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Regulation. Cycles. Reputation. Those three concepts make up the body, in essence, of San Diego banking over the last century. Regulation and deregulation efforts of state and federal governments are the skeleton upon which banks stand; economic cycles provide the soft tissue and muscle; and the reputation of lenders for trustworthiness and service are banking's heart and soul.
Through the last 10 decades, this body matured, prospered, got knocked down, beefed up, became bloodied and healed. Often, its battering came from outside sources, sometimes the wounds were self-inflicted. With each healing term came more insights and a bit more courage and flexibility to tackle the next hurdle.
"Banking is a constant reaction to competitive factors," observes Bill Nelson, chairman of Scripps Bank. "It’s always trying to maintain its footing atop changing terrain. Not every business is charged with protection of the public interest like banking is."
At The Turn
In 1900, San Diego was emerging from the Great Depression of the 1890s, and there were but three banks — San Diego Savings Bank, Bank of Commerce and Horton's Consolidated Bank — with their doors still open at the century's beginning. Actually, the latter bank soon was turned over when Alonzo Horton had to give up most of his assets, even Horton Plaza Park, which he sold to the City of San Diego, so that he could live off the income stream. Banks were little more than one-room affairs which husbanded the meager cash assets — average annual income then was about $475 — of about 35,000 residents of the dusty, predominantly rural County of San Diego, say historians. Interest wasn’t paid on deposits, by and large, and the occasional real estate loan — perhaps $1,000 for land plus home construction — charged 10 percent interest. Banks kept their capital ratios in the 50 percent range — about nine times today’s norm — and marketed themselves basically by marketing the man at the top. Trust, reputation and position in the community were the top selling points, for there were no other safeguards, such as deposit insurance or government watchdogs, which became increasingly important when capital ratios declined.
Out here in the West, few cottoned to the desires of the conservative Eastern interests to establish a United States Bank, sort of an overarching regulator/Big Brother. The Federal Reserve Act of 1912 ended up as a compromise: the states would still have the chartering rights and responsibilities, but the federal government took over and centralized the issuance of currency and bonds, as well as acted as the bank of last resort for regional problems like crop failures or floods. Still, as part of the Old West, there were different banking practices here, such as teller training that included marksmanship along with ledgers. San Diego Trust & Savings Bank (nee San Diego Savings Bank) even had a firing range built on the roof of its building, for employee convenience, which remained until renovation in the 1930s.
In 1915-16, more than 3.7 million international visitors — 50 times the number of citizens of the county then — came to the Panama-California Exposition in Balboa Park, which added to the coffers of the county and banks alike. World War I also played a part in the area's prosperity, in that San Diego’s geography made it a prime Pacific military outpost. As recalled by C. Arnholt Smith, the late banker, business magnate and Mr. San Diego on a "Heart of San Diego" television interview with Fred Lewis, banking was a time-intensive occupation, with huge ledgers — 2 feet by 4 feet — constantly being hand-updated by the bookkeepers. It was in the late teens when Smith went to work for the charismatic Bank of Italy's (later Bank of America) A. Giannini. Smith said he worked his way up the Merchant's National ladder from runner to teller to finally, a bank officer, becoming very active in the consolidation of Merchant's into the Bank of Italy.
Throughout the 1920s, banks prospered as tourism exploded and the early stirrings of the local aerospace industry were noted, with Ryan Aeronautical proudly exploiting its Spirit of St. Louis that made trans-Atlantic headlines piloted by Col. Charles A. Lindbergh. At midpoint in the 1920s, the San Diego Realty Board was quoted as burbling, "They're coming to San Diego in throngs!" Banks kept up with the outside demand, and the bungalow that cost $2,500 to build a decade earlier started pushing $5,000.
National Frenzy
San Diego was carried along in the national frenzy. As recounted by San Diego Metropolitan columnist Herbert Lockwood: "It was an era of speculation all over the country. Stocks were bought on margin, with 40 percent down and the broker lending the balance on margin. The broker charged anywhere from 5 percent to 12 percent. If the stock went down, brokers could always ask for more cash or the stock could be sold. But that option was unthinkable in 1929 when everything was going up... forever!
"A lot of foreign money was attracted by the 12 percent return here, and banks had a field day. They'd borrow from the Federal Reserve at 5 percent and turned around and loaned money at 12 percent."
But that wasn’t to say it was a free and easy lending market, despite the financial euphoria, for bankers were drilled to reject all but the textbook, low-balance, short-term, no-brainer loans. In a speech to the Ad Club of San Diego in 1929, Ed Clapp, assistant cashier of San Diego Trust, poked broad fun at the lending practices of the day. The text follows:
"When you want to borrow money from your bank, all you have to do is approach your banker as if you had known him for a good, long time, having made a study of his hobbies, his personal likes and dislikes and are able to jest with him, put the matter up to him as a strictly business proposition and expect to get a loan.
"Be sure to ask for enough. Go strong. Don't be picayunish in your desires. If you want to borrow $10 from your banker, just try to see how hard it is to get it. But if you want $200 or $400 or $1,000 or $10,000 or even $100,000, don’t hesitate, for if you do you’re lost and just out of luck. It is just too bad for you.
"Talk fast; don’t give your banker a chance to ask questions which might be detrimental or embarrassing to you. Demand an immediate answer, no difference how large an amount you seek. For if you give your banker a chance to go home with your request and sleep on it, it is very doubtful that you have sold yourself and the idea that you should have the loan.
"Of course, if you do get your money, don’t forget your banker. Come in and see him frequently and pass the time of day with him. He has nothing else to do but receive you and talk to you. Of course, you should be especially friendly along about 90 days after you have received your loan, for you must take it for granted, of course, the loan will be renewed. Just try to get it renewed."
The Great Depression brought bread lines, bank foreclosures and halted new construction here, as elsewhere, but San Diego’s expanding military and airplane presence — in light of foreign conflicts — kept the worst of it at bay. In 1933, recalled Smith, he "begged and borrowed from everyone I knew" to start U.S. National Bank, including fellow bankers whom Smith had helped while working for Bank of Italy.
In the late 1930s, recalled Bank of America veteran Ernie Yahnke, there were five banks in town, each headed by a man whose persona evoked trust and respect. Graydon Hoffman was a fixture at Bank of America; First National Bank had the venerable Andy Borthwick; Security Trust's alter ego was Bob Sutherland; U.S. National Bank promoted Smith; and of course, Joseph Sefton called the shots at San Diego Trust.
"You couldn’t get a loan if you got down on your hands and knees," says Yahnke of the late '30s and early '40s. "Banks were extremely conservative. And, Lord, was it a simple industry. If you made a loan, you'd go by the book: real estate loans were made for a 10-year term, with a 50 percent loan-to-value ratio. And we charged 6 percent interest." And business was good, for war manufacturing at Consolidated Aircraft, Ryan Aeronautical, Solar Aircraft and Rohr Industries sparked a population boom, prompting Life magazine to dub San Diego the nation's fastest-growing city.
When The Boys Came Marching Home
When the boys came marching home from World War II — Yahnke included — a brave new banking world was evolving. No longer the only game in town, banks faced competition from the nascent savings and loan industry, themselves emboldened from their wimpy building society roots by the Federal Housing Administration. The FHA had provided an aftermarket for institutions willing to lend on real estate with only a 20 percent down payment. That opening in the marketplace was leapfrogged even further when the Veterans Administration got into the act with 100 percent financing at a flat 4 percent for 20 years for veterans. With the new houses came other borrowing needs for young families, and installment loans took root in the credit market. "We had all these new powers, but it still was a cautious time," says Yahnke.
Two pioneers of the savings and loan industry in Southern California were family scions Charles fletcher and Howard Ahmanson. Fletcher, whose family was heavily invested in San Diego real estate, founded Home Federal Savings and Loan. He was friendly with Ahmanson, whose Los Angeles land holdings were legion and who started Home Savings of America. As friends, the two agreed not to compete with one another in the newly burgeoning savings and loan business, so Ahmanson took Los Angeles and Fletcher drove his roots deep into San Diego. For 30 years, until Home Savings of America opened its gaudy signature branch office in Pacific Beach, that informal agreement held, and the two remained friends.
Banks were called upon to shore up some of the peacetime industry, and then considered creative methods of lending against a percentage of inventory and receivables. That was a big item, says Yahnke, and a big step in building San Diego’s large banks. And it’s what led to some hemorrhaging when the Cold War effort fizzled out and aviation-heavy San Diego took huge hits in population as out-of-work employees fled town. Time magazine called San Diego a bust town, with pictures of halted construction projects and empty shops.
But midway through the 1960s, the cycle turned up again. Home Federal and U.S. National Bank built skyscrapers within a half-dozen blocks of each other. Southwest Bank opened to a warm reception in North County. Jack in the Box wunderkinds Robert O. Peterson and Dick Silberman were successful in their unfriendly takeover of venerable First National Bank, which they renamed Southern California First (later taken over by Union Bank and Bank of Tokyo). Highway construction opened up vast new land for suburban communities like University City, Del Cerro and Rancho Bernardo. With a near-stranglehold on the home loan market, savings and loans grew larger and more dominant as financial players, especially in San Diego. There was lots of business, and large regional banks dipped their toes into local waters betting on the come, lending domestically and internationally with un-banklike abandon.
A serious downturn in the national economy exacerbated by the 1973 oil embargo wreaked its share of havoc all over the country. Smith's U.S. National Bank, once the symbol of homegrown prosperity and largess, was taken over by federal regulators as insolvent, and reopened under Crocker National Bank's aegis. USNB was the nation's largest bank failure at the time and Smith's far-flung empire — fishing, real estate, shipbuilding — collapsed.
From those ashes rose a new crop of bankers — most of them trained by the likes of Bank of America, Security Pacific, First National and other behemoths — itching to impose their mark on the local landscape. These independent banks popped up all over the county: from Peninsula Bank in Point Loma to Borrego Springs Bank in the desert; San Dieguito National Bank along the northern coast to Balboa National Bank in South Bay; from Citizen's Western in Pacific Beach to American Valley in El Cajon, they ran the gamut of geographical market allegiance. Some were chartered in that era devoted to specific market interests — remember Women's Bank in Mission Valley? — or general independents that became specialists, like Bank of Commerce and its Small Business Administration loan dominance. Everyone who was anyone was asked to sit on the organizing board of directors for these start-ups; bank prospectuses were the fodder of cocktail party talk in their attempts to raise the $2 million or $3 million in capital needed to open their doors. It was definitely a function of ego and reputation enhancement.
 Some of the two dozen banks chartered during the 1970s were established to cash in on the fat wallets of out-of-state banks interested in setting up San Diego outpost operations, intent on the government's any-time-now breaking down of interstate banking laws. After all, if Harvey Mitchell at Escondido National could sell that bank for three times book value to Mitsubishi Bank of Japan, the reasoning went, the build-and-sell strategy could work all over the county. "As it turned out," says Pete Davis, longtime president of Bank of Commerce until its sale to USBancorp this summer, "banking cycles seem to have 10-year lengths. Those banks at the bottom were driven out of business and those at the top, ready to sell, did quite well. However, if you missed the top, you had to wait 10 years again for the market to return."
By the end of the Carter administration, inflation and attendant stratospheric interest rates rope-a-doped a number of businesses — and their banks. Almost overlooked in the corporate downsizing were their dependent credit unions, many of which were cast adrift when companies foundered. When the Reagan Administration's deregulatory call to arms came about, the National Credit Union Administration pushed through a law permitting these weakened member-owned institutions to band together and expand their fields of membership. Throughout the early 1980s uproar over federal legislation to "level the playing fields" between S&Ls, banks and alarmingly brash brokerage house money market mutual funds, credit unions quietly went about their business, adding members with little restraint and without fanfare.
The level playing field came to pass, and the walls came tumbling down separating the savings and loan powers and products from bank powers and products. Rejoicing came from every corner of Downtown San Diego where the dominant local institutions — Fred Stalder's Central Federal S&L, Harold Starkey's First Federal S&L, Gordon Luce's San Diego Federal S&L, Jack McDonald's Imperial Savings and Kim Fletcher's Home Federal S&L — opened up checking-like accounts for their consumers, came up with credit card operations and otherwise went hog wild pursuing bank-like development partnerships, takeover strategies and loan production offices in the hopes of building multibranch empires just like the banks had.
Tidal Wave Of Development
New communities like Scripps Ranch, Carmel Valley and EastLake led the way for the tidal wave of development here, fueled by out-of-state immigration coupled with prosperity that sent the population into a moving-up spin: If you rented an apartment, buy a condo; if you owned a condo, move up to a house; if you owned a house, buy a bigger house. Potential buyers were lining up days ahead of tract development openings in order to have first dibs on unfinished units. These were the days when developers were courted and encouraged to build and build and (in hindsight) overbuild, since there was so much money available to lend.
The first cracks in the facades of the S&L industry surfaced in the late 1980s when developers couldn’t move their inventory and began defaulting on their huge loans. Instead of being an arm's length from the disaster, the S&Ls were mired in the same bog, as many had partnership interests in the dead developments exacerbated by other overleveraged deals. The ink flowed red and the federal government stepped in to perform the largest financial bailout that the country had ever known. Loans from the once grand Home Federal and Great American Federal (nee San Diego Fed) got boxed up and sold to GE Capital. Other S&Ls disappeared ignominiously. The dismantling of the S&L industry left a leadership and largesse vacuum in San Diego that has not been filled to date.
"Bank failures, lost investments and ruined reputations brought new awareness to those of us who survived that this was not a game to give less than your full attention to," says Davis. "And in some cases, your full net worth," he adds, alluding to the FDIC's renewed efforts to increase capital ratios.
While the banks and savings and loans struggled during the late '80s and early '90s, credit unions just kept to their nonprofit knitting: husbanding reserves of 8 percent to 14 percent; adding to their membership bases through merger or expanding their fields of membership, explains Marla Shepherd, president and CEO of Santel Federal Credit Union. That institution originally served only employees of Pacific Bell, she says, but when the Baby Bells were divested from AT&T, the credit union was lopped by one-third. Through merger and other business arrangements, Santel is now the credit union for more than 300 San Diego businesses, with $315 million in assets. Between one-third and one-half of San Diego’s population belongs to one credit union or another.
In late 1990s, the red-hot stock market, minuscule unemployment and technological explosion have been extremely profitable for the banking industry. True to form, another wave of buyouts has come to pass, to ever bigger rewards. Stalwart Grossmont Bank was purchased by Zions Bancorp, merged with Sumitomo and renamed California Bank & Trust, intent on a solid statewide push. Bank of Commerce was merged into U.S Bank earlier this year, and within a few months, venerable Peninsula Bank followed suit.
Cycle. Perhaps these bankers saw their 10-year cycle coming up and didn’t want to look forward to the inevitable downward trip; perhaps they saw that the stock market valued independent bank stocks greatly, and were ready to cash in on their equity (sweat and stock); perhaps having to pull ever-increasing profits out of the air quarter after quarter was getting tougher; or maybe the crystal ball was hazy when looking toward cyberbanking, increased specialization and the blending of all things financial.
Regulation. "The Banking Act of 1932, separating bank powers from those of insurance companies or investment bankers was an example of the government closing the stable door after the horses were out," comments Nelson. "Today's legislation allowing free competition in the financial marketplace is tantamount to opening the doors, while the horses are in their stalls."
Reputation. "Interest rates are competitive, everyone has the same FDIC insurance and most of the products are similar," says Howard Levenson, chairman of Western Financial Corp. and the new Southwest Community Bank. "People who go into a bank are looking for service, helpful attitudes and a connection with the staff."
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