Tough Times for Banks

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As volatile times hit financial institutions both locally and nationally, banks are trying to assure customers they shouldn’t be afraid, despite the loss of millions of dollars in shares. As a result of the recent collapse of Pasadena-based IndyMac Bank, one of the biggest bank failures in the history of the United States, as well as a souring economy and a flat housing market, this is turning into a tenuous time for the banking industry.

Locally, Heritage Oaks Bancorp, the Paso Robles-based holding company for Heritage Oaks Bank, which operates as Business First Bank in Santa Barbara and as Heritage Oaks Bank in other locations along the Central Coast, has seen its price per share drop from $16.90 on July 25, 2007, to $7.41 as of close on July 22, 2008. Stockholders of Pacific Capital Bancorp, which operates locally as Santa Barbara Bank & Trust, have seen that company’s price per share cut in half over the past nine months, from $28.67 on October 5, 2007, to $14.88. That translates into an overall devaluation of roughly $647 million in market cap, down from $1.33 billion to $686 million. “There’s just a negative view of banking stocks right now,” said Debbie Whiteley, executive vice president of investor relations for Santa Barbara Bank & Trust.

Bank of America, the country’s largest retail bank, showed Monday that its second quarter earnings fell 44 percent because of real estate-related losses, but it still came out ahead of forecasts thanks to strong investment banking results and higher lending margins and fees from its consumer banking operations.

The trend follows that of the entire state, which is seeing a 124.9 percent increase in foreclosures.

According to DataQuick Information Systems, a nationwide monitor of real estate activity, Santa Barbara County has seen the number of mortgage defaults between April and June more than double over the same time period last year, from 434 to 922. The trend follows that of the entire state, which is seeing a 124.9 percent increase in foreclosures. Notices of default were served on 118,020 homes throughout the state last quarter. Records were set in almost every county, and the numbers are the largest DataQuick has ever seen going back to 1992, the year of its oldest available record.

The bulk of recent problems exist because of lending to under-qualified borrowers — with higher-interest loans, often accompanied by minimal down payments or based on no more than income — which has led to more foreclosures. Because of the slowed housing market, banks taking over foreclosed houses are unable to resell them.

Despite the FDIC (Federal Deposit Insurance Corporation) recently taking over IndyMac after withdrawals by depositors led to the bank’s failure, many bankers insist that customers should not worry. Overall, the commercial banking system, especially locally, is strong and made up of well-capitalized banks, according to Jeff Paul, the regional president for Rabobank. His sentiments echo those of many banking higher-ups. Business First Bank president Joanne Funari, in an announcement on that bank’s Web site, assures customers that the bank is well-capitalized and a “very conservative bank” producing profits quarter after quarter for the past 20 years. So too is Santa Barbara Bank & Trust, according to Whiteley, who notes that the bank just paid — and has consistently paid — its quarterly dividend, which less stable banks have been unable to do. The bank also continues to make loans and has longtime, committed shareholders. Rabobank sits under the umbrella of the Rabobank Group, rated one of the safest banks in the world with assets of more than $850 billion.

In a strong economy, people save more and healthy companies borrow and expand, leading to more business for banks. But as the economy goes, so goes the bank industry. “Banks, in general, regardless of performance, mirror their market area and the economic climate,” Paul said. “It’s not unusual for them to be tied.”

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