Higher interest rates in the spring and an unprecedented stock market crash in the fall wiped out hopes that Orange County's independent banks and savings and loans would post improved earnings and continued growth in 1987.
And the lessons of the last 12 months are making them more cautious about their expectations for 1988.
"I see 1988 pretty much as a mirror of 1987, certainly not much worse," said Clyde H. Gossert, president of CommerceBank in Newport Beach. "People are understandably nervous."
As always, the major variable facing financial institutions is the future direction of interest rates.
"I expect a good year for us, but the interest rate is the key to the equation," said Michael G. Rombold, president of Household Bank, a Newport Beach-based S&L with operations in six states.
"Rates ought to remain stable, at least for the first six months, most likely because of the psychology of 1988 being an election year and politicians not wanting rates to go up," Rombold said.
10 S&L Failures Recorded
Savings and loans could be in a more precarious position in 1988 than banks, industry consultants said. Ten Orange County savings and loans have failed in recent years, and five were declared insolvent and seized by state and federal regulators in 1987 alone.
Executives at Downey Savings in Costa Mesa are expecting a good year, but they're not so sure about the rest of the industry. "It's difficult for us to understand how so many savings and loans are getting into trouble," said Downey President Maurice L. McAlister.
Because S&Ls generally operate with a thinner profit margin, an increase in interest rates could create severe hardships for them. Still, industry consultants said, S&Ls tend to be doing a better job now than in the past of keeping the amount of interest they earn on investments comfortably above the amount they pay out to depositors and others.
"I think 1988 will be a challenging year for banks and will continue to be miserable for savings and loans," said Gerry Findley, a Brea-based consultant.
Edward Carpenter, a Costa Mesa-based consultant, said banks and savings associations will find stiffer competition next year from other financial services companies, including Sears, Roebuck with its Discover charge card and General Motors with its automobile financing arm.
In fact, the proliferation of such "nonbank banks" already is draining loans from both banks and thrifts. While both industries consider it appropriate to loan out about 75% of their deposits, the average ratio is dropping close to 60% or, for some institutions, even lower, said banking and savings consultants and executives. The ratio is falling in part because of the competition from nonbank lenders.
Competition also is increasing within the two industries. The barriers separating banks from thrifts have been falling as a result of deregulation, pitting the two types of institutions against each other for checking accounts, consumer loans and other services.
In addition, more than 60 failed savings and loans being operated by federal regulators are offering higher interest rates for big deposits than most S&Ls and banks. That competition adds to the pressure on healthy institutions to raise rates, which lowers profit margins.
Competition From Big Banks
So keen is the rate competition, in fact, that several failed thrifts in Texas are offering depositors half a percentage point more than similar S&Ls elsewhere, said Anne Bacon, president of Butterfield Savings, a Santa Ana thrift seized by regulators in 1985.
For Orange County's independent banks, competition also is coming from the state's major banks and larger independents. Security Pacific National Bank, for instance, is setting up a major banking center in Costa Mesa to solicit business clients, including smaller firms that the bank never courted before.
Imperial Bank's Costa Mesa operation is looking for companies with annual sales of as little as $5 million, said Ronald L. Askew, regional vice president of the Los Angeles-based bank.
Besides the competition, both Findley and Carpenter said, the biggest problem for banks and thrifts next year will be increasing non-interest expenses such as salaries and overhead.
"It's going to be a year in which banks can no longer ignore dealing aggressively with non-interest costs," Findley said. "They still have banking for the masses, but they have to stop trying to serve everybody under the sun."
Carpenter said S&Ls also will have to do "dramatic" cost cutting next year in response to what he expects to be even lower earnings than thrifts will post for this year.
Savings institutions are more vulnerable to a downturn in the economy than banks, Findley said, because S&L profits are more affected by changes in interest rates.
As rates go down, the difference between the amount institutions earn on loans and investments and the amount they pay out to depositors declines. S&Ls typically operate on thinner margins than banks.