acceptable amounts of capital, and a dozen of those had especially strong ratios of 9% or more.
- Although average bank losses climbed 61.5%, profits at those banks that made gains also were up sharply--to an average of 58%.
In addition, the banks that had problems at the end of 1984--and still have problems--are the same banks that had problems in 1983 and earlier.
The two banks in the county that failed this month--in the first back-to-back collapses since the Depression--got into trouble with real estate lending in 1980 and 1981, according to industry analysts and regulators.
Capistrano National Bank of Santa Ana, which was closed by the U.S. Comptroller of the Currency on April 5, and South Coast Bank of Costa Mesa, closed Friday by the state Banking Department, had both been losing money steadily since 1982.
These problems are said to be closing chapters, however, and do not signal the opening of a new and bloodier episode in banking history, according to analysts and regulators.
Few serious new troubles arose during the past year, according to industry analysts, and a number of banks managed to solve some of the problems that had been plaguing them. "Most of the banks in Orange County spent 1984 kind of hitchin' up their britches," said consultant Gerry Findley.
Few Added to Trouble List
"The thing that strikes me," said Findley, the Brea-based publisher of the respected Findley Reports California Banking Newsletter, "is that when we look at our list of problem banks (in Orange County) we have only a very few additions to those that were on the list in 1983. We are not seeing many new problems, just the public acknowledgement of old ones. It takes about three years for a bank's loan losses to ripen to the point that the bank has to, as we say, eat them."
One bank regulator, while conceding that his agency is "very concerned about the banks in Orange County," said most of the losses and erosions of capital stemmed from old problems, rather than new ones. Orange County banks have been heavily involved in real estate, both in loans to builders and buyers and by using property to secure business, commercial and consumer loans.
Findley, who has been analyzing and consulting with California independent banks for more than three decades, said he believes the Orange County independents in 1984 "made progress, in terms of improving the quality of their operations. We have some sick ones" that are carrying their illnesses into 1985, he said.
Because it operates in a pressure-cooker environment of fast growth, fast deals, big profits and big losses, banking in Orange County is a caricature; it reflects an exaggerated picture of independent banking throughout the United States.
The experiences of many banks in the county during the past year could provide a preview of what troubled banks in the Midwestern farm states face during the next few years, as they dig out from their problem loans--most of them secured by over-appraised farmland that has fallen 20% or more in value, just as Orange County real estate values plummeted in 1981 and 1982.
Real Estate Fallout
Most of the troubled banks in Orange County, according to regulatory sources and industry consultants, got into trouble during the real estate boom of the late 1970s and early '80s because they believed the real estate myth--that you can't go wrong with real estate loans because you always have the property as security, and land values in this area just keep going up.