A Look at 1986, and the Climate for ’87 : Banking

Fueled by lower interest rates and a high volume of mortgages and refinancings, most of Orange County’s 42 banks and 32 savings institutions enjoyed a boom during 1986, with many institutions posting record earnings.

And the new federal income tax law is expected to help financial institutions churn out still more loans next year as consumers start transferring their non-deductible credit card and other loan interest costs into home-equity loans--especially the newer credit-card-like revolving equity loans.

But the good times did not help everyone. The aftereffects of the real estate bust of the early 1980s and the alleged greed of some operators continued to plague some institutions.

State and federal regulators took over two banks, three savings and loans, and a thrift and loan in Orange County this year--an apparent record number of seizures in a county already infamous for failed financial institutions.

The collapses ran the total number of failed financial institutions in the county since 1982 to eight banks, four S&Ls; and one thrift--about 20% of all such failures statewide. The county is home to about 11% of the state’s financial institutions.

It also was a chaotic year for top management at county banks. A dozen bank presidents resigned or were ousted in 1986, surpassing the eight departures last year and equaling the number of changes two years ago.

The savings and loan industry was much less volatile. Besides the ouster of management at the two S&Ls; taken over by regulators, only four county-based S&Ls; changed presidents.

In some cases, the bank and S&L; presidents quit for better jobs, but most of the departures were the result of disagreements with directors over operations and performance.

The failures and the job turnovers are symptomatic of an industry going through a shakeout after a period of rapid growth and an influx of new institutions. In Orange County, for instance, 34 new banks were formed during the past eight years, stretching the industry’s ability to get capable leadership and adequate capital.

With the enactment of an interstate banking law last summer, banks and S&Ls; now face the prospect of more competition and of buy-outs. Out-of-state corporations, first from the western states and, in 1991, from the rest of the nation, will be able to purchase California banks under the new law.

But some independent bankers believe that the law will have no effect on them because they have always competed against the major banks and doubt that any outsider would want to buy their small operations.

S&Ls; have long been targets of out-of-state companies, and the interstate banking bill is not expected to have much of an impact on them, the consultants said.

In 1985, many county-based institutions cleaned up their loan and operations problems, enabling them to post record profits this year.

In fact, operators from a wide range of financial institutions, including Mercury S&L; in Huntington Beach, Eldorado Bank in Tustin and Mission Viejo National Bank, have been so confident that they have been predicting record earnings for the year.

So far, all three are on mark, and they are hardly alone. Among the banks and S&Ls; heading for record profits this year are Western Financial Savings Bank in Orange and CommerceBank and Newport Balboa Savings, both in Newport Beach.

Other financial institutions also have prospered.

First American Financial Corp. in Santa Ana, which owns First American Title Insurance Co., made more money in the first nine months--$16.8 million--than it did in any full year since it opened in 1889. And the Hammond Co., a Newport Beach mortgage banking firm, posted a record six-month income for the period ended Sept. 30.

Prosperity, however, passed by some institutions.

Long-suffering Valencia Bank in Santa Ana, whose last management team tried for two years to find a buyer, succumbed to regulators Feb. 7 after running up three years of losses totaling $10.4 million.

And Saddleback National Bank in Laguna Hills could not turn a profit in its three years of operations, losing $2.2 million and falling to the regulators’ ax on May 15.

In more controversial takeovers, regulators seized American Diversified Savings Bank in Costa Mesa, Ramona S&L; in Orange and Consolidated Savings Bank in Irvine; the latter was eventually liquidated. The other two remain open under managers hired by the regulators.

In all three cases, regulators sued the owners and operators of the three S&Ls;, accusing them of making illegal insider loans and engaging in other illegal and improper activities that put their institutions in unsafe and unsound conditions.

Meantime, Financial Corp. of America, the Irvine-based parent of troubled American Savings & Loan, has turned in five consecutive profitable quarters.

But the profits have come mostly on sales of assets, not on operations of American Savings, the nation’s largest S&L; with $34.1 billion in assets.